Financial Invasion? Tesco Might Become Second Lone Star

All eyes are on how much taxes the British retailer Tesco Group will pay to the South Korean government after its profit of more than 5 trillion won (US$4.21 billion) with the sale of Homeplus. Industry sources say that the company will not have to pay taxes at all, or will have to pay more than 1 trillion won (US$842.82 million) in taxes.

Tesco recently sold a 100 percent share of Homeplus to a private-equity consortium led by MBK Partners for 7.2 trillion won (US$6.07 billion). If the group will have to pay taxes, the amount will reach 700 billion won (US$589.97 million) to 1 trillion won (US$842.82 million). The thing is that Tesco will not have to pay taxes at all to the Korean government, depending on who is the substantial major shareholder. The major shareholder of Homeplus is the U.K.-based Tesco, but Tesco holds a 100 percent share of Homeplus through Tesco Holdings B.V., its paper company in the Netherlands, and a 50 percent share of Homeplus Tesco. The other 50 percent of its shares are owned by Homeplus Co. This setup means that the taxation base will be the Netherlands and Korea.

Korea and the Netherlands has concluded an agreement in 1981 to avoid double taxation and prevent tax evasion. Under the agreement, Tesco will pay a transfer income tax to the Dutch government, instead of Korea. However, there is even a possibility to get a tax exemption by request. If Tesco, which has operated its business in the Korean market from 1995, doesn’t pay taxes to the Korean government after gaining profits of more than 5 trillion won (US$4.21 billion) through the sale of Homeplus, it will be inevitably criticized as an “eat and run” company.

The corporate entity of Tesco Holdings Group will decide whether or not it will pay taxes, accounting and legal industry sources expect. If the taxation authorities decide that Tesco Holdings is a simple paper company for tax evasion, they should look at the tax convention with the U.K., in which Tesco is headquartered, rather than the Netherlands. Even under the agreement between Korea and the U.K., however, Tesco will not have to pay a transfer income tax to Korea. The Korean government will be able to impose taxes on the sale of real estate according to domestic law, though, unlike the agreement with the Netherlands. Since most assets of Homeplus are consisted to be real estate, Tesco needs to pay 1.2 trillion won (US$1.01 billion), 24.2 percent of the profit margin of 5 trillion won (US$4.21 billion), for taxes when it is considered as a real estate sale.

With its cooperation with the U.K. for tax invasion issues, some say that it will be possible for the government to impose taxes on the profits of stock transfers according to domestic law. In this case, legal industry sources believe that it can collect lower taxes from either 10 percent of the total sales amount (11 percent including local taxes) or 20 percent of the transfer gain (22 percent including local taxes) according to income tax law. Considering the fact that the total sales amount exceeds 7 trillion won (US$5.9 billion), Tesco will be able to pay 700 billion won (US$589.97 million).

Investment banking industry sources say that Tesco will follow the example of Carrefour when it sold Carrefour Korea to E-Land in 2006. Carrefour had a paper company in the Netherlands, just like Tesco. Although the firm was criticized for its possible intention of tax invasion at the time, the court ruled that Carrefour Netherlands did not intend to avoid taxes. To be sure, the corporate entity of Carrefour Netherlands was recognized, and its request of tax exemption was accepted based on the tax convention between Korea and the Netherlands.

An official from the legal industry said, “There is a high possibility that the corporate identity of Tesco Holdings will be recognized like Carrefour. It is virtually impossible for the government to collect taxes.” The taxation authorities are also keeping an eye on the situation. An official from the National Tax Service said, “We cannot predict about the taxation to Tesco, only based on the past case. After reviewing detailed documents of the sale, we will finally decide whether we will impose taxes or not.”

Regarding to the “eat and run” controversy of England’s Tesco due to its huge profit margins, Homeplus Co. CEO Do Sung-hwan said during the government inspection, “It is unfair to consider Tesco an ‘eat and run’ group.”

He made such a remark as a witness during an annual parliamentary audit of the Ministry of Trade, Industry and Energy held at Government Complex Sejong on Sept. 10.

On the day, Chun Soon-ok of the New Politics Alliance for Democracy (NPAD) said, “Although Homeplus turned over 8.5 trillion won [US$7.16 billion] in 2014, it didn’t pay any taxes. The combined royalties for two years – 2013 and 2014 – were 20 times higher than usual at 147.1 billion won [US$123.98 million].” Do responded, “Homeplus paid all the taxes after discussing with the National Tax Service.”