A draft plan issued by the Korean Finance Ministry last week will seek to tighten tax rules on capital gains earned by foreign funds operating in the country but which are based offshore.
The decision came as part of the government's 2005 tax reform plan introduced by the Ministry of Finance and Economy (MOFE) on Friday. Under this plan, to be submitted to the National Assembly in October, the government will tax foreign funds headquartered offshore, if their Korean operations transfer such gains to them.
"In principle, we will first levy withholding taxes on capital gains and interest income made by local corporations or foreign funds registered in tax havens abroad," Deputy Minister for Tax and Customs Kim Yong-min explained.
"Then, if such funds submit documents proving that a company in a tax haven is a real investor of a local corporation, not a bogus company within three years, the government will return their tax payments," he added.
The government is also seeking to tighten up a number of double taxation treaties, and the Ministry of Finance announced last month that it had reached a tentative deal with the government of Thailand on revising various clauses of their DTAA, which was first signed in 1977. Chief among these amendments will be the exclusion of third country-based funds from the tax agreement with Korea.
The amendment to the tax treaty with Thailand comes amid a major crackdown by the Korean authorities on foreign firms, particularly in the investment fund sector, after it was found that several firms escaped tax on major property and equity transactions by using firms registered offshore.
The Korean government has also been holding talks with Malaysia in order to try to exclude Labuan from the Korean/Malaysian DTAA. The Korean tax authorities believe that many of the firms which are accused of avoiding tax on capital gains are doing so through offices registered in Labuan.
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