Korea faces second ‘investor-state dispute’

Hanocal Holdings, a Dutch subsidiary of the Abu Dhabi-based International Petroleum Investment Company, has filed a lawsuit against the South Korean government through the World Bank’s International Center for Settlement of Investment Disputes.

This is the second time that Korea is facing international arbitration under the “investor-state dispute settlement” process. Korea is one of the few countries subject to ISDS requests filed by foreign investors in the wake of stipulations in the Korea-U.S. Free Trade Agreement and similar trade pacts.

The country began its first ISDS suit, involving $4.7 billion claimed by Texas-based buyout firm Lone Star Funds, as the defendant in Washington, D.C. last week.

Hanocal is seeking roughly 180 billion won ($165 million) in compensation for extra taxes paid to the Korean government during its sale of Hyundai Oilbank five years ago.

In October 2014, the company had sent a notice to President Park Geun-hye and her administration that it would file an ISDS application should the authorities refuse to refund the taxes.

The dispute began in 2010, when Hanocal sold 50 percent of its stake in Hyundai Oilbank to Hyundai Heavy Industries for 1.8 trillion won. Hyundai Heavy paid only 90 percent of the total price, claiming that it paid a 10 percent withholding tax to Korea’s National Tax Service.

While Hanocal claimed it is exempt from taxation in Korea because of a double-taxation avoidance agreement signed between Korea and the Netherlands, the Korean courts have ruled against the company twice, asserting that the company is in fact an Arab firm ― a “ghost company owned by the Abu Dhabi-based IPIC.” The case is currently pending at the Supreme Court.

The ISDS mechanism grants foreign investors access to third-party arbitration tribunals for actions by relevant governments that go against agreements made in FTAs or investment treaties.

As Korea begins its second ISDS arbitration process, the government is facing mounting criticism for failing to disclose relevant information about similar cases it is involved in, including the ongoing trial against Lone Star Funds.

By Sohn Ji-young (jys@heraldcorp.com)