Korea To Introduce Tax Rules On Offshore Portfolio Investment Funds

by Amanda Banks, Tax-News.com, London

18 July 2001

The Korean government has announced that is studying ways to introduce OECD-recommended rules to counter attempts to evade home country taxation on income from offshore portfolio investment funds.

An official from the Ministry of Finance and Economy said earlier this week that the move comes in the wake of the government's decision to join multilateral efforts by the OECD to prevent investors from avoiding home country taxation on cross-border portfolio income.

'We are pushing for the adoption of portfolio foreign Investment fund (PFIF) rules in order to prevent tax evasion and avoidance on investment gains from offshore funds,' a ministry official said.

At present, taxation on income from offshore investment funds is delayed until the gains are actually distributed to individual investors and their home country slaps income tax on them. The OECD and other international agencies have been seeking to introduce the PFIF regulations in order to prevent the delay in taxation for offshore portfolio earnings which may lead to tax evasion and avoidance.

The official confirmed: 'We want to eliminate harmful tax competition among countries to attract foreign investments by taking advantage of such a tax delay.' He said the government has recognized a growing need to prevent such harmful tax practices since foreign trade and capital flows continue to climb across the globe.

The government is now conducting preparatory work on how to adopt the PFIF rules in two or three years in cooperation with the state-funded Korea Institute of Public Finance. Under the PFIF rules, a home country will be authorized to impose taxes on cross-border portfolio income before the gains are actually distributed to individual investors.

Some advanced economies as the United States, Germany, Canada, and the New Zealand have already put the regulations in place.

The OECD has recommended its members to introduce the PFIF rules as part of its efforts to bar offshore investment funds from seeking a tax haven abroad in order to take advantage of the delay in taxation. However, countries such as Belgium and Switzerland have expressed concerns that the rules will have a negative effect on their efforts to attract more foreign investment.

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