Revisions create uncertain future

Following the newly announced tax revision plans, the local finance industry is divided on how the changes will help or hurt their businesses.

For securities firms, earlier joy has turned into caution. Brokerage shares jumped by more than 10 percent on Thursday after the government policy was released, but the shares slipped and traded weak on Friday.

Analysts explained that investors who had been overenthusiastic about the policies’ impact were backtracking after concluding that the establishment of Individual Savings Accounts (ISA) and tax breaks for holders of overseas investment funds cannot be a cure-all for the local ailing financial market.

An ISA combines various financial products in one basket and offers tax breaks for account holders.

“The tax revision policy will certainly help some investors who want to invest even more, but the impact is limited in bringing massive numbers of new investors into the money market,” said Yoo Seung-chang, a senior analyst at KB Investment & Securities. “Investors won’t risk thousands of won just to save some income tax.

However, analysts contended that Thursday’s tax revision will benefit the financial industry overall.

They said that securities firms and asset management firms, despite being unlisted on the stock market, will see profit boosts in the long term thanks to the tax breaks on overseas investment funds.

“The local stock market is slowing down, which is making investors expand overseas investments,” said Kang Seung-gun, an analyst at Daishin Securities.

“There is plenty of demand that can boost securities firms’ profits, because the payout from overseas investment funds is higher than local equity funds.”

Bank shares on Friday rose on average 0.7 percent compared to the previous trading day in the wake of the revisions.

Local asset management firms are preparing to release different tax-free overseas investment funds to attract investors with different demands.

Index-linked funds targeting advanced economies like the United States, Europe and Japan are being considered for conservative investors, as some are mid-risk products rooted in developing economies in Asia.

But small-sized mutual finance companies, such as National Agricultural Cooperative Federation (Nonghyup), National Credit Union Federation of Korea and Korean Federation of Community Credit Cooperatives (KFCC), are seen to be hurt by these revisions.

For one, the reforms abolish tax exemption benefits for dividend income produced by the mutual finance firms.

Mutual finance companies collect a set amount of funds from its union members and return profits generated from the management of the funds, in the form of dividends. For many years, these dividends were non-taxable as long as they were under 10 million won ($8,580) per person.

But things are about to change. According to the new regulations, a 5 percent tax will be levied on these dividends from next year, and the rate will rise to 9 percent from 2017.

The government is also set to levy taxes on interest income from trust fund deposits set up at mutual finance companies, which have been non-taxable below 30 million won.

Market players worry about an exodus of union members, which would eventually deteriorate their competitiveness within the broader financial industry.

“If taxes are levied on dividend incomes, we will have difficulty collecting new investments from union members … and this will in turn hurt our financial health,” said a mutual finance firm official who requested anonymity.

BY PARK JUNG-YOUN, KIM JI-YOON [park.jungyoun@joongang.co.kr]