Lone Star Appeals Against South Korean Back Tax Bill

by Mary Swire, Tax-News.com, Hong Kong

27 March 2006

The South Korean operation of the US fund company Lone Star is reportedly disputing a demand for millions of dollars in back taxes and fines imposed by the tax authorities last year for allegedly evading local taxes.

According to reports in the national media, Lone Star has already paid part of the 140 billion won ($145.6 million) bill, imposed after a National Tax Service investigation into the disposal of real estate in Seoul, but has submitted an appeal to the National Tax Tribunal against paying the remainder.

A company spokesperson was quoted by the Korean Herald on Friday as stating that: "The steps we are taking now are those frequently undertaken by ordinary taxpayers."

Lone Star vice president Ellis Short also told a press conference that the company was working with the tax authorities to find a solution to the deadlock.

Last year, five foreign funds were investigated and subsequently fined a total of 215 billion won (US$212 million) by the NTS for tax evasion. Lone Star, which last year apologised to the National Tax Service for evading South Korean taxes, faced the largest fine.

Mr Short was in Seoul to oversee Lone Star's sale of its controlling stake in the Korea Exchange Banks to Kookmin Bank for a reported 4.5 trillion won - a move which could spark further friction between the company and the tax authorities, as the government seeks to take its slice of the proceeds in tax.

Lone Star's holding in KEB is held by its Belgian subsidiary, LSF KEB Holdings, which could mean the the company once again avoids South Korean taxes. However, under pressure from a public becoming increasingly angered at perceived profiteering by tax delinquent foreign firms, the finance ministry has drawn up a list of several "tax havens" from which investors will be prevented from taking advantage of double tax treaties, in an effort by the authorities to clamp down on 'treaty shopping'.

Under new laws set to be introduced from July 1, 2006, investors from these countries will be subject to withholding taxes of up to 27.5% on South Korean income, including that derived from interest, dividends, and capital gains.

According to a report in the Financial Times earlier in the month, Ireland, Labuan, Belgium and the Netherlands are among the countries and offshore territories named on the list.

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