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Andrew Salmon

The US investment fund's donation comes amid growing indignation over foreign firms' immense tax-free profits

In a highly unusual move, a US investment fund has donated US$20 million to two South Korean organisations  - at a time when foreign capital is facing unprecedented public and regulatory pressures there.

'This is an unusual experience for us. In fact, it is the first and largest contribution we have ever made,' said  Richard Blum, co-chairman of Newbridge Capital as he officially unveiled the donations to the Korea Small Business Institute (Kosbi) and the Korea Asset Management Corp (Kamco) during a press conference in Seoul yesterday. Each of the state-run firms received US$10 million.

Emphasising that Newbridge wanted to be seen as a 'good citizen', co-chairman  David Bonderman said. 'We are here as long-term investors in this society, so we might as well get along.'

Newbridge said it was making the donation to stimulate 'the development of the financial industry and the growth of small and medium businesses'.

Kosbi, which researches SME issues, will use the cash to research ways to globalise Korean SMEs. Kamco, which recovers NPLs and collects delinquent taxes, will use it to set up a fund to recover individual debt defaults.

Newbridge was the first overseas investment fund to make a significant play in  Korea in the wake of the 1997-1998 Asian financial crisis when it acquired a 50 per cent stake in bankrupt Korea First Bank for US$420 million in 1999. It sold its stake this year to Standard Chartered, reaping profits reported  at more than US$1 billion.

Other players are Carlyle, which profitably sold KorAm Bank to Citigroup last year; Lone Star, which holds a controlling stake in Korea Exchange Bank; and the Singaporean government's GIC, which  owns some of Seoul's top real estate.

The investments of Newbridge and other foreign private equity funds with stakes in  Korean firms are mostly made through vehicles registered offshore, sparing these investors from double taxation.

As a result, after disposing of their acquisitions at huge profits, Newbridge and similar funds have been lambasted in the  Korean media for not paying taxes on 'excessive profits' in the country.

In an editorial on April 14, the Chosun Ilbo,  Korea's top-selling daily, said: 'Hardly anyone from abroad is building factories, but the mergers and acquisition sharks are circling freely.'

Foreign capital holds about 42 per cent of the  Korean stock market, prompting  domestic fears of loss of economic sovereignty.

Foreign investors respond that the high foreign ownership ratio is due to  Koreans' preference for investing in real estate, over stocks.

Partly as a response to public pressure, Korea's National Tax Service (NTS) announced on April 14 snap audits on US investment funds Carlyle and Lone Star.

In a press release  last Friday, the NTS conceded that one reason for the timing of the audits was a fear of public criticism.

'The activities of [foreign] funds have become something of a political football,' said Hank Morris, who consults to foreign companies on  Korea's capital markets as a director at Seoul-based IRC. 'So possibly this perked up the tax authorities in that the funds' names have come up in the hallowed halls of parliament.'

Newbridge itself was not under tax audit, its executives  said. Still, the NTS tax raids were the latest in a line of moves that have spooked foreign fund managers in  Korea.

At the end of March, the Financial Supervisory Service (FSS) reinforced a regulation requiring investors to disclose sources of capital when acquiring  more than 5 per cent of  Korean companies.

A bill is also pending in the National Assembly which would require foreign-controlled banks to fill their boards with at least 50 per cent  Koreans.

Standard Chartered, which completed its takeover of Korea First Bank this month, has already taken this advice.

Mr Blum said Newbridge's donation, which  was planned  early last month, was designed to 'maybe help those who question our motives in being here to help understand our presence in Korea'.

As to whether  tax audits could scare off foreign investors, Mr Bonderman said: 'That depends entirely on whether the investigations are fair and in the scope of the law. If seen as punitive, they could well have a negative impact.

'We think Korea is a good place to invest, [but] that doesn't mean it will always be a good place to invest.'

Responding to a reporter's question regarding the fund's widely alleged tax evasion, Mr Bonderman  said: ''Evade' has a very negative context. We are obligated by tax treaties, and we will pay them and no more. It is not a question of evading anything - it is a question of complying with laws.'

This position was an echo of the statement issued by the American Chamber of Commerce in Korea on Monday  which many observers noted for its diplomatic tone over a thin layer of retaliatory threat. 'We understand the sensationalism that may be associated with the earning of substantial profits when such profits are not taxed,' it said.

'We fully expect the [NTS] to honour their international treaties preventing double taxation that also benefit Korean firms as they invest abroad and remit profits to Korea without being taxed in the country of investment.'

A foreign fund manager, who spoke on condition of anonymity, was more outspoken. '[Overseas funds'] investments were made in a perfectly legal manner  ... meddlesome bureaucrats create regulations that don't stand up properly on their own, creating a constant need for 'window guidance'. So you never know what the law means.'



Newbridge gives Korea US$20m sweetener