Korea moves in on Tax Havens

 

Seoul to Close Tax Loopholes for Overseas InvestorsSeoul wants to change double taxation treaties with other countries so it can tax overseasinvestment funds that operate here, under plans that also target Korean and foreign investors whoavoid taxation by setting up paper companies in tax havens.It wants to tax the capital gains of foreign funds that own more than a 25 percent equity in localfirms including financial firms, which under current double taxation treaties are exempt. It is alsotargeting overseas-based funds that invest in Korean companies with more than 50 percent holdings inreal estate and sell their stake in equities.The Ministry of Finance and Economy said Sunday it will supplement local laws and seek changes todouble taxation treaties to stop tax-haven based investors from avoiding duties in Korea.But the proposed changes will have no influence on ongoing tax probes of overseas funds like LoneStar, Newbridge and the Carlyle Group since they would only apply to future investments.The ministry also decided to enshrine in law the practice of tracking down and taxing Koreans andforeigners that operate and invest in Korea by way of tax-haven paper companies.(Park Jong-se jspark??chosun.com)http://english.chosun.com/w21data/html/news/200506/200506050015.htmlKorea Seeks to Tax Foreign Capital from Tax HavenBy Kim Jae-kyoungStaff ReporterSouth Korea seeks to levy a tax on any capital gains made here by foreign funds headquartered in taxhavens abroad, such as Labuan in Malaysia, by modifying double taxation avoidance treaties and localtax rules.The Ministry of Finance and Economy (MOFE) said yesterday that it decided to revise tax treatieswith foreign nations and domestic tax rules to prevent domestic and foreign capital from dodgingtaxes by using tax havens.To that end, the ministry plans to turn in a revision to the National Assembly this year under whichthe tax authority will be allowed to tax any capital gains earned by a paper company headquarteredin a tax haven abroad.It plans to track down the real investor of a paper company and levy a tax on capital gains,interest and dividend income earned by the real investor, if it is found they set up a bogus firm toevade taxes.Under the double taxation pacts, capital gains on the sale of shares and properties are not taxed,and the same is true with respect to Korean investments in foreign countries, including the U.S.Currently, Korea has signed agreements with 62 countries to avoid double taxes, including the U.S.,Japan and Malaysia.As the first step, the government plans to have a meeting with Malaysia from Tuesday to Friday todiscuss a plan to exclude Labuan, a frequently used tax haven by foreign funds when investing inKorea, from the double tax treaties.However, the government's plan to amend double tax treaties seems infeasible, given that such anamendment will only be possible when they sign new tax treaties with counterpart nations.Analysts say that since this is not an issue limited to Korea, the Korean government should be morecautious about dealing with this issue."This issue is very new to Korea and thus generates a lot of attention, but it is a problem thatarises in many places, for example in the U.S.," Institute for International Economics (IIE)senior economist Monty Graham said."Koreans should see the problem in this context, and moreover, my impression is that othercountries, including the U.S. and Canada, that face this issue have all concluded that the benefitof foreign investment is more important than the potential loss of tax revenue," he added.The government's decision to amend tax treaties came as a result of growing anti-foreign capitalsentiment here after a few foreign private equity funds, including New Bridge Capital and Lone Star,made a huge capital gains, without paying a penny in taxes, by bypassing local rules.The Carlyle Group and Newbridge did not pay anything on their capital gains of 700 billion won and1.15 trillion won, respectively, after selling Korean banks under their control, while Lone Staravoided being taxed on capital gains of 260 billion won after selling the landmark Star Towerbuilding in southern Seoul.kjk@koreatimes.co.kr06-05-2005 19:01http://times.hankooki.com/lpage/200506/kt2005060518585710440.htm