TAX NEWS - JUNE 2010
Korea Tax: Standard Chartered goes toe to toe with National Tax Office (NTS)
Standard Chartered's Northeast Asian office, (NEA) which controls SC First Bank, has replaced its legal counsel ahead of the start of its appeal against a district court's decision to force it to pay 45 billion won in corporate taxes.
The leader of its new legal team from Korea's biggest law firm Kim & Chang served as a judge for the appellate court that will handle the case. The first hearing is scheduled for next week.
In contrast, the National Tax Office (NTS) is planning to hire a state-sponsored lawyer. If the case comes down to who has the best legal representative, Standard Chartered appears to hold an upper hand. But a little-asked question is whether, by pushing on with this recourse, SC is heading down the path of Lone Star, the Dallas-based private equity, which has received a great deal of flak in the court of public opinion. Lone Star remains stuck, not making progress on its attempt to sell its controlling stake in KEB, which has been thwarted by Korean authorities acting to prevent it from cashing in on capital gains to the tune of three times the purchase price.
NTS officials, who won the first round of legal wrangling with SC, are confident that they will win a second time during the appeals procedures. They say that they have a very strong case.
The case in dispute is complicated.
According to NTS officials, New Bridge Capital, the U.S. private equity firm, bought Korea First Bank, the predecessor to SC First, during the currency crisis hitting Korea in 1998. New Bridge bought Korea First Bank through a paper firm set up in a tax haven in Malaysia, which has a treaty with Korea to prevent double taxation.
Tax officials argue that the investors in the paper firm, named KFC New Bridge Holdings, were from eight countries that either don't have a treaty for taxation avoidance, enabling the National Tax Office (NTS) to tax their "capital gains." Because these were made by New Bridge Holdings, they were subject to corporate taxes.
The NTS levied 45 billion won in corporate taxes on Standard Chartered, the buyer, believing that between Standard Chartered and the seller New Bridge, the former was obliged to pay taxes.
Standard Chartered's new lawyers
Standard Chartered NEA fired its team of lawyers from Yulchon, who lost the case in the district courts.
Five lawyers from Kim & Chang have teamed up for the appeal case led by Kim Soo-hyung, a former senior judge at the appeal court from 2004 to 2008.
A source told The Korea Times he will argue Korean tax officials violated international standards and the ruling in favor of the National Tax Office (NTS) will set a bad precedent that will harm the interest of Korean firms operating overseas.
"As a Korean citizen, I absolutely understand the effort of the agency to levy tax on international hedge funds," the source said. "However, taxes should be imposed by law, not by patriotism."
"I think Standard Chartered chose Kim for the case. Kim's former career may affect the case," said a local legal analyst asking for anonymity.
"I cannot comment on the issue because the procedure is ongoing," Agnes Kim, head of regional communication management at the SC Group, said.
NNational Tax Office (NTS) keeps the same strategy
The National Tax Office (NTS) seems to be going about business as usual in the upcoming hearing.
Hong Seong-no, director of law affairs from the Seoul Regional Tax Office, said that the agency has no special strategy, but added, "We will win on the merits of our case."
"Our action is right, supported by many legal experts on top of the district court's ruling," Hong said.
The taxman did not know that Standard Chartered had hired a strong legal team but believes it won't affect the case.
"I do not know whether they (Standard Chartered) have changed lawyers or not. However, I do not think that the court will change the decision. The court will not be shaken by the lawyer's background."
The National Tax Office director said the agency may hire lawyers from a government agency, the Korea Government Legal Service (KGLS), again because the National Tax Office cannot afford to hire lawyers from private law firms.
"We do not have sufficient budget for lawyers from the private sector," he said
Hong Jung-pyo, another official at the Seoul office said that he is confident the National Tax Office will win the case in the appeals court, citing a precedent in the Supreme Court.
"In a similar case, the Supreme Court ruled that the tax agency is right to impose tax on real investors behind bogus companies in tax havens."
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