- Lone Star's Arbitration Claim was Possible Because of a Deficient Agreement
- By Kim Ji-hwan
This clause prevents a company from receiving the benefits of the treaty, if it is a non-operating paper company. This includes companies from the country signing the treaty as well.
According to the "Policy Information on the Parliamentary Inspection of the Administration" published by the National Assembly Research Service (NARS) on September 19, "In cases where there is a provision on Denial of Benefits, Korea can deny the benefits to a company owned or controlled by someone from a third country--besides the country signing the treaty--with no real business operations."
"Release the investor-state dispute arbitration claim that Lone Star sent the Korean government in May." Lawyer Song Ki-ho (center), chairperson of the foreign affairs and trade committee of Lawyers for a Democratic Society is submitting a request of information disclosure at Seoul Administrative Court in Seocho-dong, Seoul on July 24. Yonhap News
Simply put, if the Denial of Benefits clause was inserted in the treaty, Lone Star could not have filed an arbitration claim against the Korean government with its Belgium subsidiary, LSF-KEB Holdings, at the forefront.
The financial authorities and the National Tax Service see LSF-KEB Holdings as a paper company established to evade taxes. Belgium is a tax heaven that does not tax earnings from overseas stock investment.
However, when the Ministry of Foreign Affairs and Trade revised the 1974 bilateral investment treaty with Belgium in 2006, they left out the Denial of Benefits clause. Eventually, the Korean government provided the pretext for Lone Star's claim.
The problem is that Korea has omitted the Denial of Benefits clause in all bilateral investment treaties with the 22 member states of the OECD. Thus pressure is mounting on the Korean government to hurry and revise the treaties to prevent paper companies from laundering their nationality to claim investor-state dispute settlements.
Still the treaties with Finland, Greece, Italy, Portugal, Spain, France and Germany state that the company's main office must be located in the country signing the treaty, so there isn't a total absence of measures to filter out paper companies.
NARS explained that in order to prevent "a second Lone Star claim," the government should revise the bilateral investment treaties signed with OECD member states to include the Denial of Benefits clause. They also insisted that it is necessary to specifically define the terms of the investor--company or corporate body--and investment.
In a written answer submitted to independent lawmaker Park Joo-sun, the foreign ministry stated that they were "currently in the process of consulting related ministries to select the countries with which to negotiate revisions in the bilateral investment treaty based on their investment records in Korea, the current status of paper companies, and their potential to provide a tax haven, etc."
They added that the ministry has prepared a standard draft of the bilateral investment treaty, which includes measures to prevent the investor-state dispute settlement with paper companies including the Denial of Benefits, and has signed treaties based on this draft since 2009.