South Korea To Reinstate Withholding Tax On Bonds

by Mary Swire, Tax-News.com, Hong Kong

22 November 2010

South Korea’s Ministry of Strategy and Finance has confirmed that it supports the two bills currently before parliament that call for the re-application of withholding tax on interest payable to foreign investors in South Korean government bonds.

The reintroduction of the withholding tax, which was removed in May last year to try and encourage investment by long-term foreign funds, is now deemed necessary to put a brake on the substantial flow of volatile short-term foreign capital into and out of the country’s financial markets.

The Ministry’s support for the two bills introduced by members from the ruling Grand National Party and already in parliament - one of which would reintroduce the previous 14% withholding tax (15.4% when an additional surtax is added) immediately, while the other would allow more flexibility to impose the tax - could mean that the tax is imposed by the end of this year.

Despite the above, however, the government has also confirmed that it will, if necessary, look at other means of controlling hot money flows. Those could still include the introduction of a bank levy on the financial system’s non-deposit foreign currency liabilities, and/or limits on outstanding foreign exchange positions held by banks.

The Ministry has reported that net investments by offshore investors in South Korean listed bonds reached KRW21.1 trillion (USD18.5bn) by the end of October 2010, as against KRW18.5 trillion for all of last year. It was disclosed that almost 15% of South Korean treasury bonds are held by foreign investors.

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