South Korea Restored Tax on Foreign Bond Purchases

South Korea announced on 19 November 2010 to restore tax on foreign bond purchases. It will tax foreigners buying government bonds. South Korea took this decision to protect itself against the excessive capital inflows. The excessive inflows could destabilise the economy of South Korea and push the value of its currency Won higher.

This decision is in line to other measures taken elsewhere in the world by emerging markets to curb excessive flow of capital from US or anywhere else which affects the value of their local currencies.

South Korea brought recently two bills to re impose the tax on capital gains and interest generated from the government bonds.
The first bill has a provision to cut or remove the tax as per requirement of market stability and the other bill provides for 14 percent withholding tax.

 South Korea stated that ultra low interest rates in US and other developed countries caused huge capital inflows into emerging markets.
Moreover, South Korea is also worried about that its currency Won’s appreciation against the dollar could harm its exports.

The Federal Reserve’s (Central Bank of USA) recent decision to transfer 600 billion dollars to the US economy increased worries about excessive capital inflows into emerging markets. Apart from South Korea, Brazil, Thailand and other nations have also taken measures to control the unrestrained flow of capitals.

Emerging markets is a term used for those nations whose social or business activities are in the process of rapid growth and industrialisation. At present, there are 28 emerging markets in the world, with the economies of China and India considered to be the two largest. South Korea is also included in emerging markets.