Controversy Over 'Reverse Discrimination' Excluding Fund Basic Deduction... Government to Review Supplementary Measures

Hong Nam-ki, Deputy Prime Minister for Economy and Minister of Strategy and Finance (file photo)
[Image source=Yonhap News]

[Asia Economy Reporter Joo Sang-don] As criticisms increase that "collective investment schemes (funds) are subject to reverse discrimination because, unlike domestic stocks, there is no basic deduction on earnings," the government has decided to prepare supplementary measures. Attention is focused on whether a certain level of basic deduction will be applied to fund earnings, as requested by the investment industry.

On the 6th, a Ministry of Economy and Finance official told Asia Economy in a phone interview, "We are aware of various demands such as providing basic deductions for funds like stocks and establishing tax support for long-term investments," adding, "We are reviewing supplementary measures for the pointed-out and concerning issues." Although the official was cautious about the possibility of amendments, this statement indicates a serious consideration of the industry's various concerns. Until now, the government had drawn a line on basic deductions for funds, stating it would review measures to address disadvantages in indirect investment in domestic stocks under the Individual Savings Account (ISA) system.

Earlier, on the 25th of last month, the Ministry of Economy and Finance announced the 'Financial Tax System Advancement Direction,' which includes taxing capital gains on small shareholder listed stocks, currently tax-exempt, from 2023, and lowering securities transaction tax from the existing 0.25% to 0.15%. When taxing capital gains, a 20 million KRW deduction applies to domestic listed stocks, but there is no basic deduction for stock-type Exchange-Traded Funds (ETFs) and funds, sparking controversy over reverse discrimination. For example, if an investor earns 20 million KRW annually through direct stock investment, the basic deduction applies, and no tax is paid. However, if the same 20 million KRW is earned through stock-type funds, it is fully taxable, resulting in a 4 million KRW tax (applying a 20% tax rate) under the financial investment income tax.

Regarding this, Lee Sang-yeop, Senior Research Fellow at the Korea Institute of Public Finance, pointed out, "The government's basic deduction plan for financial investment income violates tax fairness among financial assets and tax neutrality on financial asset investments," adding, "(If only funds are excluded from basic deductions) it may lead to an increase in direct domestic stock investments and a decrease in indirect investments."

Calls for tax support to encourage long-term investment are also growing. Hwang Se-woon, Research Fellow at the Korea Capital Market Institute, emphasized, "Considering that individual investors tend to have a strong short-term investment tendency, tax support is needed to promote long-term investment," and "Preferential tax rates should be applied to long-term investments (held for more than one year) to encourage individual investors to invest long-term."

In response, Kim Moon-geon, Director of the Financial Taxation Division at the Ministry of Economy and Finance, explained, "The basic deduction is a necessary expense deduction for efforts such as selecting stocks when investing in stocks, but funds are a concept of entrusting money, so applying a basic deduction to them is not appropriate," adding, "Also, fund profits currently have no income deduction system, and in the future, through the introduction of loss offsetting and carryforward deduction systems, taxation will not occur in case of losses."

Regarding tax support for long-term investment, the Ministry's position is that while real estate, as a tangible asset, requires preferential treatment for long-term holding considering inflation, financial assets do not have inflation factors, so preferential treatment for long-term holding is unnecessary. The government is also concerned that preferential treatment for long-term investment could lead to relative discrimination against short-term investment.

Additionally, the market worries that if the financial investment income tax is withheld monthly, funds will be tied up to the extent of the tax withheld, restricting investment. In response, the government is open to extending the withholding period to quarterly, semi-annually, or annually.

The government plans to finalize the government proposal by the end of this month after collecting opinions from the industry and various stakeholders through a public hearing on the financial tax reform plan on the 7th. This will be included in the '2020 Tax Law Amendment Bill' to be submitted to the National Assembly.

This content was produced with the assistance of AI translation services.