Bank of China fails to overturn $26 mil. tax imposed by Korea's tax authorities

A woman stands in front of the Bank of China's headquarters in Beijing, Jan. 22. EPA-Yonhap

The Bank of China (BOC) lost its legal battle in the Korean Supreme Court, failing to overturn a 35.8 billion won ($26.9 million) tax imposed by the Korea's tax authorities.

According to sources, the Supreme Court on Jan. 25 upheld the lower court's ruling against the Chinese central bank in the corporate tax cancellation lawsuit.

The BOC has raised capital from its Seoul branch, generating profits by either depositing this capital in branches located in China or by lending it to Chinese businesspeople. The interest income generated by such activities has been attributed to its Seoul branch.

Regarding this business practice, the BOC deducted 10 percent of the income — the amount withheld by the Chinese government as tax — when filing corporate taxes to the Korean government.

According to domestic regulations, foreign corporations paying corporate tax in Korea are permitted to make their payments after deducting the amount they have already paid to foreign countries. This provision, known as the foreign tax credit, is designed to prevent double taxation.

For example, if the BOC's Seoul branch earned profits in Japan and paid the relevant taxes to Japan, the bank could apply this regulation to reduce its tax liability in Korea by the amount of tax already paid in Japan.

However, a legal dispute arose in this case because the BOC applied the regulation to deduct taxes it paid to its home country, leading to a difference in legal interpretation.

Korean tax authorities determined that the regulation could not be applied in this case, and subsequently levied a tax of 35.8 billion won on the BOC. This amount was calculated based on the income the bank earned between 2011 and 2015 in addition to some additional taxes.

The Chinese bank disagreed with this assessment and filed a lawsuit to challenge the decision.

While the outcomes of the first and the second trial were different, the Supreme Court ultimately upheld the second trial's decision, mandating the bank to pay the levied tax.

The Supreme Court stated that Korea has the primary right to tax, before China.

It reasoned that if the BOC's Seoul branch generated profits in China, where its headquarters are located, and paid corporate taxes there, Korea should have the first opportunity to levy taxes on those earnings. Only after such taxation by Korea would the earnings be eligible for any tax deductions in China, it said.