South Korean Tax Office Expands Probe Into Foreign Investors

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

25 April 2006

The South Korean tax authorities have reportedly widened their probe into the activities of foreign funds, but continue to deny that they are discriminating against overseas companies amid a popular outcry over the level of profits being made from the sale of national assets.

According to reports in the national media, the National Tax Service is examining changes in the stakes of 4,889 foreign invested corporations that were more than 10 percent owned by foreign investors as of the end of 2004.

"We are seeing whether they have rightfully reported the changes in stakes and gotten appropriate tax benefits," an official was quoted as saying by the Korea Times.

Under the Foreign Investment Promotion Act, foreign investors are entitled to certain tax privileges provided that foreign share ownership does not fall below 10 percent.

The latest move by the NTS comes amid growing controversy over how foreign investors are taxed. Much of this attention in the past few weeks has focused on Lone Star, the Dallas-based equity fund which is set to record a 4 trillion won profit from the sale of its stake in Korea Exchange Bank. However, it has also been reported that the Seoul Regional Tax Office officials have visited the premises of Newbridge Capital and seized documents and accounting records.

The US-based investment fund sold its 48.6 percent stake in Korea First Bank - bought for 500 billion won in December 1999 - for over 1 trillion won to Standard Chartered Bank in January last year. However, the firm is said to have paid no tax on the transaction, as the profit was channeled through Labuan in Malaysia, which has signed a double taxation avoidance treaty with South Korea.

Such activities have caused outrage among members of the public, who are accusing foreign funds of profiteering by snapping up Korean financial institutions on the cheap in the aftermath of the Asian financial crisis in the late 1990s. However, the NTS insists that it is not carrying out a politically motivated vendetta against foreign investors.

"The National Tax Service is undertaking tax probes in accordance with laws and principles, without discriminating against domestic and foreign funds and not being swayed by public opinions," the NTS said in a statement, quoted by Reuters.

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