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| A dealer looks at an electronic board on a dealing floor at KB Kookmin Bank, June 9. Korea Times file |
By Lee Kyung-min
The government's plan to impose a hefty capital gains tax on wealthy stock investors in 2023 will drive local investors with substantial funds out of the country, slowing down the already underperforming financial market of Asia's fourth-largest economy, market analysts said Wednesday.
The capital flight will be most pronounced in the KOSDAQ where small- and mid-cap shares are largely held by retail investors alongside the benchmark KOSPI, which is heavily influenced by foreign and institutional investors.
"The concern is lingering," Standard Chartered Bank Korea investment strategist Hong Dong-hee said.
Starting 2023 those who earn over 20 million won ($16,000) in capital gains following transactions of listed shares will face a 20-percent tax on anything earned over 20 million won ― the maximum deductible amount ― the country's finance ministry said earlier. The rate will be 25 percent if profits from stocks are over 300 million won.
"Many investors thus far have preferred the Korean equity market despite our recommendation to expand their investment portfolio to increase the holding of shares in the U.K, or the U.S., for example, countries that impose a rate of up to 20 percent in capital gains tax. With the incentive gone, investors will increasingly ditch local markets for more advanced financial markets," he added.
The new tax will draw protests from profit-sensitive investors, leading to a possible adjustment in the market given its nature of high volatility, according to another analyst.
"The market sentiment could turn sour, however minimal, short-term and temporary it may be," Standard Chartered Bank Korea investment strategist Hwang Jung-ha said.
This is in line with some market views that equity indices will swing due to factors irrelevant to market fundamentals and corporate competitiveness of listed firms, if investors pull their money prompted by a judgment that their profit is expected to take an unnecessary hit in the process.
"It is hard to make an accurate prediction on how much of a fluctuation will take place, we will have to see how the government finalizes the measure," he said.
Another criticism of the new measure is a lack of tax incentives for investors in funds operated by local asset management firms, a reason they say is discriminative to a group of financial market participants, already struggling to expand presence to devise and maintain long-term investment strategies.
"It certainly is an issue for us if assets under our management are not at all deductible, as opposed to 20 million won minimum amount deductible granted to investors that buy shares of listed firms," a sales marketer at a local asset management firm said asking not to be named. "The lack of incentive will surely lead to many customers leaving us to directly invest in shares themselves, which then will hamper growth in the industry."
The official pointed out that a separate form of tax incentive should be given to long-term investors, criticizing the ministry's stance that financial products, unlike real estate such as housing, are not affected by inflation concerns and therefore should not be given a greater tax incentive based on the period of holding.
"Not only houses but shares are tied to inflation because corporate earnings are determined by profit derived from the price of a product manufactured set reflective of inflation. Tax incentives should be given regardless of the physical form of an asset," he added.
