Tax Investigation Into Large-Scale Foreign Funds

The National Tax Service (NTS) has embarked on a tax investigation regarding domestically active foreign capital such as Lone Star of the U.S., the Korea Exchange Bank’s largest shareholder.

This is not the first tax investigation into foreign capital, but due to the government’s continuous indications concerning speculative foreign capital of late, the outcome is of interest.

According to the NTS and financial circles on April 14, the NTS has initiated a tax investigation concerning foreign capital, such as Lone Star, since April 12.

Han Sang-ryul, director of the investigation department of NTS, indirectly acknowledged that the investigation was underway by saying, “We cannot disclose details such as the subjects, procedures, or time of the investigation.”

He also added, “It is the NTS’s duty to inspect the irregular illicit gains of foreign capital,” and that, “We will explicitly investigate according to international standards whether or not the investments are routine.”

Consequently, a high-ranking source from a foreign fund reported, “Though the initial subjects of investigation will be Lone Star, Carlyle, Government of Singapore Investment Corporation and Citigroup, it is expected that the investigation will expand to five to seven other corporations, such as New Bridge Capital.”

Foreign private equity funds, chiefly aiming at short-term profits, have been able to gain vast amounts of profits and not pay a penny in taxes within the boundaries of law.

The NTS has started its tax investigation just as voices conveying that regulations concerning speculative foreign capital need to be strengthened have started to rise.

Lee Ju-sung, the commissioner of the NTS, announced on April 12, “Regardless of nationality, we will establish indiscriminate principals concerning tax evasion,” and that, “We will continuously scrape out undetected illicit income.”

On April 14 at a lecture, Financial Supervisory Commission chairman Yoon Jeung-hyun said as a guest speaker, “Capital that has gained illicit gains through irregular market procedures should be severely regulated, regardless of nationality.”

In addition, he noted, “If we do not regulate illicit gains, virtuous and sound corporations and market participants will become victims of reverse discrimination and undermine the stable growth of the economy and the financial market.”

However, in one sector of the financial world, the opinion that the tax investigation is untimely has come to light.

This is due to the uneasiness over the current situation where the strengthening of the “five percent rule,” which demands the investor state the origin of capital and the object of investment when one invests in over five percent of a company’s equity for management participation purposes, and the limitation of foreign directors in banks have made foreign investors anxious, and that in addition, a tax investigation may induce foreign capital to abandon Korea.