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Goldman Sachs Denies South Korean Tax Evasion Claims

by Mary Swire,, Hong Kong

03 May 2007

Global investment bank Goldman Sachs has confirmed that the South Korean National Tax Service (NTS) is conducting an audit of the company's business affairs in the country, but has denied these are connected to allegations of tax evasion.

According to a report by Dow Jones Newswires, Christopher Jun, a spokesman at Goldman Sachs, has said that the process is a "routine tax audit of the firm's businesses in Korea."

"In Korea and everywhere else we conduct business, we are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. During our close cooperation with the NTS, there has been no evidence that would suggest we have failed to meet this standard," Jun was quoted as stating.

However, Yonhap News reported on Wednesday that the NTS is looking into Goldman Sach's investment in Jinro Ltd., the nation's leading maker of the distilled liquor soju, which was subsequently sold by the bank to the Hite Brewery Co in 2005 for 3.4 trillion won (US$3.7 billion). Goldman Sachs is said to have made a profit of more than 1 trillion won from the sale.

Yonhap said that Goldman Sachs did not pay taxes on the entirety of this gain because the deal was handled mainly by an Irish subsidiary known as Senna Investment Ltd which took advantage of the double taxation avoidance agreement in place between South Korea and Ireland.

South Korea has been particularly sensitive to the activities of foreign investment firms in recent years and has moved to block the booking of large capital gains by such firms through offshore companies to prevent them from avoiding Korean taxes. The most notable example has been the case of Lone Star, the Dallas-based investment firm, which stood to make a tax free gain from the sale of its majority stake in Korea Exchange Bank by using South Korea's double taxation avoidance treaty with Belgium. The 50.5% stake was acquired by Lone Star's Belgian subsidiary in 2003 for about $1.2 billion. Last year it was worth about $5 billion.

In July 2006, Jun Goon-pyo, then the newly installed head of the NTS, warned that there would be no let up of pressure on foreign investment companies under his regime, and promised "stern measures" to prevent foreign funds from trying to exploit loopholes in the double-taxation avoidance treaties.

"Speculators will realize it is no longer possible to make profits through speculation in real estate," he warned.

Jun was appointed by President Roh Moo-hyun after the unexpected departure of his predecessor Lee Ju-sung. As head of the tax service, Lee oversaw the first ever tax probes into foreign investment funds - a policy that looks set to continue under his successor.

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