Ex Post Taxo: Korean Government Renegs on Tax Advice
by Brendon Carr
Government of Singapore Investment Corporation (GIC) today found out about Korea’s regrettable preference for “flexibility” in re-interpreting laws. The Seoul Administrative Court, ruling on GIC’s appeal against a tax assessment by the Gangnam District Office for deemed acquisition tax in GIC’s December 2004 acquisition of Star Tower, upheld the district’s April 2007 tax grab:
[GIC] used two paper companies to complete the transaction, with neither holding fully 51 percent of the property. Under Korean law, a company buying more than 51 percent of an asset is subject to acquisition tax as the “controlling shareholder.”
The Gangnam District Office slapped a 17 billion won ($18.7 million) acquisition tax on the deal, reasoning that the two firms were merely paper companies that were not officially in operation, and that the Singaporean government company was the controlling shareholder.
The Seoul court said, “As the mother company has full control of its two subsidiaries, the legal liability for share acquisition [in Star Tower] will go to the Government of Singapore Investment Corporation.”
Note the term “paper company”. Korea hates “paper companies”, despite the fact that at the end of the day, all companies are essentially just paper.
The deemed acquisition tax-driven two company asset purchase structure has been a staple of corporate practice since I’ve been working here in Korea—which means since 1997. In all cases when I’ve worked on such a deal, where the client faces a potential liability that is relatively large the client seeks not only the legal opinion of a leading law firm, but also a written revenue-ruling letter from the National Tax Service. Informed sources tell me that’s what happened in the GIC case in 2004.
In other words, the Korean government’s tax authority advised a foreign investor in advance of a deal, Go ahead, your proposed investment structure will not result in deemed acquisition tax. But that caution did GIC no good: The administrative court says We don’t care what you’ve been told. Your mistake was believing the government.
As a friend mused earlier today, the real mistake GIC made was purchasing an asset from Public Enemy No. 1, Lone Star Funds. Once the mob mentality took hold and made Lone Star and all its assets radioactive, the outcome for GIC was pre-ordained. The good news is it probably won’t break GIC: The Star Tower asset was purchased for W930 billion won—what’s an extra W17 billion?
GIC seems bound to appeal the Administrative Court’s ruling. And it’s an important issue—nearly every large investment in Korea, foreign and domestic, has been structured around the deemed acquisition tax. The amounts at stake could be trillions of won. But also the future of the country is at stake. If the court system does not produce justice for foreign investors who act prudently and structure according to the laws then in effect at the time of their investments, Korea could find itself very lonely in the FDI derby for a very long time.
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While I understand and agree with your argument on the need for people to be able to rely on revenue-ruling letters from the National Tax Service, I’m curious about a couple of things:
1) The decision to hold GIC as the mother company liable for a 51+% acquisition seems like the “substance over form” tax doctrine we have in the U.S. Is there a similar doctrine in the ROK and, if so, where does this authority come from?
2) Is there (in theory, anyway) a guarantee of some sort that if you get a written revenue-ruling letter from the National Tax Service that the Service will honor it? It seems like there must have been some legal mechanism to compel the Service to honor the revenue-ruling letter and to keep the case out of court. Otherwise, everybody would be making big business deals knowing that, although rulings on the tax consequences have been honored in practice, they’re ultimately not legally enforceable, and that seems like a big risk to run…
Nice title to your post, btw… ^_^
Are you just pulling my leg with these questions? These are in fact the core issues.