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Investors in Foreign Funds Could Face `Double Whammy`

Posted July. 08, 2009 08:47,   


An office worker in September 2007 invested 10 million won (7,950 U.S. dollars) in China and Latin funds when global stock markets peaked. Though the global financial crisis has halved his principal investment, the earning rates of his funds has eased to minus 40 percent thanks to the recent rallies in overseas stock markets.

He says he is determined to stay the course in the hope of recovering his investment. As tax deductions on gains from foreign stock investment are expected to end at year’s end, he faces a difficult choice: sell or keep the funds.

If the government imposes taxes on gains from overseas fund investment from next year as planned, many investors will find themselves in the same unenviable position as the office worker. Korea had more than seven million foreign fund accounts at the end of May.

The only bright spot is the government’s new interpretation of profit generated by a falling won. Until now, investors who suffered losses had to pay taxes on gains from the falling won.

The tax exemption on foreign funds that began in early 2007 and will continue until the end of the year was intended to prevent a rapid rise in the won’s value. At the time, the global stock market was booming and demand for foreign funds peaked.

Since the global financial crisis, however, foreign stock markets have suffered big losses. With tax exemptions coming to an end, many investors are expected to suffer a double whammy of fund losses and tax payment.

For instance, if an investor sees his or her principal recover to 15 million won (11,800 dollars) next year after plummeting to 10 million won (7,950 dollars) from 20 million won (15,700 dollars), the tax will be 770,000 won (605 dollars) for gains of five million won (3,900 dollars), though return on investment will remain at minus 25 percent.

Financial companies are being bombarded with calls from investors. Ryu Nam-hyeon of Samsung Securities said, “Particularly at a loss are those who subscribed to foreign funds a long time ago and forgot about their subscription.”

“Most of them have taken no specific action and want to wait until the end of the year, but some are considering share buybacks.”

In response to such an atmosphere, financial authorities are urging the Strategy and Finance Ministry to consider an extension of the tax exemption or a tax cut.

Neither of them is likely, however, given that the government is seeking to increase tax revenues to offset aggravating fiscal soundness stemming from a revenue decline as a result of tax cuts and massive fiscal spending.

In addition, certain experts say tax exemptions are no longer necessary since the situation is different from that of 2007, when dollars were plentiful in the foreign exchange market.

jarrett@donga.com cha@donga.com