Under a draft plan, some foreign investors would face capital gains taxes if they hold as little as 5% of a South Korean company’s stock, a big change from the current 25% threshold. This would cover investors from nations that South Korea doesn’t have a tax treaty with, which include Hong Kong, Singapore, Luxembourg and the Cayman Islands, according to a recent Bloomberg Gadfly column.
“This proposal, if implemented as presented, could potentially have negative impacts on Korean equity market accessibility and hence, the replicability of the MSCI Korea Indexes and the MSCI Emerging Markets Index,” New York-based MSCI said in a statement Friday.
That’s dry language, but it raises a scary prospect for the Asian nation: If a country’s stock market isn’t deemed accessible enough, MSCI could in theory yank its shares from widely followed indexes. It’s a little early in the process to be jumping to worst-case conclusions, according to Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, who helps oversee $35bn and has exposure to South Korea through through emerging markets indexes.
“Concern that the MSCI is going to kick Korea out of its indexes is premature now that we have no specific details on whether the tax policy change will occur,” McCain said in a telephone interview. “I have been covering the markets for a long time, and I don’t recall that the MSCI kicked out a country just like that.”
The tax proposal is open for public comment through the end of January and likely wouldn’t go into effect until the middle of the year.
“The government is aware of the concerns raised in the financial and investment industries and we are currently reviewing the matter,” a senior government official who asked not to be identified due to internal policy, said yesterday in a text message.
Traders at the South Korea Stock Exchange. MSCI, whose decisions on stock indexes guide the investment of trillions of dollars, said South Korea’s proposed changes to capital gains taxes could make the nation’s market harder to access.
