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Only institutional, foreign investors benefit from stock income tax, market watchers say

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Members of the Korea Stockholders Alliance rally in front of the office of the main opposition Democratic Party of Korea in Yeouido, Seoul, May 30. Yonhap

Members of the Korea Stockholders Alliance rally in front of the office of the main opposition Democratic Party of Korea in Yeouido, Seoul, May 30. Yonhap

New tax no more than tax relief for large investors
By Lee Kyung-min

Institutional and foreign investors will emerge as undue beneficiaries of the planned enforcement of a capital gains tax on stock trading income at the expense of retail investors, market watchers said Wednesday.

The much-disputed law set to take effect next year stipulates that a tax of up to 27.5 percent will be imposed on income from trading stocks, funds, bonds and financial derivatives exceeding 50 million won ($36,300).

However, clearly exempted from the hefty tax are the two groups of major investors.

Their business conditions will improve dramatically conducive to high-frequency trading, underpinned by the contentious tax that will lower the stock trading tax to 0.15 percent, down from the current 0.2 percent.

Instead of fostering long-term value investments, this will breed scalping, an investment technique whereby investors make small profits after holding a buy or sell position for a very short time.

Many say Korea's underdeveloped financial market will lose momentum to advance altogether, hamstrung by poor institutional framework and overall loss of policy drive for the Corporate Value-up Program. The financial initiative of the Yoon Suk Yeol administration aims to reinvigorate the stagnant equity market, defined by chronic undervaluation of local stocks and poor, lagging regulatory standards.

A petition calling for the scrapping of the tax gained over 60,000 signatures, Wednesday, setting the stage for a renewed deliberation in the newly formed 22nd National Assembly. Previous similar moves ended up in vain after legislations proposed during the 21st Assembly were discarded.



Tax relief for large investors

"The tax is nothing short of a major tax break for institutional and foreign investors," said Jung Eui-jung, leader of the Korea Stockholders Alliance, a group representing retail investors.

Foreign investors with holdings of over 25 percent in a single stock are subject to the capital gains tax, he said. This means only a handful with at least tens of billions of won in their portfolio will be subject to the tax.

Worse yet, institutional investors do not bear any brunt at all.

The specifics are understandable, he said, since the law was the careful construct of financial market players' vested interest protection methods designed by the Korea Financial Investment Association (KOFIA).

"KOFIA represents the interest of local brokerages and asset managers, with no regard for retail investors. This is why the tax is designed to fall exclusively on retail investors while the two large investor groups are able to fortify profits and market dominance significantly."

The underdeveloped Korean financial market will crash, unsettled by investors with substantial holdings in local stocks leaving for advanced markets such as the United States and Europe, in his view.

"Retail investors will incur major losses, crippled by a massive capital outflow of great magnitude in a country with little investor confidence," he said.

Jung refuted claims of a "tax cut for the rich," as spearheaded by the main opposition Democratic Party of Korea.

"The main opposition falsely claims the scrapping of the tax will exacerbate income inequality. But it is beyond incorrect, since the real beneficiaries are conveniently left out of the discussion. We demand the main opposition make a stance fully reflective of investor concerns and frustrations."

Meanwhile, the drafter of the petition said the DPK's basis for the logic that "there should be taxation where there is income" lacks merit entirely.

"For that claim to stand to reason, the foreign and institutional investors should pay the tax at an equal rate as retail investors do," the petition read.

The characterization of "tax cuts for the rich" will make sense only if the scope of the tax is revised to include global investment fund operators and foreign hedge funds, it added.

"BlackRock, Vanguard and Elliott have significant holdings in the local stock market," it said. "The tax rate of up to 27.5 percent should be equally applied to them to make it fair."

Lee Kyung-min


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