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[Editorial] Wealth drain

Tax haven investments should be subject to close monitoring

Korean conglomerates are actively tapping tax havens worldwide for the apparent purpose of reducing their income tax burdens, a development that was highlighted during the National Assembly’s audit last week.

It is widely believed that, in some countries in the Caribbean, global investors can easily attain documents that could register their operations there. It is known that these sort of documents are available via brokers within several days of application.

Arguments start from the point whether the companies will really set up offices or operate factories by hiring workers. The issue of paper, or bogus, firms has been a core investigation target of tax authorities.

Korean conglomerates’ direct investments in the tax havens, such as the Bahamas, Virgin Islands and Cayman Islands, have totaled 22.9 trillion won ($20.3 billion) over the past five years. After posting 7.8 trillion won from 2011 to 2012, the amount increased further to 9.4 trillion won during the 2014-2015 period.

In their report to the Bank of Korea and the National Tax Service, the conglomerates insisted the money -- made as direct investments -- was used for establishing companies, factories or purchasing properties there.

Some companies might be sincere in their investment activities. It is legitimate to operate businesses in tax havens and benefit from tax cuts or exemptions. It is certainly a corporate strategy to maximize profitability.

At the same time, however, there have been allegations that some foreign and local firms sought to exploit the tax havens as tools to evade taxes or conceal wealth -- and possibly as slush funds.

In Korea, the allegations are based on the huge sums of money, which have yet to be returned to the country after being transferred to tax havens. Offshore taxes levied by the NTS also suggest there could be loopholes in tracing sources of taxation.

Last year, the tax agency imposed 1.11 trillion won on 223 overseas investments. Those involved additional or back taxes from local businesses, which allegedly tried to dodge through low-key relocations of funds to tax havens.

According to online data service provider Chaebul.com, more than 10 percent of overseas companies owned by Korea’s 30 biggest conglomerates are based in tax havens. The business groups operate 231 subsidiaries in tax havens such as Luxembourg, Bermuda, Hong Kong, Singapore and Labuan in Malaysia.

As lawmakers demanded during a parliamentary audit, financial regulators need to launch a full-fledged probe into the currency trading of alleged tax dodgers.

The law stipulates that a Korean national should notify foreign exchange-specialized banks in advance of any major direct investment, purchase of property or financial transactions made outside the country.

Four years ago, an independent online-based media outlet unveiled the identity of a group of businesspeople who had set up bogus companies in popular tax havens such as the British Virgin Islands.

In 2013, tax authorities raided the headquarters of a conglomerate-based insurance firm to look into whether the company played a significant role in the alleged tax dodging of the group as its flagship financial unit. An executive at a business unit of the group was included on a blacklist unveiled by the online news provider.

Domestic conglomerates have been enjoying a variety of tax benefits compared to small and medium-sized enterprises and ordinary households, under the government’s initiative to boost the economy by providing a favorable business environment.

Tax evasion by big businesses undermines individual taxpayers, including salaried workers, who are levied withholding taxes strictly.

The government should bolster crackdowns on shady investments in tax havens to ensure it does not lose its legitimate tax base and to block wealth earned in the domestic market from draining out of the country.

Establishing tax justice is also important in terms of providing local and foreign businesses operating here with a level playing field. Any negligence will offer foreign businesses, including private equity funds, cause to challenge the authority’s income tax scheme.
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