Foreign Exchange Transactions

Transcription

1 CHAPTER 6 Transactions The government is committed to foreign exchange liberalization to upgrade its financial market to global standards. Basic Principle Liberalization Administrative Authorities

2 1 Basic Principle Capital Transaction $ Capital Inflow Foreign currency borrowing by non-residents Issuance of overseas securities by residents Foreign direct investments into Korea Local depository transactions by non-residents Capital Outflow 1. Definition After the 1997 Asian financial crisis, the Act (Act) has been newly introduced in April 1999 to liberalize the financial market and to upgrade it to global standards. The Act identifies 3 types of foreign exchange: (i) instruments of external payments, (ii) foreign currency denominated securities, and (iii) foreign currency denominated bonds. Accordingly, foreign exchange transactions refer to any transactions carried on with the medium of any of the 3 types of foreign exchange. 2. Act $ Granting loans to non-residents Issuance of local securities in Korea by non-residents Investment into overseas securities by residents Overseas direct investments by residents Overseas depository transactions by residents (i) Manufacturers: Reports must be filed with a designated foreign exchange bank at which the company has an account only if the loan being sought is equal to or more than 50 percent of the foreign investment. (ii) High-tech companies: Reports must be filed with a designated foreign exchange bank at which the company has an account only if the loan being sought is equal to or below the amount of the foreign investment. The new Act is designed to promote a sound and autonomous market principle backed by a negative system where only a few exceptions are enumerated in the provisions. In other words, in line with IMF, WTO and OECD standards on international transactions, the Act guarantees free foreign exchange transactions in Korea with minimum ex-post management and monitoring system (i.e. safeguards). Apart from other transactions such as ex/import payments regulated under the External Trade Act, capital transactions involving foreign exchange are directly governed by the Act. Meantime, the Act recognizes preferential treatment for foreign invested companies in several business categories regarding the reporting requirement

3 2 Liberalization With a view to foreign exchange market liberalization, a series of policy measures has been put in place since Previously, any foreign exchange borrowing required reporting to BOK or MOFE, which will be repealed in end Instead, reporting to any foreign exchange bank will replace it. Forex Deregulatory Measures to be Enforced within 2006 Won s internationalization Immediate enforcement in effect from May 22, 2006 a. Extend the ceiling on the won-denominated borrowings by non-residents The threshold subject to reporting compliance to the BOK will be upwardly adjusted from the current 1 billion won to 10 billion won b. Expand the limit on the exports/imports of the Won The threshold subject to reporting shall be raised to US$1 million from the current US$10,000 Target enforcement within H2 of 2006 a. List won/dollar futures contracts on the Chicago Mercantile Exchange b. Encourage investment in won-denominated bonds by non-residents (relevant tax law revision will follow) Lower withholding tax rate on interest income from 25% to 14% Allow creation and operation of bond funds, of which interest income is subject to lower tax rate, for a limited time period Forex Liberalization Measures in Implementation as of End 2005 Trade transactions Non-trade payments Capital transactions Non-bank financial institutions 2002~2005 forex deregulation Permit multi-netting and streamline settlement procedures Disestablish verification for large external payments in cash by individuals (such as remittance of donation/gift nature) Soften mandatory reporting and approval compliances (i.e. extension of upper limit on the won-denominated funding by non-residents) ** As of Jan 1, 2006, all mandatory approval for capital transactions has been replaced with simple reporting compliance. Extend foreign exchange related business scope whereby allowing participating in bank-to-bank markets Liberalization of foreign exchange transaction a. Allow acquisition of overseas real estate up to US$1 million or less for investment intent by individuals and companies b. Expand the scope of foreign exchange lending related businesses by insurers and equipment lease companies via abolishing the limit of permissible principal amount - Rate (month-end) Export of the won Mark up the upper ceiling of permitted export amount Upgrading foreign exchange market a. Allow futures transaction deposit in foreign currency When entering into domestic futures contracts, foreigners are allowed to pay deposits in foreign currency a. Extend foreign exchange position from the current 30% of equity capital at the previous month-end to 50% a. Seek to improve the transaction structure of the foreign exchange market with full consultation with the Market Comittee regarding implementation of any such measures thereupon 86 87

4 Medium and Long Term Forex Liberalization Plan Won s internationalization Phase I (2006~2007) a. Expand won holdings by non-residents b. Pursue listing of KRW/US$ futures in overseas exchange house c. Lower tax rates for non-residents interest earnings from investments in won-denominated local bonds d. Consolidate won accounts of similar nature held by non-residents e. Remove limits on export/import of the won Phase II (2008~2009) a. Expand scope of the won transactions exempted from reporting compliance 3 Administrative Authorities 1. Ministry of Finance and Economy Liberalization of overseas investment by Korean nationals Abolishment of the mandatory collection of external credit Appeasement of procedural restrictions on the capital transactions a. Allow acquisition of overseas real estate up to US$1 million or less (ceiling) for investment intent by individuals and companies * Ceiling to be upwardly adjusted in phases a. Mark up the threshold principal amount subject to mandatory b. Convert current approval regime to reporting system with respect to exemption from a. Soften procedural restrictions on capital transaction (i.e. reporting to MOFE or BOK reporting to any foreign exchange bank in Korea) a. Liberalize acquisition of overseas real estate by residents with complete lift of investment ceiling a. Repeal the mandatory b. Instead, institutionalize reporting system for the purpose of sound monitoring on overseas lending or capital transactions of such nature exceeding certain amount a. Allow simple reporting to foreign exchange banks with a few exceptions including won-denominated fund-raising by non-residents and some credit derivatives MOFE is in charge of formulating foreign exchange policies and enacting laws and regulations. MOFE is also responsible for registering foreign exchange institutes in the market and handling approval and reporting related procedures. Most safeguard measures including but not limited to the emergency termination order shall be commended by MOFE as well. 2. Bank of Korea BOK oversees the management of total foreign exchange reserves and collection of relevant data and information. Any activities pertinent to foreign exchange remittance, deposit and credit transactions shall be subject to BOK s supervision. 3. Financial Supervisory Commission Permission of foreign exchange business a. Expand permitted scope of foreign exchange business by non-bank financial institutions a. Allow all kinds of won-denominated financial businesses stipulated under each law and decree in foreign currencies Like any other financial transactions, foreign exchange transactions are not exception to the FSC s supervision. Advancement of foreign exchange market a. Extend foreign exchange position in phases b. Allow margin trading in foreign currency c. Improve transaction structure in the foreign exchange market with full consultation with the Market Committee a. Remove foreign exchange position while including such purport in the prudential regulations under each law and decree 88 89

5 Chapter 6. Questions from Foreigners Q1 Forex Regulation Q2 Margin FX Regarding the relaxation of regulations relating to FX transactions and trading I have a few queries. What regulations will be kept intact, if any? What are the safeguard regulations media reports have suggested will remain even after the liberalization? Currently, what are the regulations relating to foreign exchange transactions? When will the liberalization of regulations begin? I was also hoping to locate a formal statement or press release on the recent announcement by the Ministry of Finance and Economy regarding the liberalization of the FX transactions. If there is one, could you please post it on the website or it to me. ARegarding the revision of foreign exchange transactions, specific details are not determined as the revision is in its initial stage (Please see page 88 of this book). My employer is currently viewing the possibility of opening a subsidiary or representative office in Korea. The firm I work for is a margin fx and cfd (equity swap) provider. Could you please advise whether there are any restrictions or licensing requirements for such a firm in Korea? Also, could you please advise if there are any restrictions on fund transfers from Korea to the overseas parent company? AAs to your first question, if the subsidiary made investment in Korea depending on appropriate procedures, the transfer of earned surplus is not subject to any legal restrictions. According to the Act, some financial institutions including banks and insurers are allowed to play as forex traders, while individuals and general companies being only able to exchange foreign currencies in banks. In the case of futures contracts, FX futures transactions among individuals, which do not involve intermediaries such as futures traders, are to be reported to the Bank of Korea