South Korea is seeking to push through tax changes aimed at encouraging savers to invest in foreign assets, the latest in a series of moves seemingly aimed at easing a painful strengthening of the national currency.
The capital gains tax levied on foreign, but not domestic, equity investments has been a big factor behind South Koreans’ relatively low levels of investment in foreign shares.
But the government is rethinking the approach as part of a broader drive to drive currency outflows, as record-high current account surpluses hurt exporters by pushing up the won’s value against key trading currencies.
Under the reform, which the finance ministry hopes to have approved by parliament this month, savers will be able to invest up to Won30m ($25,600) in foreign equities without being liable to capital gains tax.
Song In-chang, director-general of the finance ministry’s international finance department, said the move was aimed at boosting capital market efficiency and returns to savers.
“Individuals are having difficulty finding decent investment opportunities,” he said, noting four central bank cuts over the past year that have left the policy interest rate at a record low.
But bankers and economists view the move as part of a concerted effort to help exporters by easing upward pressure on the currency. While it has fallen over the past year against a resurgent US dollar, the won has risen strongly against the currencies of key trading partners in Europe and emerging markets — a problem that contributed to weak earnings announced this month by manufacturers from Hyundai Motor to LG Electronics.
South Korea has been accused by critics including the US Treasury of deliberately holding down the value of the won through interventions in the currency market, although the authorities maintain these are aimed only at reducing volatility.
The country’s exports fell 0.9 per cent in the second quarter from a year before, helping pull overall growth down to its weakest level for two years. Imports have been falling still more sharply, a result of low oil prices and weak domestic demand, resulting in a hefty current account surplus that is pushing up the won’s value and further damaging the outlook for exporters.
Despite the rate cuts, and a Won11.5tn supplementary budget approved by parliament last month, the central bank is forecasting full-year growth of 2.8 per cent — low by recent South Korean standards, and down from its estimate of 3.9 per cent at the start of the year.
“Monetary policy has been exhausted, and fiscal policy is close to being exhausted, so they’re turning to exchange rate policy,” said Wai Ho Leong, an economist at Barclays.
Other recent moves to encourage outflows have included a pledge to support overseas acquisitions by South Korean companies with up to $5bn in public funds, and raising the ceiling on foreign investments by insurance funds.
The tax relief for foreign equity investments could help boost South Korean savers’ appetite for foreign equities, which has fallen sharply since the 2008 financial crisis. Of Won76tn invested in equity funds in South Korea, 78 per cent is in funds that hold only domestic shares.
But with some details still to be confirmed, the change is bringing a dubious response from some senior asset managers in Seoul. One complained that it had forced his company to postpone a new fund, because only those launched after the start of next year will be eligible for the tax relief.
Another said that this restriction, and the decision to limit the tax relief to investments of Won30m, would drive further growth in the excessive number of funds that is blamed for depressing profits in the industry. “These will be small funds, expensive to run, and not in the best interests of investors,” he said.
original source: http://www.ft.com/intl/cms/s/0/04c7c8b8-3767-11e5-b05b-b01debd57852.html#axzz3hlUqqrx4