By Kim Jae-won
Staff reporter
It was 10:30 a.m., Wednesday morning. Courtroom 306 at the Seoul High Court was sparsely seated, a bit unusual considering a prize fight was about to begin. The second round of a legal fight pitting the mighty National Tax Service (NTS) against Standard Chartered (SC) Group, the U.K.-based banking giant was beginning.
Presiding Judge Kim Jin-sung took his seat high in the center of the room accompanied by two judges beside him. Three lawyers from Kim & Chang, a top local law firm representing SC, were positioned at the left, while three lawyers from the Korea Government Legal Service (KGLS), a legal representative of the Jongno Tax Office, were seated at the right.
Kim Soo-hyung, lead lawyer of the Kim & Chang team, started his argument at the first trial of the appeal court. To Kim, the court room was quite familiar because he served as a senior judge before retiring. He looked short but his eyes looked sharp.
“The Seoul Administrative Court denied the legal status of KFB New Bridge Capital by admitting the tax agency to a impose tax on real investors who hid behind the company. However, this is not the case,” Kim said. His voice resonated throughout the courtroom.
Kim earnestly tried to present New Bridge Capital as being totally different from Lone Star, a Texas-based hedge fund, which has been criticized for evading tax here.
“Lone Star was slapped with a tax because it was a real beneficiary, while New Bridge is not, thus should be exempted from taxes,” Kim told the court.
Kim’s plea was immediately rebutted by the state lawyers representing the tax officials.
According to NTS officials, New Bridge Capital, the U.S. private equity firm, bought the Korea First Bank, the predecessor to SC First, during the currency crisis in Korea in 1998. New Bridge bought Korea First Bank through a paper firm set up in a tax haven in Labuan, Malaysia, which has a treaty with Korea to avoid double taxation.
Tax officials argued that the investors of the paper firm, named KFB New Bridge Holdings, were from eight countries that don't have a treaty for taxation avoidance, enabling the NTS to tax their "capital gains." Since the profit was made by New Bridge Holdings, they were subject to corporate taxes. The NTS levied 45 billion won in corporate taxes on SC, the buyer, believing that there was a contract made between SC and New Bridge so SC would have to pay taxes. The Korean tax officials won in the first round.
Then, Kim apparently gave up his defense of New Bridge and went onto the defense of his real client.
Kim did not make clear why SC is different from Lone Star in detail, but hinted he would unveil his argument during the second hearing.
Sohn Ho-chul, chief lawyer for the tax office, counterattacked Kim, saying the tax agency imposed tax in a proper manner by the principle of taxation of real beneficiaries.
“The principle is that somebody who earns an income should pay tax. Under this principle, it is no problem for the tax agency to impose taxes on SC, which is obliged to pay tax on behalf of New Bridge,” said Sohn.
Kim argued that even though the taxation is proper, New Bridge should pay it, not SC.
“New Bridge had a permanent establishment (PE) in Korea. So, SC is not obliged to pay tax for it.” By Korean law and international taxation standards, if a foreign company runs a PE, an office or a subsidiary company, which takes on a real role for the parent company, the tax agency can impose tax on the PE.
However, Sohn said it was already revealed at the administrative court that those offices of New Bridge were not real PEs.
“The administrative court already recognized that those offices were not PEs. Moreover, SC also admitted it at first. It is ironic that they now argue New Bridge had PEs.”
The three-panel judge listened to both sides carefully, but did not show any hint on how they felt on the first day of trial.
“I accept the suggestion to have about 30 minutes of debate next time. The second trial will be at 11:30 a.m., July 7,” Judge Kim said.