Following South Korea's approval for inclusion in the World Government Bond Index (WGBI) last October, subsequent measures need to follow, but the government is struggling with the implementation. The 'non-taxation post-reporting system,' highlighted as the primary improvement task and the biggest complaint of foreign investors, has been halted by the Legislative Counsel's opinion that it is challenging to amend the enforcement decree. Moreover, changes in the law remain uncertain due to the parliamentary whirlwind of impeachment. As the actual inclusion in the WGBI has not yet been realized, it is pointed out that these follow-up measures should be expedited.
According to the National Assembly and the Ministry of Strategy and Finance on the 26th, the proposed amendment to the law to omit the obligation for foreigners (non-residents) and foreign corporations to submit 'non-taxation' (income tax and corporate tax) application forms has not yet passed the National Assembly's plenary session. Initially planned to pass with the '2025 budget plan and related bills,' and reflected in the 'alternative proposal of the Planning and Finance Committee' through bipartisan agreement, the content was not included in the revision process when only the government's original proposal passed the National Assembly.
The proposed amendment was necessary to facilitate foreign investment in our Government Bonds. Since October 2022, non-taxation measures on interest income and capital gains for foreign Government Bonds investment have been implemented. However, according to our current laws, to receive these tax benefits, foreigners themselves must individually submit proof documents such as the 'non-taxation application form' and 'transaction holding statement.'
The problem is that these procedures are only required by countries like ours and Japan. In most countries, it is possible to verify through the system when opening financial and securities accounts, hence skipping the separate application submission process. For this reason, the non-taxation reporting principle has been a major grievance among foreign investors wishing to invest in our Government Bonds, considering it an 'unnecessary system.'
The government also received these suggestions and, since the approval for inclusion in the WGBI last October, has reviewed various ways for improvement. However, it has not been easy, with the first hurdle being the Legislative Counsel.
The tax office of the Ministry of Strategy and Finance inquired with the Legislative Counsel whether it is possible to stipulate the exemption of the 'non-taxation application form' in the enforcement decree of the Income Tax Act and Corporation Tax Act. However, the Legislative Counsel considered that it might conflict with the current law's provision that states a foreign corporation or qualified foreign financial institution intending to receive non-taxation must apply for non-taxation to the head of the tax office with jurisdiction over the tax location, as prescribed by presidential decree. Although it was an informal inquiry at the working level, the Ministry of Strategy and Finance found it valid and decided to pursue law revision instead of amending the enforcement decree.
Eventually, the Ministry of Strategy and Finance had to choose 'law amendment' instead of amending the enforcement decree, which could be enacted immediately. The plan was to pass the law amendment within the year and apply it from February next year. However, the parliamentary situation intertwined with the impeachment proceedings has become the second obstacle. A government official noted, 'The government will work to pass the bill through an extraordinary session of the National Assembly early next year to expedite implementation as much as possible.'
In the foreign exchange market, there are concerns that although the National Assembly is entirely focused on the presidential impeachment, the follow-up steps for WGBI inclusion should not become a lower priority. The Financial Times Stock Exchange (FTSE) Russell, under the London Stock Exchange Group in the UK, stated, 'South Korea's actual inclusion in the WGBI is scheduled to proceed in stages over a year from Nov. next year on a quarterly basis.' Since the inclusion has not yet been finalized, these efforts are considered even more important to see the final result.
Of course, there have already been some follow-up measures. The scope of Qualified Foreign Financial Institutions (QFI) that must be approved by the National Tax Service is limited to international central securities depositories (ICSD) such as Euroclear and Clearstream, and the registration process for other custodian transaction institutions using these ICSDs will be exempt. This measure recently passed the State Council and is set to take effect on Jan. 1 next year. An amendment that considers overseas private funds as the actual beneficiaries of interest and capital gains from Government Bonds, applying non-taxation without individual verification of lower-tier investors, also passed the National Assembly on the 10th.