A Break On Foreign Capital Tax Evasion

Tax agreements and domestic tax laws are being reformed to tax foreign capital that benefits from profits gained domestically, even if it was invested through establishing a paper company in a tax haven. However it is undetermined whether tax agreements will be able to be revised, due to the fact that tax treaties must be discussed with the country in question and it is difficult to get countries to surrender their vested rights.

On June 6, the Ministry of Finance and Economy (MOFE) announced, “We will stipulate precise tax laws to enable the Korean government to tax incomes that have been invested in Korea through tax havens to 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 to receive benefits by establishing paper companies in a country that Korea has formed tax agreements with.”

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 to taxation on the grounds of tax agreements.”

This guideline of the government’s seems to be a result of the government’s awareness of the critical public opinion that some foreign capital sources are raising an enormous amount of profit by using tax havens and tax agreements.

Through June 7 to 10, the MOFE is planning to hold a second round of negotiations with Malaysia to discuss 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 are oligopoly stock-holders possessing over 25 percent of a company’s total stocks or who earn investment yields by transferring the stocks of a company with over 50 percent of its assets in real estate.

Byong-Ki Lee eye@donga.com legman@donga.com