By Kim Jae-won

The Korean government is moving to exclude Labuan from a tax treaty with Malaysia as part of efforts to prevent any attempts to evade taxes through the island, which is well known as a tax haven for global investors.

Seoul and Kuala Lumpur are currently having talks in Seoul to modify their bilateral tax treaty, which was established in 1983.
“We have asked Malaysia to exclude Labuan from the Korea-Malaysia Tax Treaty,” a high ranking official of the National Tax Service (NTS), said on condition of anonymity.

“Malaysia has declined our request for the last a few years, but this time we may get a nod from the country.”

“Nothing has been changed in the treaty, so it does not reflect changed reality,” an official of the Ministry of Strategy and Finance, said. “We will ask Malaysia to exclude Labuan from our tax treaty to crackdown on tax evasion through the region.”

Seoul said that this time Malaysia may accept Korea’s suggestion due to changed circumstances.

“Nowadays international circumstances for the tax haven changed a lot. The OECD urges tax havens to follow international taxation rules, and promises to crack down on illegal cases,” the high-ranking official of the NTS said.

“Malaysia already excluded Labuan from tax treaties with Japan and the U.K. So, Kuala Lumpur may have no choice but to accept our request if we ask for the same treatment.”

Many foreign companies have used the island for tax evasion. According to NTS officials, New Bridge Capital, the U.S. private equity firm, bought the Korea First Bank (KFB), the predecessor to SC First, during the currency crisis in Korea in 1998. New Bridge bought KFB through a paper firm set up in Labuan, Malaysia, which has a treaty with Korea to avoid double taxation.

According to the Financial Supervisory Service (FSS), Malaysians invested a total of 964.8 billion won in the local stock market in 2009. They also spent 2 trillion won buying local bonds in the same period. The FSS said 95 percent of those investments were based on Labuan, and a significant portion of those investments came from paper companies, which aim to evade taxes.