Tax authorities rejected Tuesday the demand by Lone Star Funds that they return 391.5 billion won (about $342 million) in capital gain taxes the U.S. buyout firm paid on earnings from its sale of the Korea Exchange Bank (KEB) earlier this year. The decision, which was widely expected, means the dispute will enter the long process of international arbitration.
“Lone Star had a presence in the Korean market for a long time and made considerable capital gains, so we don’t believe there’s any problem in taxing the company,’’ said a National Tax Service (NTS) official, adding that international arbitration for these types of matters typically takes three to four years to be settled.
Legal representatives for Lone Star were unavailable for comment.
The squabble with the NTS accounts for the smaller part of Lone Star’s widening conflict with the Korean government, shaping up for an explosive showdown that threatens to have huge ramifications for either side.
The Texas-based company, which acquired KEB in 2003, finally received its much-awaited ticket out of Korea earlier this year when financial regulators gave the go-ahead to the sale of its 51.02 percent stake in KEB for $3.5 billion to Hana Financial Group.
Lone Star informed the government last month that it may file a damages claim of about 2 trillion won to the International Center for Settlement of Investment Disputes (ICSID), claiming that financial authorities’ unwillingness to approve a number of prospective buyers for KEB in the few past years cost its investors massively.
Officials responded by forming a task force from by the Prime Minister’s Office, the Ministries of Strategy and Finance, Foreign Affairs and Trade, and Justice, the Financial Services Commission (FSC) and the National Tax Service (NTS), backed by an all-star team of lawyers, to design legal strategies against Lone Star.
FSC officials involved in the task force insist that Lone Star was stuck here longer than it wanted not because the regulator was reluctant to approve prospective KEB buyers, but rather because of the global economic turmoil that took hold after the collapse of the Lehman Brothers.
The government and Lone Star have six months to settle their differences, and should talks fall through, the U.S. fund has said it will file for arbitration.
“We have to be prepared for anything. The difference in opinion between the government and Lone Star is rather large, so at least now, we have to say the possibility of entering international arbitration is decent,’’ said an FSC official.
In its fight with tax authorities, Lone Star states that its Belgium-based subsidiary LSF-KEB was the listed seller in its deal with Hana and it shouldn’t have to pay capital gains tax under a double-taxation avoidance treaty between Korea and Belgium. Belgium doesn’t impose any taxes on capital gains by companies there.
The NTS argues that Lone Star’s Belgian subsidiary is merely a paper company and the real entity involved in the KEB deal was the business unit established in Korea. <The Korea Times/Kim Tong-hyung>
Russia, Attended Kim Il-sung University, PhD in Korean History, Leningrad State University, Professor at Australian National University(1996), Professor at Kookmin University, Contributor for The AsiaN
Egypt, Editor of Al-Arabi Magazine in Kuwait, Chief of The AsiaN's Middle East Bureau
Nepal, Reporter of The Rising Nepal
Pakistan, Pakistan Press International Editor, Contributor for The AsiaN
India, SPOTFILMS CEO, FORMEDIA Chairman
Egypt, Managing Editor of the AsiaN's Middle East Bureau, Graduate Student of Mass Communication and Journalism at Ahram Canadian University
Singapore, President of Asia Journalist Association