hankyoreh

Jan. 13. According to the agreement

By Park Byong-su and Hong Dae-seon, senior staff writers

The US belatedly admitted that it deposited the unused part of South Korea’s monetary contribution for US troops in South Korea in a non-government bank and has been earning interest on the deposit. Despite this, it has been confirmed that the Korean National Tax Service has declared the interest to be tax-exempt, treating the bank where the money was being deposited as an US government institution.

“During the recent ninth round of negotiations for sharing the military defense costs, the US acknowledged for the first time that it had earned interest on the unused portion of South Korea’s contribution,” a senior official with the Ministry of Foreign Affairs told reporters on Jan. 23.

According to the official, the US explained that Community Bank, where it deposited the money, is actually an affiliate of Bank of America, a private sector American bank. And, the interest that accrued on the account is unconnected with the US government, meaning South Korean tax authorities should deal with the taxes owed on this money according to the relevant regulations.

The US had been first depositing the South Korean government’s contribution in an interest-free account in Community Bank inside the army base and then reinvesting that money in Bank of America - Community Bank’s parent company - as a certificate of deposit. Bank of America reportedly paid 3-5% of interest on the deposit made in Community Bank.

But the National Tax Service regarded Community Bank as a US government institution and waived taxes on the interest, documents show. In a lawsuit filed in 2009 by civic group Solidarity for Peace and Reunification of Korea about the eighth round of defense cost negotiations, Bank of America’s Seoul branch said that it had paid a total of 56.6 billion won (US$52.69 million) in interest to Community Bank in 2006 and 2007.

If the 12% tax rate stipulated in the ROK-US income tax convention had been applied to the interest that accrued during these two years, US Forces in Korea would have had to pay 6.7 billion won in taxes, but the Korean National Tax Service did not levy the tax.

Concluding that Community Bank was affiliated with the US Department of Defense, judges at the Seoul Regional Tax Office decided to grant an exemption for tax on the interest in accordance with the tax convention between the two countries. But with the US having confirmed during the recent negotiations that Community Bank is not a state-run bank, the National Tax Service’s argument was found to be invalid.

The US did not disclose exactly how much interest it has earned on the portion of since 2002 on South Korea’s unused contribution. Solidarity for Peace and Reunification of Korea estimates that the interest is more than 300 billion won (US$279.30 million).

“The key question here is whether Community Bank is or is not an American government organization. When we receive official notice in regard to this issue from the Ministry of Foreign Affairs, we will make our decision according to law and principle, said an official the National Tax Service on condition of anonymity.

Please direct questions or comments to [english@hani.co.kr]