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US base Camp Casey in Dongducheon

Community Bank, which has earned interest estimated in the hundreds of millions of dollars from depositing massive savings from the South Korea­-US defense contribution fund, was officially confirmed by Washington to be “property of the US Defense Department.”

The declaration is expected to generate major controversy, with the US government effectively admitting to exploiting legal loopholes to earn interest off money paid by South Korea each year for military construction and claiming exemptions on the resulting earnings.

In a recent report to the National Assembly, the South Korean Ministry of National Defense said it had received an official written response from the US in October confirming that Community Bank was a “bank program owned by the US Defense Department,” New Politics Alliance for Democracy lawmaker Yoon Hu-­duk said on Oct. 23.

The response came fifteen months after South Korea inquired in June 2014 on whether Community Bank was a private bank or one owned by the US government.

Community Bank, which provides banking services to US troops stationed oversees, is operated under commission by the Bank of America, a private US financial institution. It is also where the defense contributions paid every year by South Korea are deposited.

The current controversy centers on the interest earned from unspent defense contributions that have been saved up by USFK since 2002. The Ministry of National Defense has reported defense contribution savings of 1,119.3 billion won (US$985.2 million) in Oct. 2008, 710 billion won (US$625 million) in Aug. 2013, and 621 billion won (US$547 million) in Jan. 2014 to the National Assembly.

Neither South Korea nor the US has disclosed interest earnings from the defense contributions. But financial data submitted to the court in 2009 as part of a case filed by the group Solidarity for Peace and Reunification of Korea (SPRK) demanding damages from the state in connection with the defense contribution agreement showed Community Bank earning 56.6 billion won (US$49.8 million) in interest from defense contribution deposits at Bank of America’s Seoul branch in 2006­­-07 alone.

“If we go back to when the defense contribution savings first appeared in 2002, the total interest earnings would be somewhere over 300 billion won (US$264 million),” claimed Yu Yeong-­jae, head of SPRK’s USFK issues team. If accurate, the estimated earnings would mean an income tax bill of at least 30 to 40 billion won (US$26,4­­35.2 million) a year at a 12% rate.

So far, the South Korean National Tax Service (NTS) has not demanded payment of taxes on the interest interesting on the grounds that Community Bank is a “(quasi)­ state institution of the United States.”

The South Korea-­US Tax Convention states that the two countries do not tax interest earnings by the government, central bank, or government­ owned institutions in the other country.

But the US’s position on the defense contribution interest earnings has been inconsistent. Initially, it denied the payment of interest in the first place, claiming to Seoul that the defense contributions had been deposited in a non-­interest ­bearing account. As the debate continued to rage, Washington changed its position just before the signing of the ninth joint defense contribution agreement in Jan. 2014, verbally admitting that interest had indeed been earned. The then-­ambassador to the negotiations for the South Korean Ministry of Foreign Affairs, current Special Representative for Korean Peninsula Peace and Security Affairs Hwang Joon­kook, visited the press room to announce that the US delegation had “admitted that interest was earned on the defense contribution account.”

But Hwang also quoted the US as saying the earnings “had not been transferred to the US government” and the taxation issue was a matter for South Korean law because Community Bank was “essentially a private bank.” Even so, the NTS did not take any subsequent measures.

It was only in Apr. 2014 that the South Korean government released an official position announcing that it would “take all necessary measures on interest earnings according to domestic law if Community Bank is judged to be a private institution.” Its belated action came as the opposition appeared poised to link

government measures on defense contribution interest earnings to National Assembly ratification of the ninth defense contribution agreement submitted by the administration, which stipulated a yearly contribution of 920 billion won +∝ between 2014 and 2018. This was also when the administration sent its June 2014 inquiry to the US Defense Department on Community Bank’s legal status and the amount of interest accrued.

The official written response from Washington fifteen month later reversed the unofficial answer that had been given in Jan. 2014, when Community Bank was called a “private bank” during defense contribution negotiations. This meant that none of the interest earnings was taxable.

The US also issued an official denial of the amount of interest claimed, noting that the earnings were the result of the entire Community Bank investment balance and arguing that it was impossible to calculate the earnings for the defense contribution account alone.

The claim that the defense contribution account is non­-interest ­bearing and that USFK did not earn any interest was also repeated in the written response. But the same document also claims that interest earnings were used for Community Bank operational expenses. If interest earnings were indeed used to operate a bank owned by the US Defense Department, this would be an effective admission from the department that interest was indeed earned.

“They illegally earned interest off of defense contributions that are not supposed to be used for non­-designated purposes,” argued SPRK. “They need to pay all of that interest back to South Korea.”

The South Korean Ministry of National Defense appeared reluctant to pursue the matter further, saying only that it would “consider reflecting Community Bank’s interest earnings in a reasonable way during the next negotiations, since it is impossible to calculate the precise amount of interest earnings resulting from defense contributions.”

The “next negotiations” in question are for the South Korean and US defense contributions as of 2019, which suggests that the ministry plans to put the issue off for another three to four years instead of resolving it right away.

By Park Byong-su, senior staff writer

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