A taxing dilemma

As distressed firms reap profits off the rock bottom prices found in the wake of the 1997 to 1998 South Korean financial crisis, the government—responding to public opinion—is turning against the foreign investors, as Aaron Lovell reports.

Following the late-nineties currency crisis in South Korea, US buyout shops were able to scoop up many of the country’s distressed assets, including banks and buildings, at fire-sale prices. These investments have paid off as economic conditions have improved, meaning big paydays for players like The Carlyle Group, Lone Star Funds and Newbridge Capital.

But these profits are drawing criticism in the South Korean media, from politicians and citizens alike, who see the foreign investors as taking advantage of the once-floundering Korean economy. The criticism seems to revolve around the fact that many foreign investment firms do not pay taxes in Korea by basing themselves outside the country, oftentimes in well known tax havens—something that doesn’t sit well with some Koreans.

Yoon Jeung-hyun,

“We will not tolerate any speculative capital if it is for short-term investment gains and intervening in management,” said Yoon Jeung-hyun, the country’s Financial Supervisory Commission Chairman, in a speech late last month.

This outcry led to at least two rounds of National Tax Service investigations last month—described as everything from “visits” to “raids”—into a number of US private equity firms, all of which have recently made profitable, high-profile exits.

Last year, Washington, DC-based Carlyle successfully exited a minority investment in KorAm Bank, South Korea’s sixth largest lender. Carlyle sold the Seoul-based bank to Citigroup last year for $2.7 billion, having invested $435 million in the institution since 2000.
Now Carlyle is being investigated by Korean tax authorities, some of which paid a surprise visit to Carlyle offices in Seoul in late April, according to a source close to the situation. The source said the investigation involves a Korean law stating that private equity funds do not have to pay a gains tax, provided the funds are not domiciled in South Korea. The Carlyle Asia fund is reportedly based in the Cayman Islands.

Dallas-based Lone Star Funds was also reportedly targeted and paid two visits by Korean tax officials in the past month, possibly tied to a number of recent investments and exits in the region. In 2003, Lone Star acquired a majority stake in the Korea Exchange Bank for $1.2 billion. The firm recently sold Star Tower, a 45-story office building in Seoul, to the Government of Singapore for an undisclosed amount, which is reported to be around $1 billion.   

In 1999, Newbridge Capital became the first foreign investor to buy a Korean bank. The private equity firm, which focuses on Asia and affiliated with the Fort Worth, Texas-based Texas Pacific Group, acquired half of Korea First Bank for $430 million. It sold its stake in the bank earlier this year to London-based bank Standard Chartered for $3.3 billion, registering a reported profit of $1.1 billion. Newbridge’s fund is based in Malaysia.

While Newbridge says it has not been targeted by tax authorities for an audit, the group announced a $20 million donation two weeks ago to help foster small business in the country.

“Korea is a generally good place to invest,” David Bonderman, a Newbridge co-chairman, told reporters at the time of the announcement, adding that he did not see another Korean deal in the immediate future.

As the debate heats up, Korea’s commission chairman Yoon has reassured investors that the country is not biased against foreign capital, adding that foreign capital has helped South Korea in the wake of the 1997 financial crisis.

“Our policy is to not discriminate against foreign or domestic capital,” he said in the April speech. “We will offer a level playing field and ensure that any rule violators will be held accountable without fail, regardless of nationality of capital.”