Fears Proposed Korea Tax Change Will Scare Off Foreign Investors

Подписывайтесь на наш канал @east_veter :)

South Korea’s plan to change the tax regime for foreign investors could throttle the flow of overseas money that has fueled the stock market’s record highs, index providers and financial-sector lobbyists warned.

Seoul is planning to lower the ownership threshold at which foreign investors will have to pay capital-gains tax when they sell shares. It hopes that will boost the country’s coffers and bring the tax treatment of local and overseas investors more into line.

Critics say the move won’t notably increase the number of foreign investors subject to the tax because few single investors own 5% stakes in a particular company. But they say the proposal could prove rather expensive for funds to comply with related requirements and impact their liquidity.

The proposal would apply to any foreign investor who, along with any related parties, individually owns more than 5% of a South Korean company’s shares. Under the changes, due to start in July, they would have to either pay a tax equal to 22% of the trade’s profit when they sell any of their stake, or pay 11% of the sales proceeds, whichever is lower.

Currently, a foreign investor has to own a quarter of a company before any share sale is subject to capital-gains tax—a relatively high threshold that was put in place to attract foreign investment. By contrast, domestic investors pay capital gains on holdings of as little as 1%.

Index provider FTSE Russell said this week the proposed tax was likely to make investors who base investment decisions on global indexes delay putting money into South Korean stocks or avoid the country altogether. Foreigners collectively own about a third of equities there.

“The resulting uncertainty may prove unhelpful” to equities there, FTSE Russell said in a company statement. “The proposal is particularly unwelcome, coming as it does at a time when other countries such as China and Saudi Arabia are actively seeking to open their domestic markets to foreign institutional investors.”

But the potential extra tax the investment industry may have to pay isn’t what worries them much: it is the possibility that large proportions of their funds will be locked in the country when they try to sell shares.

South Korea lacks a central registry tracking who owns what. Without such a registry, brokers argue they can’t implement the tax on offshore investments, said Patrick Pang, head of fixed income and compliance at the Asia Securities Industry & Financial Markets Association.

As a result, he said, brokerages would have to withhold a portion of all stock-sale proceeds and ask foreign investors to seek a tax refund from South Korean tax authorities. That process could take weeks. What the government wants to do “is operationally not possible,” Mr. Pang said. “There just isn’t the infrastructure at the moment.”

A finance ministry spokeswoman said the government is talking with “related industries” to review the withholding-tax process, but declined to elaborate.

In most countries, brokers can consult exchanges for data on shareholder registries at the time of a transaction. No such information is publicly available in South Korea. Industry sources point out that when a nonresident investor buys or sells stocks via multiple brokerage firms, none of those firms would share a client’s individual investment information with rivals.

MSCI , another major index provider, said the tax plan could affect investment funds’ ability to withdraw money quickly. It predicted last week the proposal could impact South Korea’s market accessibility and investors’ ability to replicate its indexes. It stopped short of saying any changes to its benchmarks are imminent.

South Korea is the second-biggest country in the MSCI Emerging Markets Index, which is tracked by $1.6 trillion of passive wealth.

It isn’t clear how much foreign investors have been paying in capital-gains taxes; the government collected 13.7 trillion won ($12.85 billion) overall in 2016, according to the Organization for Economic Cooperation and Development. That is 4% of total tax revenue received that year.