[2020 Tax Law] Wealth Tax Increase vs Tax Justice... Hong Nam-ki "Strengthening Social Solidarity and Income Redistribution"

Controversy Over Raising Top Income Tax Rate to 45% for Wealth Tax Increase Expected to Grow
Hong: "Expand Corporate Investment Tax Credits and Consumer Credit Card Income Deductions
Please Also Consider Revenue Reduction Factors Like Lowering Securities Transaction Tax Rate"
Hong: "Prepared an Almost Tax-Neutral Tax Law Amendment
Only 67.6 Billion KRW Increase in 30 Trillion KRW National Tax Revenue Over 5 Years"

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki reading the announcement at the pre-briefing for the "2020 Tax Reform Bill" held at the Government Sejong Complex on the afternoon of the 20th. From left, Ko Gwang-hyo, Director of Income and Corporate Tax Policy at the Ministry of Economy and Finance; Lim Jae-hyun, Director of the Taxation Office at the Ministry of Economy and Finance; Deputy Prime Minister Hong; Kim Tae-ju, Director of General Tax Policy at the Ministry of Economy and Finance. (Photo by Ministry of Economy and Finance)

[Asia Economy Reporter Moon Chaeseok] Deputy Prime Minister and Minister of Strategy and Finance Hong Nam-ki announced on the 22nd in the '2020 Tax Reform Bill' statement that "to strengthen social solidarity and income redistribution functions, we intend to raise the income tax rate for relatively affluent ultra-high-income earners." He emphasized that the bill also includes balanced measures to reduce tax revenue, such as the phased reduction of securities transaction tax rates, expansion of investment tax credits, and an increase in the credit card income deduction limit for this year, but fierce controversy over 'tax hikes on the rich' is expected.

In his opening remarks at 2 p.m. that day, Deputy Prime Minister Hong said that a new tax bracket exceeding a taxable income of 1 billion KRW would be established, raising the top income tax rate from the current 42% to 45%.

Hong emphasized that the tax reform bill reflects the economic contraction caused by the COVID-19 pandemic. He explained that the three pillars of this year's tax reform bill are ▲overcoming COVID-19 damage and enhancing economic vitality in preparation for the post-COVID era ▲expanding the inclusive foundation of our economy and strengthening coexistence and fairness functions ▲rationalizing the tax system and improving the taxpayer-friendly environment.

To boost economic vitality, tax support measures will be implemented, including ▲improving the corporate investment environment ▲stimulating consumption ▲strengthening momentum for innovative growth companies ▲reforming financial investment tax systems ▲strengthening tax support requirements for returning companies.

Specifically, nine specific facility investment tax credits will be integrated and simplified, and the scope of tax-supported assets will be changed to a negative list system, greatly expanding to all general business-use tangible assets. Incentives will be provided for increased investments, and higher tax credit rates will be applied to investments related to new growth technologies. To revive domestic demand, the credit card income deduction limit will be raised by 300,000 KRW for this year only.

The securities transaction tax will be reduced by 0.02 percentage points next year and an additional 0.08 percentage points in 2023. From 2023, financial investment income will be introduced, combining profits from equity funds and capital gains from listed stocks, and the basic deduction amount will be increased from 20 million KRW to 50 million KRW. The requirement to reduce overseas production volume for tax support for returning companies will be abolished. When venture capital, etc., invest in small and medium-sized enterprises in materials, parts, and equipment, capital gains and dividend income from stock transfers will be tax-exempt.

Deputy Prime Minister Hong said, "Even with the introduction of financial investment income taxation in 2023, the tax burden will decrease by more than 80 billion KRW compared to now, including securities transaction tax." He added, "97.5% of stock investors, excluding the top 2.5%, are expected to continue enjoying tax exemption benefits on capital gains from stock transfers while significantly reducing the burden of securities transaction tax."

Strong controversy is expected over the government's tax principle of 'strengthening coexistence and fairness functions.' Hong announced that to improve tax equity between self-employed, small and medium enterprises, low-income and high-income groups, a new tax bracket exceeding a taxable income of 1 billion KRW will be established, raising the top income tax rate from 42% to 45%.

Hong explained, "After much deliberation, the government intends to raise the income tax rate for relatively affluent ultra-high-income earners to strengthen social solidarity and income redistribution functions."

Additionally, ▲virtual asset transaction income will be taxed as other income ▲the VAT simplified taxpayer threshold will be raised from an annual sales amount of 48 million KRW to 80 million KRW to reduce tax burdens on the self-employed ▲the special tax reduction system for small and medium enterprises (5-30% reduction in income or corporate tax without separate conditions) will be extended for two years ▲the application period for the four major job tax support measures expiring at the end of this year (earned income increase tax system, regular employment conversion, parental leave and employment retention, employment support for career-interrupted women, etc.) will be extended.

The decision to impose dividend income tax on major shareholders and related parties is also controversial. The government has newly established a deemed dividend system on excess retained earnings for personal quasi-corporations to prevent tax burden reduction by exploiting differences in taxation between individuals and corporations.

Going forward, if a corporation in which a major shareholder and related parties hold 80% or more of shares retains retained earnings exceeding an appropriate amount without distributing profits to shareholders, it will be deemed to have distributed dividends to shareholders, and dividend income tax will be imposed on the shareholders.

Deputy Prime Minister Hong said, "There are items in this year's tax reform bill that will increase tax revenue and items that will decrease it," adding, "The government aimed to prepare this tax reform bill to be almost 'tax neutral.'"

He continued, "Compared to the national tax revenue scale of nearly 300 trillion KRW, the tax revenue effect is only an increase of 67.6 billion KRW over the next five years from next year to 2025," emphasizing, "I hope there will be no further tax hike debates."

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