Foreign Firms Cited for Tax Evasion
Its been divulged that foreign companies have omitted tens of billions of won in local taxes while engaging in real estate transactions.
The city of Seoul announced on April 25 that 13 foreign companies purchased large buildings in central Seoul amounting to hundreds of billions of won but did not pay any acquisition and registration taxes, and it plans to collect a total of 36.3 billion won of omitted taxes. Out of the 36.3 billion, unpaid acquisition taxes accounted for the largest portion at 23.34 billion won, followed by 9.16 billion won of unpaid registration taxes, and 3.89 billion of other types of taxes uncollected.
During the period of September to November of last year, out of the 126 foreign companies, the city of Seoul waged tax audits on 20 which acquired large buildings. It is the first time that tax audits have been conducted on foreign companies concerning local taxes.
Paper Company Abroad Used for Tax Evasion
Thirteen foreign companies were unmasked during this audit, including the Government of Singapore Investment Corporation (GIC), PCA Life Korea, Rodamco, and ABM Amro Bank.
According to Seoul city, they bought 20 buildings ranging from Star Tower and City Tower in Namdaemun-ro to the former party building of Grand National Party in Yeouido, and evaded taxes in the process. GIC acquired Star Tower from Lone Star and failed to pay 16.7 billion won and PCA Life Korea did not pay 10.2 billion won, which they must.
In addition, these foreign companies used high legal advice and created offshore paper companies and avoided paying registration and acquisition taxes unlawfully by having these paper companies own the dispersed stock.
For example, a foreign company creates two paper companies which will each own 50.99 and 49.01 percent respectively of the Korean real estate shares. Since there are no mutual investment shares between these paper companies, the shares do not need to be added. That is done in order to avoid the acquisition tax that is levied on the majority shareholder that owns over 51 percent of the printed stock and controls the company management.
Otherwise, it was disclosed that after acquiring Korean real estate, these foreign corporations entrusted the building management and lease tasks to another company or omitted the large consulting costs in acquiring the real estate, hence evading taxes.
As a result of Seoul citys pursuit of uncollected taxes, as of April 10, nine companies including GIC have paid 21.7 billion won of unpaid taxes.
The city of Seoul also plans to conduct addition tax audits sometime in the first half of this year on about 40 foreign companies that purchased large buildings.
Foreign Company Tax Evasion Shakes Local Government Budget
In the fiscal year 2004, Seoul city collected about three trillion won in real estate acquisition and registration taxes, which amounts to 34.2 percent of the total tax revenue.
Considering the situation in which acquisition and registration taxes following real estate transactions comprise a large portion of local government bodies, the city of Seoul is concerned that if tax evasion by foreign companies increases, it will set back budgets of the local governments.
Local tax experts pointed out that foreign companies are obliged to report the fact of acquiring stock to a tax office, but they do not have to report it to the local government, hence local governments have difficulty in confirming whether the foreign company is the majority shareholder.
Tae-Hun Hwang beetlez@donga.com gaea@donga.com
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