The Changing Capital Markets of East Asia

Gitte Heij

Tax systems in the Asian region can be approached from different angles, including overall tax rates, tax exemptions and incentives, tax treaties ¹ and specific incentives for foreign investors. These issues must all be analysed to accurately evaluate whether a country is attractive as an investment destination relative to another.

The taxes themselves are, of course, the main cost but they are not the only costs in any given tax system. To obtain a more complete picture, one has to look at other aspects such as clarity of the tax rules (for example, the transparency of taxation of financial instruments), access to information and procedures for objection and appeal. These can be described as the costs of compliance, briefly discussed below.

Given the medium- to long-term nature of investment returns, another important aspect is possible tax policy changes during the term of the investment. Is it likely that certain tax incentives will be introduced to encourage certain sectors? Are new types of taxes likely to be introduced or are rates of existing taxes likely to be changed?

In this chapter these three aspects—tax policy, the general taxation system and costs of compliance—are discussed for six countries. Some conclusions are drawn for each country in relation to its capital market.

It should be noted that much of the information given in this chapter is of a ‘principle’ character. The specific tax consequences of the more sophisticated financial instruments would have to be judged on a case by case basis, and would sometimes involve individual tax rulings by the tax authorities concerned. But even so, given the poor legal framework in certain countries, ruling results in past cases cannot always be interpreted as probably binding for present or future cases of a similar nature. The rapid evolution and change in the financial sector of East Asia, in terms of institutional and market structure and prudential framework, can make specific analysis of tax issues at times counter-productive.

Having said that, besides looking at the current general structures of

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