Starting this year, changes to the foreign tax credit system have put at risk the tax benefits received by investors. In this situation, Mirae Asset Global Investments has reignited the competition for fee reductions in the asset management industry, which had been momentarily halted. Competitors, worried that the decline in tax benefits could lead to a decrease in demand for overseas investment funds, are voicing their dissatisfaction now that even major firms like Mirae Asset have reactivated the 'chicken game.' Samsung Asset Management quickly responded with additional fee reductions.
According to the financial investment industry on the 7th, Mirae Asset Global Investments has reduced the total fee for its exchange-traded funds (ETFs), 'TIGER U.S. S&P 500' and 'TIGER U.S. NASDAQ 100,' to 0.0068% from the previous day. This marks a reduction to one-tenth of the fee, which had been lowered from 0.3% to 0.07% in November 2020.
Other asset management firms are expressing their grievances. There are not many firms that are profiting significantly from their ETF businesses, and after Samsung Asset Management last year, this year it is Mirae Asset that has introduced the fee reduction card. The announcement comes at a time when the controversy over changes to the foreign tax credit system is intensifying, prompting competitors to react more sensitively. Previously, on April 19 last year, Samsung Asset Management lowered the total fees for four ETFs tracking major U.S. indices from 0.05% to 0.0099%.
A source from the ETF division of a mid-tier asset management firm said, 'It is disheartening that the large firms already dominating the ETF market are engaging in a chicken game again this year, just as they did last year.' They added, 'Last year, we thought, "Let's just do what we can." But now, with the policy changes potentially reducing demand for overseas fund investments through tax-efficient accounts, we are contemplating whether we should join the fee reduction competition.'
In 2021, during the Moon Jae-in administration, the decision was made to revise the foreign tax credit system for funds, which began implementation this year. Until last year, when overseas investment funds received dividends after local taxes were deducted, the National Tax Service would refund those taxes to the funds. This year, the change means that taxes will not be refunded, and withholding will occur at the dividend payment stage. As a result of this policy change, the benefits of low taxation and tax deferral for investments in overseas funds through tax-efficient accounts, such as Individual Savings Accounts (ISAs) and pension accounts, have disappeared.
This has also sparked concerns over double taxation. Investors using pension accounts will receive distributed amounts that have been subjected to local withholding taxes, necessitating them to pay taxes overseas and subsequently on pension income. In response to the controversy, the Ministry of Strategy and Finance has stated that it is considering solutions to address the double taxation issue concerning pension accounts. Methods such as refunding pension income tax have been mentioned, but this matter is expected to take significant time due to its connection with tax law amendments. Additionally, concerns about the dilution of the tax deferral effect of pension accounts will persist.
Given the situation, other asset management firms, excluding Samsung and Mirae Asset, are also contemplating whether to join the fee reduction chicken game. After conceding the lowest fee title to Mirae Asset, Samsung Asset Management again reduced the total fees for two ETFs, 'KODEX U.S. S&P 500' and 'KODEX U.S. NASDAQ 100,' to 0.0062% on the morning of the 7th. A senior official from a small to mid-sized asset management firm remarked, 'It seems like it could result in a situation where the sparrow gets torn apart while chasing the stork, but many believe we need to take some kind of action.'
Regulatory authorities are worried about excessive competitive bleeding among asset management firms. Lee Bok-hyun, head of the Financial Supervisory Service, met with reporters after an open forum for activating the Korean stock market held at the Korea Exchange in Yeouido, Seoul, the previous day, and noted, 'In the short term, excessive competition in response to actions from opponents could send incorrect signals to consumers,' adding that it may overlook the need to enhance qualitative services, such as developing sound products.