S Korea seeks back taxes from JPMorgan

South Korea’s tax authorities have ordered CCMP Capital Asia and Affinity Capital, the controlling shareholders of Mando, to pay about Won15bn ($16m) in back taxes on dividends they received from the country’s largest auto parts maker.

The move is the latest blow for the two private equity groups, which have struggled to divest their $446m investment in Mando, while the tax ruling highlights the difficulties facing foreign investors doing business in Asia’s third-largest economy.

The investment groups purchased a 73 per cent stake in Mando in 2000 through Sun Sage, an investment firm registered in the Netherlands. They received Won124.4bn of dividends during 2002-2006 and paid a 10 per cent tax last year according to South Korea’s double taxation treaty with the Netherlands.

But following a tax probe into Mando last year, the National Tax Service (NTS) claimed that the major shareholders should pay a 25 per cent tax as the beneficial owner of the dividends is not located in the Netherlands, people close to the situation said.

Mando appealed against the ruling but the appeal has been rejected.

Affinity and CCMP, formerly known as JPMorgan Partners until the US bank disposed of its last interest in the firm in November 2005, recently hired lawyers to take legal action against the tax ruling, the sources said.

“However, the NTS accepted some of the complaints raised by the investment funds and lowered the tax rate somewhat and ordered them to pay an additional Won15bn or so,” one person familiar with the situation said.

The NTS, Mando, CCMP, and Affinity declined to comment.

The investment funds have previously tried to sell their Mando stake for more than $1bn but potential investors were scared off when Hyundai Motor, Mando’s main customer, suggested it could turn elsewhere for its vehicle parts and offered a drastically reduced $700m for the stake.

The Mando case reflects South Korean authorities’ stronger determination to strictly impose taxes on foreign investors for capital gains they make in the county.

In a similar case, the NTS imposed a Won140bn tax on Lone Star for capital gains made from the sale of the Star Tower building in Seoul. The US private equity fund claimed that it did not have to pay the tax because the property investment was made through a firm registered in Belgium with which South Korea has a double taxation treaty. But the NTS took issue with the beneficial owner. Lone Star is appealing against the NTS decision.