Tax czar ready for fight with multinationals

By Kim Jae-won
Staff reporter

Perhaps, it is time for multinationals both Korean and foreign to pay extra attention, if they have not done so already, to a series of moves by the National Tax Service (NTS) under its commissioner Baek Yong-ho.

A task force of 15 investigators, set up late last year to look into untapped offshore sources of tax revenue, is being turned into a permanent part of its apparatus, and a former Barclays Securities executive has been hired.

Separately, these two developments can be viewed as nothing out of the ordinary. However, combined they could lead anywhere. Baek, an economist who served as the chairman of the Fair Trade Commission (FTC), the watchdog for corporate governance, has turned into a tough taxman following the model of the U.S. Internal Revenue Service (IRS).

The IRS has lately put pressure on UBS, the largest Swiss bank, to cough up a list of American customers taking advantage of offshore tax havens, while mandating American citizens to report their overseas accounts of over $10,000. The obvious purpose is to promote impartial taxation or, in other words, find more sources to tax.

Throw in the public resentment of foreign firms gaining large profits from purchases of distressed assets during the 1998 financial crisis, in what is widely seen as "unstoppable outflows of national wealth." The NTS didn't do much then. Now obviously Baek is intending to do something about it.

"We will focus on uncovering hidden tax resources. To achieve this goal, we will do our best to crack down on overseas tax evasion, which seriously harms our economy," Baek said in a news conference in January, marking his first sixth months in office.

Baek launched the Overseas Tax Evasion Report Center in November last year. The 15 member special team has monitored capital outflow cases in cooperation with other officials in the agency since then. It is being turned into a permanent organization.

The agency also hired international finance expert, Lim Woo-taek, as a move to beef up its investigations into offshore tax evasion. Lim, 49, used to work for the Seoul office of Barclays Securities as a general manager from 1994 to 1997.

"His presence will definitely be an asset to us. We expect him to help us reveal more international tax evasion cases," Lee Dong-shin, a director of the NTS, said.

By and large, Baek's taxmen have breathed heavily down the neck of Hyosung, a medium-sized conglomerate, for allegations of extensive tax evasion using its overseas affiliates. They spent two years investigating the conglomerate but were unable to charge anybody. Still, it obviously dented Hyosung's reputation, sending chills down the spines of other conglomerates that may have engaged in such alleged offshore tax evasion activities.

Baek's gun sight, however, is not just trained on domestic firms but also foreign multinationals such as U.S.-based private equity fund, Lone Star, the holder of a controlling stake in the Korea Exchange Bank, the nation's fifth largest lender.

The tax authorities have lost several lawsuits against the fund before. However, NTS officials have declared that it will be different this time. The tax agency is confident that this time Lone Star will pay more in tax.

"There is no problem to levy taxes on Lone Star when it sells off its 51.02 percent stake in the KEB. We already imposed taxes when it sold its small stake in 2007," a high-ranking official of the agency said on the condition of anonymity.

Lone Star sold 13.6 percent of its KEB stake, or 87.7 million stocks, at a price of 13,600 won, gaining investors a total of 1.2 trillion won in June 2007.

The NTS imposed 119 billion won in corporate tax on Lone Star Advisors Korea at the time saying the local subsidiary of the U.S. hedge fund is a permanent establishment. The NTS also argued that Hudson Advisors Korea, Lone Star's asset-management affiliate, contributed to the sale, so it is proper to impose taxes on them.

Lone Star argued that it is against the Korea-Belgium tax treaty to impose tax on income from a stock trade. The KEB stake is held by Lone Star IV, a Belgium subsidiary of Lone Star. The fund filed a complaint to the tax tribunal, and the case is still under review. However, as heatedly discussed in Lone Star's first attempt to sell its KEB stake, it remains to be seen what legal grounds the NTS will have to force the fund to pay more.

KEB was very careful when commenting on the tax issue.
"We did not hear any official stance from Lone Star," Kim Sun-gyu, spokesman of KEB said. "Moreover, the sales for the big stake are not realized yet. It is too early to talk about such an issue."

Some analysts argued that the tax agency's stance will affect other Korea-based global companies, such as Samsung and LG, as they do businesses overseas.
"It can negatively affect Korean companies. They also try to avoid taxes through tax havens when they do business in other nations," Kim Soo-hyung, a lawyer from Kim & Chang, said.

However, the NTS said the investment size of those local companies is small compared to that of hedge funds.

"I know that Korean companies also do the same thing, and our tough stance can affect their overseas businesses. However, we can gain more tax revenues compared to their loss. We should compare which is better for the nation," the high-ranking official of the NTS, said.