National Assembly’s Procrastination to Lead to Extra Taxes with Korea-US FTA
The National Assembly of South Korea is postponing the ratification of the Foreign Account Tax Compliance Act (FATCA) for the automatic exchange of South Korean and U.S. taxpayers’ financial information. Under the circumstances, South Korean financial companies are about to be forced to pay more than 600 billion won (US$521 million) in extra tax in the United States.
The U.S. and South Korean governments signed the agreement in June 2015 in order to prevent offshore tax evasion. Then, the South Korean government asked the National Assembly to ratify it in July last year. According to the governments, the deadline for the ratification is September this year. If the FATCA fails to take effect in or before September this year, the U.S. government will impose taxes on 30% of the incomes resulting from South Korean financial companies’ investments in U.S. assets, starting from next year, based on the Internal Revenue Code.
According to the Korea Capital Market Institute, the amount of South Korea’s overseas fund investment totaled 61 trillion won as of the end of last year and investment in the U.S. accounted for approximately 40% of it. The annual investment income reaches 3.75 trillion won or so given the three-year average indices and dividend yield ratio, 15.4%, of the Dow Jones Industrial Average and S&P 500.
When the current tax rate is applied, the tax is equivalent to 12.3% of the income or about 462 billion won. However, the percentage will go up to 30% and the amount will increase by 1.127 trillion won next year unless the FATCA is ratified until the deadline.