May 24, 2012

Korea's National Agricultural Cooperative Federation vs. Korea Fair Trade Commission at Seoul High Court: Antitrust Litigation in Korea

The National Agricultural Cooperative Federation has filed suit against the Korea Fair Trade Commission at the Seoul High Court.  Nonghyup is claiming that the monopoly prevention measures, imposed by the KFTC and Korean law, should not be applied to an organization with a main function of supporting struggling farmers.  What do you think?   The Korea Times reports, in part, that:  
The National Agricultural Cooperative Federation, otherwise known as Nonghyup, said Thursday it had filed a suit against the Fair Trade Commission (FTC) with the Seoul High Court. This comes one month after the FTC prohibited Nonghyup and its affiliates from making equity investments in or offering loan guarantees to one another.

Conglomerates with assets of 5 trillion won ($4.25 billion) or more, including Samsung, LG and Hyundai among others, are subject to the restriction aimed at preventing the distortion of conglomerate governance structures.

As of April 12, Nonghyup had assets of 8.6 trillion won. Nonghyup’s assets jumped sharply early this year after the government invested 5 trillion won into it.

The FTC’s decision is equivalent to a provincial court’s ruling, which means Nonghyup must take the case to an appellate court to overturn it.

Nonghyup counters it should be given an exemption from the restriction, highlighting its activities meant to improve the livelihood of farmers. “We have been struggling with a variety of disadvantages caused by the restriction imposed on April 12,” a Nonghyup official said. “Apart from the suit, we are seeking a court injunction to minimize the side effects of the measure.”

The official complained that the FTC’s decision has put the federation at a great disadvantage in tax benefits and subsidies among others. “Under the restriction, we can no longer receive state funds with which Nonghyup has helped cash-strapped farmers and livestock breeders,” he said.

The federation also faces the risk of losing some 20 billion won since the regulation mandates it to sell its stakes in private equity funds, he added.

The ban on direct investment among affiliates has made it difficult for Nonghyup to establish a new affiliate whose role is supporting farming and livestock industries.

“Without the collection of funds from affiliates, it’s virtually impossible for us to establish any new affiliates,” another official said. “The government invested (5 trillion won) to help us. It eventually crippled us.”

Nonghyup has reportedly launched a campaign calling on lawmakers to revise the law in a way that gives Nonghyup an exemption from the restriction. But many analysts express concerns over the move, saying it can hurt the basic principle of equality under the law.

“If Nonghyup is given an exemption, other federations and interest groups will ask for the same status, which will eventually undercut the entire system,” an FTC official said.

As of Dec. 2011, Nonghyup has nearly 2.44 million farmers as members nationwide. Last year, it was ranked the 9th greatest cooperative among the Global 300 cooperative list by the International Co-operative Alliance. In March, it was spun off into one federation and two holding companies to help increase its effectiveness and competitiveness. 
The complete article may be found at:  Nonghyup vs. FTC

What do you think?
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SeanHayes@ipglegal.com
IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S. www.ipglegal.com

May 16, 2012

Korean Government to Increase Monitoring of Chaebols in Korea

The Korea Times has report that Chairman Dong-Soo KIM of the the Fair Trade Commission of Korea will strengthen its monitoring of Korea's main conglomerates.  We suspect that increased monitoring of major foreign-capital invested enterprises will, also, be the target of the increased monitoring.  We strongly advise to have an attorney conduct a complete compliance audit immediately.

The Korea Times reported, in part, that:
Kim Dong-soo, chairman of the Fair Trade Commission (FTC), said Wednesday that the FTC will disclose fact sheets demonstrating dozens of conglomerates’ stock ownership, liabilities and inter-subsidy dealings by August.

Kim said 51 conglomerates banned from doing cross-investment among affiliates will be subject to the announcement which he said is to “strengthen the FTC’s monitoring to secure more transparent corporate management.”

Information regarding stock ownerships of 51 firms will be announced in June, with one regarding liabilities in July and inter-subsidy dealings in August, he said.

“We need to have a stronger monitoring system on conglomerates to make their management more transparent,” Kim told reporters at a Seoul hotel where he spoke at a forum. “We will tell what big companies in phases to those involved in their business.”

Kim Hyung-bae, FTC spokesman, said as of late April, 63 conglomerates were banned from doing cross-investment among affiliates, but the FTC will focus on 51, excluding 12 state-funded firms.

Kim’s remarks came only one week after the Commission on Shared Growth for Large and Small Companies (CSG) announced a list of best and worst companies in terms of business attitude toward domestic suppliers and subcontractors.

Six companies, including Hyundai Motor, Kia Motors, Samsung Electronics and POSCO, got the highest scores in the CSG’s assessment, while seven firms, including LG Uplus, Hyundai Mipo Dockyard, STX Offshore, were categorized as “underachievers.”

The FTC and the CSG are key entities playing a pivotal role in pushing forward President Lee’s co-prosperity policy. Kim said the FTC will look into all inter-subsidy dealings, each worth 5 billion won ($4.29 million) or more, to check whether they were done in a fair and transparent manner.

“We will continue to provide detailed information about this (inter-subsidy dealings), enabling small firms to know their counterparts’ business practices,” he said.

Asked about the FTC’s alleged pressure on large retailers to open new sections that exclusively sell products from small and medium-sized manufacturers, he said “this is a matter that should be resolved voluntarily between retailers and small manufacturers.”

The alleged intervention, surfaced last week through news reports, stirred controversy and provoked retail giants. Critics say the anti-trust regulator is abusing its power and the scheme will run counter to free-market principle, of which the FTC exists to uphold.

 
The complete article by the Korea Times may be found at: FTC to Tighten Chaebol Monitoring.

Additional articles on the Korean Fair Trade Commission and Korea's Monopoly Control Measures may be found at:
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SeanHayes@ipglegal.com
IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines,Vietnam and the U.S. www.ipglegal.com

Import Duties & Taxes in China

China is and will continue to be one of the most attractive markets for consumer goods.  With a population of more than one and a half billion people and a middle class of more than 300 million, that is projected to grow to at least 700 million in the next 20 years.  Based upon our experience in China and having been a part of the tremendous growth, we have seen that this emerging middle class, which is already larger than the U.S. population, is spending money like crazy and is not saving like previous generations.

Given that China is one of the only places in the world that has had double digit growth in GDP (except for this year which is still 8%), it has a burgeoning and spend crazy middle class, a developing legal system and excellent infrastructure, everyone should want to bring their products and services into this market.  It’s not that easy.  For many products, and services there are taxes.  China does not have a national sales tax on retail items like other countries and so it imposes import duties, value added taxes and consumption taxes which the importer, wholesaler or retailer must add to the price the consumer pays.  It’s all hidden, but, believe me they can be quite steep.  For example, the total duty on imported wine, which is the only wine worth drinking in China, is between 41 and 50% which can make many products cost prohibitive when compared to quality – the value is just not there.

And people think China is cheap!  I would offer that in the major cities in China, cost of living is higher than most cities in the U.S. and Europe and inflation has not stopped in the 10 years that we have been advising clients in China.  China aint cheap anymore, but, the domestic market where they don’t mind paying higher prices on quality items (that aren’t fake) is enormous and growing.

So, until the central government decides to either scrap it’s antiquated and cumbersome Value Added Tax “V.A.T.” system, which we don’t see that happening for a long time as too many people would lose a lot of money ,or they lower the import duties and consumption taxes on imported products - there might be other way to bring in imported products that are in high demand in China.

China and Hong Kong operate under a one country two systems arrangement that has been in place since the turnover in 1999.  Despite obvious cultural differences and the fact that there is a border crossing, most of us who do business in South China consider the two as one.  In fact, there is a treaty between Hong Kong and China which many people don’t know about that allows for Hong Kong companies and professionals to operate in China and also a few other things such as the duty free import of Hong Kong made products.  Below is a summary of the CEPA rules pertaining to importation of Hong Kong products which could provide a solution to the high import duties in China.

In order to enjoy zero tariffs under the Closer Economic Partnership Agreement (CEPA), goods exported from Hong Kong to Mainland China must fulfill the rules of origin and show evidence of being “made in Hong Kong.”

The execution of the rules of origin is detailed in the “Customs Provisions of the People’s Republic of China on Executing the Rules of Origin for Trade in Goods under the Mainland/Hong Kong Closer Economic Partnership Arrangement (haiguanshuling No.106, hereinafter refers as ‘Provisions’),” which was promulgated in December 2003 and came in effect from January 1, 2004. Under the Provisions, “Hong Kong” as the origin of goods shall be determined according to the following principles:
1.  Goods entirely obtained in Hong Kong 2.Goods “substantially manufactured” in Hong Kong if not entirely obtained in Hong Kong Goods entirely obtained in Hong Kong According to the Provisions, goods entirely obtained in Hong Kong include:
  • Minerals exploited or extracted in Hong Kong
  • Plants or related products collected in Hong Kong
  • Animals born and raised up in Hong Kong and their related products
  • Animals hunted in Hong Kong
  • Fish and other sea products caught by ships with Hong Kong licenses and regional flags and their related products
  • Waste disposal for recycling from and collected in Hong Kong
  • Waste and scrap for recycling resulting from manufacturing in Hong Kong
  • Products made out of waste disposal or waste and scrap mentioned above Substantial processing, transformation, or manufacturing The criteria of determining whether the products are “substantially manufactured, transformed, or processed” in Hong Kong should include the following:
Manufacturing or processing operations.  The goods should be endowed with essential characteristics after principal manufacturing or processing operations in Hong Kong.

Change of tariff number.  Change of tariff number refers to a change of the four-digit tariff numbers and taxation categories after the manufacturing or processing operation of non-Hong Kong materials in Hong Kong. Moreover, no further manufacturing or processing should happen outside Hong Kong.

Ad valorem percentage.  Ad valorem percentage is the ratio between the total value of raw materials, components, labor and product development that are fully acquired in Hong Kong, and the FOB value of the finished product for export.
  • Ad valorem percentage = (Value of raw materials + value of components + labor costs + product development costs) ÷ (FOB value of finished product for export) Products with an ad valorem percentage equal to or greater than 30 percent, and with the last manufacturing or processing procedures completed in Hong Kong, shall be regarded as “substantial processing.” The following stipulations apply:
  • Calculation of the above “ad valorem percentage” should be consistent with generally accepted accounting standards and with the “Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994.”
  • “Product development” refers to product development conducted in Hong Kong for the purposes of producing or processing the exporting goods. Incurred expenses for development shall be related to the exporting goods, including the costs for self-developing of the producers and processors, as well as the costs for the developing of consigned natural or legal person. The expenses also includes fees for purchasing designs, patents, patented technologies, trademarks or copyrights processed by a natural or legal person in Hong Kong. The concerned value should be clearly identifiable under generally accepted accounting standards and the provisions of “Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994.”
  • If raw materials or components originating from Mainland China are used and they constitute part of the export products in Hong Kong, when calculating the ad valorem percentage of the export product, the raw materials or components from Mainland China should be deemed to be originating from Hong Kong. The ad valorem percentage of the export product should be greater than or equal to 30 percent, and greater than or equal to 15 percent excluding the price of the raw materials or components from mainland. Other criteria The “other criteria” refer to other criteria agreed by authorities of both Mainland China and Hong Kong in determining the origin of the products, besides the three above-mentioned criteria.

Mixed criteria. The “mixed criteria” means that two or more of the above-mentioned criteria are used in determining the origin of the products.

Manufacturing or processing for the purpose of transporting or storing the goods, facilitating the packaging of the goods, or better packaging and displaying the goods is not considered as “substantial processing, transformation, or manufacturing.”

Simple diluting, blending, packaging, bottling, desiccation, assembling, sorting or decorating will not be regarded as “substantial processing, transformation, or manufacturing.”
Package, packaging materials, containers and accessories, spare parts, tools and explanatory materials accompanying the goods should be ignored in determining the origin of the goods.

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by Frank Caruso.  Chair, China Practice Team
info@ipglegal.com

Merger Control Remedies in Korea

Earlier this year, Korea's Fair Trade Commission has announced the amendment of its rules on merger remedies through the Notice on Merger Remedies.  The amendment revises the prior Merger Remedies Guidelines.  The most relevant changes are listed below.
  • The KFTC will, only, utilize behavioral changes when structural changes are impracticable or may be ineffective.  Structural changes, include, prohibition of a merger, divestiture and the transfer of intellectual property rights.  The Fair Trade Commission has noted that the preferred choice will be divestiture and a merger injunction will only be ordered when the divestiture is not feasible in the situation.  
  • The Korea Fair Trade Commission has noted that the guiding principles of the Merger Remedies is: Effectiveness, Proportionality and Transparency and Enforceability.  Arguments from attorneys should be directed at the KFTC ability to meet these guiding principles by proposed actions. 
  • The KFTC has increased investigations and has become much more aggressive in all areas under its jurisdiction.  We strongly recommend a compliance audit and a nuanced approach in all actions where your company may be a target of the KFTC.
Other articles on the Korea's Antitrust/Competition Law may be found at:
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SeanHayes@ipglegal.com
IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S.
www.ipglegal.com

May 13, 2012

East Asia FTA in the Works

It has been reported in local news outlets that China, Japan and Korea have vowed to commence free trade negotiations and cooperate in alleviating the issues with North Korea.

Korea's Yonhap News has reported, in part, that:
During annual summit talks in Beijing, South Korean President Lee Myung-bak, Chinese Premier Wen Jiabao and Japanese Prime Minister Yoshihiko Noda also agreed to start preparations to launch official negotiations on a three-way free trade agreement by the end of the year.

The summit came a month after North Korea unsuccessfully launched a long-range rocket on April 13. Though the rocket fizzled soon after takeoff, the liftoff drew international condemnation as it broke a U.N. ban adopted over concerns such a launch could be used to develop missiles capable of carrying nuclear warheads.

Concerns have since grown that Pyongyang could stage additional provocations, such as a nuclear test, which would be its third, as well as more missile tests and border clashes. Officials in Seoul have said the North appears to have completed preparations for a nuclear test.

"The leaders of the three countries appreciated the U.N. Security Council's strong and swift presidential statement regarding North Korea's long-range rocket launch and agreed that they cannot accept a nuclear test and other additional provocations by North Korea," the presidential office said.

The agreement on North Korea was seen as rare because the three countries have usually differed over how to deal with North Korea, with South Korea and Japan calling for a tougher stance, and China, the North's last-remaining major ally, being reluctant to criticize Pyongyang.

On the sidelines of the summit, the three countries also signed an investment guarantee treaty that calls for providing most-favored-nation status and other protective measures for investment from each other. The pact is the first economic treaty between the three countries.

The three countries also agreed to begin preparations to launch free trade negotiations before year's end. The envisioned pact, if realized, would create one of the world's largest markets as South Korea, China and Japan account for 20 percent of the global gross domestic product (GDP) and 17.5 percent of all global trade.

The sides have carried out non-governmental academic research on the trilateral FTA since 2003.

The three countries also signed two other cooperation agreements, one of them on agricultural cooperation and the other on preventing desertification of forests and protecting wildlife.

After the trilateral session, the leaders attended a lunch meeting of business leaders.

Later in the day, Lee planned to hold a one-on-one summit with Wen, which is expected to include discussions on North Korea and free trade 
The full article may be found at Korea, Japan and China Agree to Work Together on N. Korea, FTA
We suspect that an FTA will not be forthcoming until, at least, until a couple of more years. 
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SeanHayes@ipglegal.com IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, Vietnam and the U.S. www.ipglegal.com

May 7, 2012

Fines Increased by Korea Fair Trade Commission for Violations of Monopoly Regulation and Fair Trade Act

The Fair Trade Commission of Korea has implemented substantial amendments to its guidelines for imposing fines on companies doing business in Korea.  The Amendments were detailed in a document the Fair Trade Commission of Korea calls the "Amendment Notice."  This Amendment Notice comes into effect on April 1 of 2012.

The Amendment Notice will likely increase the fines imposed by the Fair Trade Commission.   Prior to the Amendment Notice violations of the Monopoly Regulation and Fair Trade Act would result in lower fines than that authorized by Korean Monopoly Law.  The change will, likely, substantially increase the fines.

INCREASE IN FINES FOR UNFAIR TRADE PRACTICE AND ABUSE OF DOMINANCE IN MARKET

The Amendment Notice will likely increase fines for Abuse of a Companies Dominant Market Position in Korea from 2 % to 3% of revenues earned because of the violation.  Additionally,the fine will be increased from 1% to 2% of the revenue earned because of violation of the catch-all unfair trade practice prohibition.

AGGRAVATION OF FINES FOR OBSTRUCTION OF INVESTIGATIONS

The fine may be increased by 40% for the physical obstruction of an on-site investigation through violence or use of force; 30% increase for obstructing an on-site inspection through concealing, destroying or falsifying records; and 20% increase for other acts of obstruction.

Korea's Fair Trade Commission has been very proactive in its enforcement of Korea's Antitrust laws and it is advisable to have an attorney conduct a compliance audit to determine and assist in mediating your risk of an investigation, fine and criminal punishment for violation of Korea's Monopoly Regulation and Fair Trade Act and related laws.

Additionally posts on Korea's Antitrust/Competition law may be found at:
Sean Hayes, IPG's Co-Chair of the Korea Practice Team, may be contacted at: SeanHayes@ipglegal.com

SeanHayes@ipglegal.com
IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, the Philippines, Myanmar, Vietnam and the U.S.
www.ipglegal.com

Korea's Saving & Loan Crisis: 4 Additional Banks Suspended by KFSS


In a sign of more trouble in the second-tier banking market in Korea, four savings banks operations have been temporarily suspended by the Financial Services Service.

The banks were ordered to increase capitalization within 45 days or face the risk of being forced to permanently suspend operations or sell their assets.  16 banks were closed last year.  These, previous, closings led to prosecutions and a bailout by the Korean government.

Savings deposits are backed by an explicit Korean government guarantee on each account at each bank of KRW 50,000,000 (USD 45,000).  The banks are presently providing yearly deposit rates in the low 5% range.  An investor may receive this protection from as many accounts opened if the accounts are at different banks.   This, guarantee, along with many peculiar loans by these banks lead, in part, to this banking crisis in Korea.  External factors played a negligible for in the crisis. 

According to Korea's FSS the combined assets at the savings banks totaled nearly USD 53 billion nearly 31 percent from 2010.  
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SeanHayes@ipglegal.com
IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, Vietnam and the U.S. www.ipglegal.com

May 2, 2012

Cap-and-Trade in Korea Implemented from 2015: Many Unanswered Questions

The Korean National Assembly has passed, with the support of the ruling and opposition parties, a bill to implement a carbon trading system.  Korea is one of the fastest-growing emitters of greenhouses gases in the industrialized world because of, inter alia, an over reliance on the use of coal, inefficient use of resources and lack of a consistent environmental management program.  Korea, according to the International Energy Agency, was the 8th largest carbon emitter in the word in 2009.

The Korean cap-and-trade system will be effective from 2015.

There are many issues that are not addressed in the bill in Korea.  Many of the major details have been delegated to the president or will be addressed in future bills including:
  • Availability of International Offsets
  • Calculation for determining the amount of carbon emission
  • Feed-in-tariffs for renewable
  • Renewable energy quota
  • Enforcement Mechanism
  • Implementation of a Carbon Trading Market
We expect the system will benefit energy management and like companies.  Many of the large international players, in this industry, either have small or no footholds in the Korean market.

The penalty for non-compliance is three times the prevailing market price with a cap of KRW 100,000 per ton.
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Sean Hayes, IPG's Co-Chair of the Korea Practice Team, may be contacted at: SeanHayes@ipglegal.com

IPG's Energy & Natural Resources Team is one of the leading and most experienced teams in Asia because of working in Asia for over a decade on some of the most noteworthy energy and natural resources projects. SeanHayes@ipglegal.com IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, the Philippines, Laos, Myanmar, Vietnam and the U.S. www.ipglegal.com