Only the rich may enter tax heaven
How would a British multinational company importing bananas from Honduras avoid paying taxes? It is quite simple. It would set up a financial subsidiary in Luxembourg, which lends money to the banana company in Honduras. It will pay $20 million a year as interest payments on the loan. The Honduran company would deduct the amount as expenses. Having made little money, the company would pay no tax at home. How about the Luxembourg financial subsidiary? It has just earned $20 million without paying any tax, thanks to the magic of “tax heaven.” The hard-earned wealth from planting bananas in a poor country is handed over to a wealthy country so easily.
Tax heavens have left Koreans with a bitter memory. Around the time of the foreign currency crisis, Malaysia’s Labuan emerged as a tax haven. People in finance used to say in the early and mid-90s that you would be a fool not to have a fund in Labuan. You could set up a paper company in a week for 10 million won ($8,913) and pay no capital gains tax. Securities companies and financial services firms established shell companies there and operated foreign currency funds with loans. It became a catalyst for the 1997 financial crisis.
There is an even more bitter memory. By selling Korea First Bank, Newbridge Capital made 1.15 trillion won in 2004 and paid no tax to the National Tax Service. The controlling stakeholder was a shell company in Labuan, a hideout frequented by Korean conglomerates and owners, exploiting Labuan to prepare slush funds and boost stock prices. With so many troubles with Labuan-based companies, the Korean government entered into an agreement with Malaysia in 2007 to impose tax.
The latest popular tax heaven is the Virgin Islands. The International Consortium of Investigative Journalists has been disclosing a series of client lists since last month. The small islands, with a population of 25,000, have more than 800,000 registered companies. A few days ago, three Korean businessmen’s names were disclosed. As a new list will be released each month, many feel nervous that the next one might include their names.
Tax heavens originate from tax havens. For tax evaders, tax havens must feel like heaven. And only the rich can enter this heaven. Because it is easier for a camel to pass through the eye of a needle than for the rich to enter the kingdom of God, the rich may have created their own heaven.
*The author is an editorial writer of the JoongAng Ilbo.
By Yi Jung-jae