Market rout reignites concerns over South Korea investment tax

Korea Investment Holdings Co

07/08/2024 08:02

By Cynthia Kim
       SEOUL, Aug 7 (Reuters) - A stock market rout that wiped
$140 billion off South Korea's KOSPI index on Monday may
accelerate the government's efforts to scrap a proposed tax on
stock trading income amid concerns of a market dominated by
retail investors. 
    President Yoon Suk Yeol has been trying to secure approval
from the main opposition party for his plan to eliminate the
tax, which would impose a levy of at least 20% on trading income
from stocks and bonds if annual capital gains exceed 50 million
won ($36,325) from 2025. 
    "Any new tax at this point would be absolutely absurd," said
 Oh Jeong-min, 42, a retail investor who lost nearly 10% of his
portfolio in domestic and U.S. shares on Monday.
    "We once again saw how vulnerable the Korean market was when
the U.S. sneezes," said Oh, referring to how a rise in the U.S.
unemployment rate to a near three-year high spooked markets. 
    Financial regulators worry the proposed capital gains tax
could deter many of the 14 million local retail investors from
the $1.7 trillion domestic stock market. There has been a trend
of local investors favoring global stocks such as Nvidia
 NVDA.O  and Tesla Inc  TLSA.O  over domestic investments since
the pandemic.
    This week, a blog run by opposition Democratic Party
lawmaker Jin Sung-joon, who supports the tax bill, was flooded
with critical comments from retail investors, who account for
around two-thirds of domestic trade.
    "(Monday's) crash revealed the painfully weak supply and
demand situation of the domestic markets. The financial
investment tax will put a nail in the coffin, is this how you
want to ruin the market?" one post read.
    Democratic party lawmakers contend that the proposed tax is
fair, affecting only about 1% of the 14 million retail
investors.
    Jin at a May 10 policy meeting had said that such a tax has
been successfully introduced in Germany and Japan and helped
stabilise their financial investment systems.      
    However, following the KOSPI's 8.8% slump on Monday, the
Democratic Party cancelled a public debate on the tax scheduled
for Wednesday, according to the office of lawmaker Lim
Kwang-hyun, who also backs the tax.
    Yoon's office on Wednesday issued a statement once again
urging parliament to accelerate the discussion to abolish the
bill as "it is undesirable for the bill to hang over
uncertainties when the majority of the public agrees that the
tax should be scrapped."
    Han Dong-hoon, leader of the ruling People Power Party, said
in televised remarks on Tuesday that sticking to the tax plan
would be like "creating a perfect storm and walking into it
ourselves".
    The tax is slated to take effect from 2025 unless the
opposition Democratic Party bloc, which holds a majority in
parliament, revokes or amends the bill.
    "Given the meltdown we saw, the opposition may agree to
delay the introduction of the tax," said Kevin Choi, head of
ANDA Asset Management in Seoul.
    "They should acknowledge that stock investment is a channel
to boost people's wealth at a time when the domestic stock
market has been underperforming compared to its global peers." 
    The KOSPI  .KS11  has lost 3.4% so far this year,
underperforming the S&P 500  .SPX  and Nikkei  .N225 , which are
up 10% and 5%, respectively.

 (Reporting by Cynthia Kim; Editing by Ed Davies and Jacqueline
Wong)
 ((Cynthia.Kim@thomsonreuters.com; 822 3704 5655; Reuters
Messaging: cynthia.kim.thomsonreuters.com@reuters.net))