Tax but dont discriminate

 

by Byong-Ki Lee (eye@donga.com legman@donga.com)Tax agreements and domestic tax laws are being reformed to tax foreign capital that benefits fromprofits gained domestically, even if it was invested through establishing a paper company in a taxhaven. However it is undetermined whether tax agreements will be able to be revised, due to the factthat tax treaties must be discussed with the country in question and it is difficult to getcountries to surrender their vested rights.On June 6, the Ministry of Finance and Economy (MOFE) announced, "We will stipulate precise tax lawsto enable the Korean government to tax incomes that have been invested in Korea through tax havensto evade taxes whether they are foreigners or Koreans."They also added, "We will stipulate laws so that a resident of a third country will not be able toreceive benefits by establishing paper companies in a country that Korea has formed tax agreementswith."Korea currently has tax agreements with 62 countries including Malaysia, the U.S., and Japan.The international taxation manager of the MOFE, Lee Gyeong-geun, explained the situation, saying,"We need to establish definite regulations because there are foreign funds that are insubordinate totaxation on the grounds of tax agreements."This guideline of the government's seems to be a result of the government's awareness of thecritical public opinion that some foreign capital sources are raising an enormous amount of profitby using tax havens and tax agreements.Through June 7 to 10, the MOFE is planning to hold a second round of negotiations with Malaysia todiscuss revising tax agreements to exclude Labuan, which is currently used as a tax haven.Additionally, the MOFE is planning to enable the Korean government to tax foreigners who areoligopoly stock-holders possessing over 25 percent of a company's total stocks or who earninvestment yields by transferring the stocks of a company with over 50 percent of its assets in realestate.Copyright 2002 donga.com.All rights reserved.http://english.donga.com/srv/service.php3?bicode=020000&biid=2005060609518June 7, 2005 KST 14:24 (GMT+9)Tax, but don't discriminateThe government has said that it will develop measures for taxing foreign funds that have madeprofits in Korea after setting up a paper company in a tax haven. The government also said that itwould try to find a way to tax foreign funds' capital gains from acquiring management control inKorean companies and selling the shares back later, or from selling a company in Korea whose valuederives mostly from its real estate.Currently, the Korean government cannot tax foreign investors' earnings from the Korean stockmarkets, or from real estate transactions here. This is because no provisions for doing so werewritten into Korea's tax laws, or because laws dealing with the issue are vaguely written. Anotherreason is the tax treaties Korea has signed with other countries, treaties designed to preventdouble taxation. Thus, it is a relief that the government plans to establish a legal basis forlevying such taxes, though it comes a bit late.But the government should take care that such measures not be seen as an intentional exclusion offoreign funds from the Korean market, or as discrimination against foreign investors.Many of the foreign funds that have made enormous profits in Korea invested here after the 1997-98financial crisis, for Korea's sake. Back then, most of the Korean companies and financialinstitutions that were put on the market would otherwise have been liquidated, or the governmentwould have had to shoulder the struggling companies.Now, some complain that Korean companies were sold to foreign funds at dirt-cheap prices, or arguethat it would have been better if Korean funds had purchased them. But at that time, every singlecent was desperately needed. Of course, there were some cases in which foreign investors here tookadvantage of loopholes in Korea's capital market regulations, knowing that Korean funds could notafford to compete.But as long as foreign funds do not violate laws and regulations, it would be going too far topunish them for making money by excluding them from the market, or otherwise discriminating againstthem. If we do so, the lessons we learned from the difficulties of restructuring, and the fruits ofglobalization that we have acquired since then, will be in vain. Korea needs realistic,sophisticated measures that can expand the government's right to tax foreign funds without inflamingemotions against them.Copyright by Joins.com, Inc.http://joongangdaily.joins.com/200506/06/200506062355054079900090109011.html