Tax Cut Requested for Foreign Funds

At the time of the foundation of the Korea Fund Inc., the Korean government agreed to exempt taxation on securities transactions on the condition that not more than 10 percent of total assets would be repurchased. It was a decision made to activate the domestic financial market, which is a market inhospitable to foreign investors.

The board of the Korea Fund recently extended the rate of repurchase to 50 percent of total assets. Deviating from its previous tax exemption conditions, it has asked to alter the previous agreement with the government.

The Ministry of Finance and Economy stated, “We are considering altering the extent of tax exemption, after a source from Korea Fund mentioned how the withdrawal of a fund that symbolizes investment in Korea may damage the image of Korea as an investment opportunity,” but that “we can’t come to a decision due to the balance with other funds.”

Asset management firms that are considered as institutional investors in the domestic law on non-direct investment asset management businesses are exempt from the taxation on securities transactions when selling stock, but foreign funds that are invested from the U.S. or other overseas companies have to pay 0.3 percent of the transaction fee in taxes.

Oh Sung-sik, managing director of Franklin Templeton Investments said that “the annual tax rate can rise up to 1.2 percent (0.3 percent times 4) in the event that a single stock is traded four times annually,” and that “taking into account the fact that the trend of the current low interest rate is continuing, and that transactions of stock have increases, the tax exemption seems to be an attractive opportunity.”

The exemption of taxation for foreign funds such as the Korea Fund will result in a decrease in tax income for securities transactions, a form of indirect tax. The tax on securities transactions amounted in 2.8882 trillion won in 2002 and has declined steadily, resulting in 1.9027 trillion in revenue last year.

legman@donga.com