Foreign tax evaders may soon face clampdown

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Foreign tax evaders may soon face clampdown

The National Assembly Budget Office raised the need to strengthen and clarify regulations against foreign tax evaders.

The office said that in the last 15 years, speculative foreign investments have made huge profits in the country but in many cases did not pay taxes.

It added that such investors have frequently exploited loopholes in the nation’s tax regulations, or used tax-haven treaties to pocket all of their profits or minimize their payments.

It stressed that allowing such practices to continue would shake the very principle of levying fair and reasonable taxes.

The report was released after U.S. Lone Star Funds complained about a 391.5 billion won ($XXX) bill from the National Tax Service on its profits from selling its majority stake in Korea Exchange Bank to Hana Financial Group this year.

The U.S. buyout firm is estimated to have pocketed more than 4 trillion won from its investment.

Additionally, the Supreme Court ruled in favor of Yeoksam District Tax Office last week for imposing corporate tax on the company after it made 245 billion won in profit from selling a skyscraper in Gangnam, southern Seoul.

The local financial market is watching closely as ties between Lone Star and the tax office become increasingly frayed to see what verdicts and ramifications result.

Foreign investors such as Lone Star and New Bridge Capital rushed to the Seoul market after it opened up out of necessity while recovering from the Asian financial crisis of the late 1990s.

U.S. investment consortium New Bridge Capital used the tax treaty between Korea and Malaysia to avoid paying tax on the sale of Korea First Bank that it bought in 2000 for 500 billion won.

Although the lender was sold to Standard Chartered Bank five years later at more than 1.6 trillion won, New Bridge managed to escape paying capital gains tax as it acquired the bank through an affiliate set up in Labuan, a Malaysian tax haven.

Based on the investment treaty signed between the two countries, the Korean government was not allowed to tax the U.S. investment.

Similarly, Lone Star bought KEB though a vehicle set up in Belgium, which also ranks as a tax haven due to its bilateral agreements with Korea.

“Tax evasion not only damages the policy aims of a country but also affects tax reservoirs,” said an official at the National Assembly Budget Office. “As it is more effective to ward off tax evasion before it happens, it is essential to reinforce preventative measures.”

By Lee Ho-jeong [ojlee82@joongang.co.kr]

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