Asia-Pacific Transfer Pricing Handbook

Chapter Thirty-Seven

South Korea–Japan Bilateral Investment Treaty

Bilateral Investment treaties (BITs) are comparatively new legal structures. These treaties go back over 50 years, when Germany and Pakistan signed a bilateral investment treaty on November 25, 1959. Tax practitioners have had little opportunity to address the tax issues of these BIT agreements. The Korea–Japan BIT treaty provides an example of the tax issues relevant to the tax practitioner.

BACKGROUND

At the present time, country participants participate in more than 2,500 BITs, involving most countries in the world. Bilateral investment tax treaties are, for the most part, not tax treaties. Nevertheless, some BITs contain significant tax components. One such BIT having tax components is the Korea–Japan BIT. This treaty, perhaps uniquely, contains treaty shopping provisions.

BITS are unique among other treaties. BIT treaties give the investor significant rights vis-à-vis the treaty country, treating the host country and investor almost as equals. The investor achieves these rights through powers that its own country grants to the investor.

A BIT is distinct from an income tax convention. Countries might have income tax conventions, might have BITs, or might have both or none depending on the circumstances. BITs are akin in many respects to treaties of friendship and navigation, which also might exist with the same countries.

U.S. INVOLVEMENT IN BITS

The United States has 40 BITs in force. The United States operates ...