The return-to-domestic-market account (RIA), introduced as part of the government's measures to stabilize the exchange rate, is increasingly likely to launch next month due to legislative delays. As investor interest in RIA grows, those investing in overseas exchange-traded funds (ETFs) through retirement accounts (IRP and retirement savings) or individual savings accounts (ISAs) should review the tax-benefit structure in advance.
RIA is a system that deducts capital gains tax when the proceeds from selling overseas stocks are converted into won and reinvested in domestic stocks and other assets. However, when calculating the deduction amount, the system is designed to cap the overall deduction by aggregating not only the performance within the RIA account but also the net purchases of overseas investment products in other accounts such as retirement accounts or ISAs.
According to guidelines the Korea Financial Investment Association distributed to securities firms on the 17th, the larger the net purchases of overseas stocks and overseas stock alternative assets across all accounts other than RIA from Jan. 1 to Dec. 31 this year, the smaller the RIA deduction benefit becomes. Depending on the transaction timing (based on settlement date), weighting of 100% applies for January to May, 80% for June to July, and 50% for August to December.
While investing in domestic stocks through RIA after selling overseas stocks will only be possible once the relevant law takes effect, the tally of net purchases of overseas investment products that reduces tax benefits is applied retroactively from January this year. In other words, if U.S. stocks were already purchased early in the year, the future deduction amount may be smaller than expected.
The scope of "overseas investment products" that limit tax benefits includes not only overseas stocks (including ETFs, ETNs, and DRs) but also domestically listed overseas ETFs and ETNs and overseas equity funds, the so-called "overseas stock alternative assets."
For this reason, those who have consistently invested in domestically listed overseas ETFs through retirement accounts (IRP and retirement savings) or ISAs need to be careful when using RIA. Domestically listed overseas ETFs are a representative product actively traded by investors seeking tax savings in retirement and ISA accounts. Unlike domestic stocks, domestically listed overseas ETFs are taxed on both capital gains and distributions, but certain tax credit benefits can be obtained through retirement and ISA accounts.
As of the end of August last year, overseas ETFs accounted for about 30% (8.9 trillion won) within ISA accounts, roughly three times the level of domestic ETFs (3.3 trillion won). The share of ETF investments in retirement accounts has also been steadily increasing. The more an investor has pursued long-term diversification centered on existing tax-saving accounts, the more they should consider cross-account effects together.
Considering the purpose of the policy to encourage the repatriation of overseas funds, it is in some ways unavoidable to reflect overseas investments in long-term accounts in the deduction calculation and to apply it retroactively. However, some note that if volatility persists and the strong dollar trend continues, RIA's effectiveness could be limited, as overseas stock investment is effectively constrained for more than a year.
When the investor later files a capital gains tax return, to receive the RIA deduction they must gather all transaction histories for overseas investment products by securities firm and apply for the special tax treatment. Investors can use a filing proxy service only if securities firms voluntarily establish it.
Some securities firms, taking this structure into account, have begun preparing notices to guide customers on products subject to reduced tax benefits. They also plan to inform investors that when investing in overseas investment products in parallel, earlier investment timing is reflected with a higher net-purchase weighting, which can increase the extent of tax-benefit reduction.
Meanwhile, some raise concerns about fairness in how the criteria are applied. ETFs are included as subject to deduction reductions if they contain overseas assets regardless of their inclusion ratios, while overseas equity funds are not subject to reductions unless at least 60% of their assets are invested in overseas stocks. A person in the asset management industry said, "Even though both are overseas investments, differing application standards by product structure can cause confusion for investors."