Tax Hike
The Korea Financial Investment Association announced on May 20 that the net assets of the funds investing abroad decreased from 84.7 trillion won (US$77.7 billion) to 60.6 trillion won (US$55.6 billion) between the end of 2007 and the end of last year, while the percentages of public and private equity funds changed from 92.4 percent:7.6 percent to 46.9 percent:53.1 percent.
The ratio of public equity funds began to drop in the wake of the global financial crisis and dipped below 50 percent last year. Meanwhile, pension funds and insurers increased their investment in private equity funds for investment diversification. Still, American public equity funds showed consistent capital inflow with the only exception of 2008.
Under the circumstances, those in the industry are claiming that the tax exemption for global investment funds implemented in 2007 be resumed. At that time, the government levied no taxes on the funds, with the appreciation of the won based on an excessive trade surplus showing signs of affecting exports. At present, however, a 15.4 percent dividend income tax is imposed on the profits from such funds. When the combined dividend and interest incomes exceed 20 million won (US$18,350) a year, the tax rate goes up to 38 percent.
Korea’s current account surplus is estimated to have reached US$89.4 billion last year and to amount to US$96 billion this year, which implies the strong won is likely to continue to add difficulties to the business of exporters. The government is planning on a tax reform so the U.S. dollar can flow out. As of now, separate taxation based on a tax rate of 22 percent, the same as that applied to international stock investment, is more likely than tax exemption.