Out of some 700 trillion won (US$621.95 billion) worth of South Korean stocks and bonds held by foreign investors, nearly 20 percent originates from regions deemed as tax havens, raising concerns over the heightening volatility of the local financial market.
According to a report titled “Foreign Investors’ Current Investments by Nationality” from Rep. Park Kwang-on of the ruling Democratic Party of Korea on October 26, the number of registered foreign investors reached 40,141 from 127 countries as of the end of August.
By nationality, the United States ranked first with 13,882, followed by Japan with 3,784, the Cayman Islands with 2,682, Canada with 2,428, the United Kingdom with 2,394 and Luxembourg with 1,742. Among Asian countries, except for Japan, Hong Kong came in first with 1,047 and Taiwan in second with 942.
The foreign investors held a total of 700.6 trillion won (US$622.48 billion) – 596.2 trillion won (US$529.72 billion) worth of stocks and 104.4 trillion won (US$92.76 billion) of bonds. Nearly one in five foreign investors, 20.5 percent, or 8,253, in South Korea's stock markets are located in tax haven countries.
The Korea Customs Service designated 62 as tax haves in 2011. These countries and areas don’t impose a duty on any capital and trade transactions or apply very low tax rates. Accordingly, they are frequently used for offshore tax evasion and slush fund creation.
Specifically, the Cayman Islands had the most investors with 2,682, followed by Luxembourg with 1,742, the Virgin Islands with 940, Singapore with 689, Malaysia with 650, Switzerland with 403, Bermuda with 305, Bahamas with 133, Jersey with 130 and Guernsey with 104.
The amount of stocks and bonds owned by foreigners from these regions came to 102.13 trillion won (US$90.74 billion) and 33.79 trillion won (US$30.02 billion) – 135.89 trillion won (US$120.74 billion) in total, accounting for 19.3 percent of total shares and bonds held by foreign investors.
Rep. Park said “Considering the fact that specific figures are not available for U.S. investors from Delaware State, which is categorized as a tax haven, the number of investors from tax havens is estimated at more than 8,300.”
He added, “As it is easier to set up paper companies in tax havens, it is also easier for investors there to engage in tax evasion or stock manipulation. Domestic investment by these investors can potentially increase market volatility. It is crucial to strengthen international cooperation systems like sharing of financial and taxation information among governments and closely monitor the markets.”
Meanwhile, 88 investors from 18 countries owned over 1 trillion won (US$888.49 million) worth of domestic stocks, while 20 investors from 16 countries held over 1 trillion won (US$888.49 million) worth of domestic bonds. Most investors owing over 1 trillion won (US$888.49 million) of stocks from tax havens came from Luxembourg with 8, followed by Switzerland with 3, Singapore with 3 and Malaysia with 1.
Switzerland took first place in terms of the number of investors from tax havens owing over 1 trillion won (US$888.49 million) of bonds, followed by Luxembourg and Singapore.
The National Tax Service (NTS) collected about 1.31 trillion won (US$1.16 billion) from 228 offshore tax dodgers using tax havens last year. Considering the fact that the number and amount of offshore tax evasion cases stood at 30 and 150.3 billion won (US$133.54 million), respectively, in 2008. The number of cases increased by 7.6 times, while the amount of tax penalties grew by 8.7 times.