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South Korea Introduces Bank Levy

by Mary Swire,, Hong Kong

03 August 2011

In a further measure to ease capital volatility due, particularly, to foreign capital flows during periods of global financial uncertainty, the South Korea’s Ministry of Strategy and Finance has decided to impose a levy on banks’ foreign-currency liabilities from August 1.

This move comes after the government had already lowered the ceiling on banks’ foreign exchange positions and introduced a withholding tax on interest paid to foreign investors in South Korean government bonds.

The levy will apply to a total of 56 financial institutions - 13 commercial banks and 37 domestic branches of foreign banks, together with state banks, such as the Industrial Bank of Korea, Korea Eximbank, Korea Development Bank and Korea Finance Cooperation, and will be imposed on their foreign currency liability balances.

Temporary liabilities, such as those arising from foreign exchange transactions and derivatives transactions, will be exempted from the levy, and outstanding balances will be calculated on the basis of daily average balances.

Initially, a levy will be imposed according to debt maturity - with 0.2% for liabilities of less than one year, 0.1% for those between one and three years, 0.05% for three to five year debts, and 0.02% for debts of more than five years. However in case of an emergency, particularly a sudden surge of foreign capital inflows, it is possible that an extra levy can be imposed for up to six months.

The first notice of the levy, for liabilities between August and December 2011, will be issued in April 2012.

TAGS: tax | economics | fiscal policy | banking | tax rates | withholding tax | Korea, South | currency

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