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21 March 2003 A decision from the Korean National Tax Service to impose capital gains tax on British bank HSBC after a transfer of local stock from a Malaysian fund sets a dangerous precedent and could frighten off investors, observers have warned. |
The storm commenced when the authority told the bank that it was going to levy the tax on income from the transfer of stocks from a $300 million Labuan-based fund, according to local newspaper, the JoongAng Daily. It is also looking to repeat this course of action in several other cases.
Korea has signed a tax treaty with Malaysia which allows such transactions to remain exempt from capital gains tax. However, the Tax Service has concluded, following investigation, that the fund is owned by individuals residing in the Cayman Islands, with which Korea has no such treaty. Therefore it was deemed to be liable for the tax. "The fund operated by HSBC was formed in Labuan, but we found the people that actually profited from the stock transfers resided in another region" a tax official confirmed.
Countering the move by the Korean tax authority, an HSBC spokesman said: "According to international customs, it is not proper to impose taxes on funds that came from tax havens," adding that the bank was prepared to go to court over the matter. The HSBC official added: "We cannot accept it and we will file a lawsuit if the agency actually imposes the tax"
A source from inside the finance ministry tax department acknowledged that this is likely to be un unpopular decision and the government is treading a delicate line in pursuing such cases. "We should deal with the issue carefully," the official warned: "We will face difficulties if foreigners become reluctant to invest in Korean stock markets."
