This is the abstract of an article on the official financial centers, which is recently attracting interests from both government authorities and investors in Korea and contained in the Kyung Hee Law Journal, Vol.39 No.3, published in February 2005.

Korea's admission to the Organization for Economic Cooperation and Development (OECD) in 1996 ignited the inbound and outbound flows of capital. Several Korean corporations embarked on investment in the so-called tax havens like Cayman Islands, Labuan and Dublin. Until the 1970s, the offshore financial centers (OFCs) around the globe had been tapped only for the purpose of borrowing foreign capital necessary for the development of the nation. Since the 1980s, OFCs have been used as a gateway to foreign investments in line with the improved Korea's balance of payment conditions.

Offshore banking may be simply defined as borrowing from and lending to non-residents. So an OFC is a jurisdiction where such out-out transactions far outweigh transactions related to the domestic economy. The most famous OFCs are London, Singapore, Dublin, Cayman Islands and Labuan, among others.

As the international funds flow to the OFCs making use of looser regulation than any other financial markets, OFCs attract more and more capital around the world. International banks, insurance companies, fund managers, representatives of the special purpose vehicles (SPVs) related with securitization are mushrooming in those financial centers. More often than not OFCs are criticized for money laundering, tax competition and other unfair transactions. The Korean government, however, has a master plan to establish a regional financial hub in East Asia by making Incheon and Jeju Island an attractive offshore market.

On the other hand, harmful tax practices staged in those tax havens are increasingly put under the surveillance of nations concerned. OECD is leading the project to eliminate such practices to preserve the integrity and fairness of the tax systems of Member States. In particular, the United States is alert to the movement of unidentified funds through many OFCs. In this context, the Korean government is reinforcing the regulation and supervision of the offshore banking activities of Korean financial institutions and companies. Authorities' attention have been paid to the attempted tax evasion and unfair trading of securities in violation of the Korean tax law and the foreign exchange-related laws.

This article examines the mechanism of the OFCs around the world and the content of regulations concerning Korean financial institutions and enterprises. At present, the taxation of profits from the offshore funds invested by a Korean tire manufacturer would make an interesting issue in this regard.

In general, the preoccupation of offshore fund managers is to give more dividends to the investors than expected. So every OFC levies no or nominal tax on revenues arising out of such funds, and makes convenient or streamlined the chores of establishment of a company, calling of shareholders' meeting, distribution of dividends and so on. It is allegedly offshore funds stationed to OFCs that commit such illegal activities as foreign exchange speculation and manipulation of stock prices. However, such activities must be subject to strict regulation of each government.

In terms of illegality, the effect of activities at issue depends on the nature of provisions. If a fund manager violates provisions of the Foreign Exchange Transactions Law, which aims at law enforcement with little legal impact to the violating activity, his activities are not always null and void keeping the legal status of funds intact, though he could be subject to administrative fines.

Therefore, it is not advisable to determine the activities of offshore funds in accordance with local laws and regulations. It will thwart the international banking activities related with OFCs because international competitiveness depends to some extent on how to exploit OFCs. In this regard, it is contrary to the national agenda to make a regional financial hub that the revenue from the offshore funds is directly acknowledged as that of a local investor, although the fund is invested and directed by its beneficial owner.

In conclusion, the government had better to change its OFC-related tax policy looking at the reality. If an offshore fund turns out to be profitable, its sponsor should pay relevant tax on the capital gains and other income derived from the fund, and its whole profit should not be construed as, and integrated into, its sponsor's domestic income for the tax purpose. It's because the offshore fund is recognized legally and economically as an independent and separable entity from its beneficial owner.