[Seungseop Song's Financial Light] Why Was the Implementation of the 'Geumtu Tax' Delayed by 2 Years?

Financial Investment Tax Scheduled for Next Year Postponed by 2 Years
Opposition: "Tax System Rationalization and Compliance with Tax Principles... Should Be Implemented"
Ruling Party: "Concerns Over Stock Market Decline... Let's Postpone for 2 Years"
Agreed to Postpone for 2 Years and Reduce Securities Transaction Tax

[Asia Economy Reporter Song Seung-seop] The partial amendment bill to the Income Tax Act, which postpones the implementation of the financial investment income tax for two years, passed the National Assembly plenary session on the 23rd. The financial investment tax system, which was scheduled to be implemented next year, has been delayed until 2025. We explain what the key issues of the financial investment tax are, how things will change if it is introduced, and why the postponement occurred.

Taxable Even If Not a Major Shareholder, If You Earn Money Through Financial Investment

The financial investment income tax literally refers to the tax levied on income earned through financial investments. The initiative began during former President Moon Jae-in's administration. At the 8th Emergency Economic Central Countermeasures Headquarters meeting held on June 25, 2020, Hong Nam-ki, then Deputy Prime Minister and Minister of Strategy and Finance, announced the ‘Direction for Financial Tax System Advancement for Financial Investment Activation and Tax Rationalization (Direction for Financial Tax System Advancement).’

Until then, most stock investors only paid securities transaction tax (0.25%) regardless of the amount when trading stocks. It was like a kind of toll tax. Only a minority paid capital gains tax on domestic listed stocks. This applied only to major shareholders holding more than KRW 1 billion per stock or with a high shareholding ratio (1% for KOSPI, 2% for KOSDAQ). The tax rate was 20% for taxable income up to KRW 300 million and 25% for the amount exceeding KRW 300 million.

The direction for financial tax system advancement mainly proposed establishing the financial investment income tax and gradually reducing the securities transaction tax. This means that even if you are not a major shareholder, if you earn income through financial investments such as stocks, bonds, funds, or derivatives, you must pay taxes. The tax period is from January 1 to December 31. Income and losses during this period are combined to calculate the tax. Capital gains on stocks exceeding KRW 50 million are taxed at 20%, and those exceeding KRW 300 million at 25%. For other products, if gains exceed KRW 2.5 million, 22% of the trading profit (25% for over KRW 300 million) is taxed.

However, the loss deduction carryover period is five years. If losses exceed profits, deductions can continue for the next five years. The securities transaction tax will also be reduced. The securities transaction tax for KOSPI stocks, currently 0.08%, will be abolished, and for KOSDAQ, it will be gradually reduced from 0.23% to a final 0.15%.

Former Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki is attending the 'Emergency Economic Central Countermeasures Headquarters Meeting' held at the Government Seoul Office in Jongno-gu, Seoul on June 25, 2020. Photo by Jinhyung Kang aymsdream@

The estimated number of taxpayers is about 150,000. This is based on the Ministry of Strategy and Finance's analysis of stock trading records from 11 securities firms from 2008 to 2018. This is ten times the current taxable population of 15,000. The number will increase further when including investors in other products. There is also an analysis that the tax burden will increase by KRW 1.5 trillion.

Opposition Party: "Tax Rationalization and Compliance with Tax Principles, Should Be Implemented"

Since the initial announcement of the financial investment income tax introduction plan, it has been a contentious issue with divided opinions. The Democratic Party and opposition parties argue that the introduction of the financial investment income tax is essential for tax rationalization. While securities transaction tax is paid even when losses occur, the financial investment income tax is levied only on profits, aligning with the tax principle of ‘taxing where income exists.’

They also claim that the majority of retail investors will benefit from tax reductions if the financial investment income tax is implemented. As explained earlier, for domestic listed stocks, capital gains up to KRW 50 million per year are exempt from tax. It is known that investors earning more than KRW 50 million annually in the stock market account for less than 1% even when the market is good. In fact, retail investors have paid securities transaction tax when the market conditions were poor, so the introduction of the financial investment income tax is said to be more advantageous for ordinary people.

Additionally, taxes can be levied on capital gains of wealthy high-net-worth individuals from stocks and bonds, and the securities transaction tax was introduced when the financial system was not well established. Since institutional investors and foreigners already pay corporate tax and capital gains tax, there is no issue of fairness.

Ruling Party: "Concerns Over Stock Market Decline... Let's Postpone for 2 Years"

On the 20th, the KOSPI index opened at 2344.73, down 0.32% (7.44 points) from the previous trading day, at the Hana Bank dealing room in Jung-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

There are also considerable opposing arguments that the negative impact of introducing the financial investment income tax will be greater. It is argued that the introduction of the financial investment income tax could accelerate the decline of the stock market. The domestic stock market is heavily influenced by high-net-worth individuals. If their tax burden increases, tax resistance may grow, potentially dampening market vitality. Taiwan introduced a similar capital gains tax on stocks in 1989, but the stock index plunged more than 30% in nearly a month, leading to the abolition of the system within a year.

Criticism also exists that the financial investment income tax design is unfavorable to long-term investment. Generally, for capital markets to develop, long-term investment funds should increase rather than capital seeking short-term gains. However, the financial investment income tax does not distinguish between long-term and short-term investments. It is very difficult to make gains exceeding KRW 50 million through short-term investments, but the possibility increases with long-term investments. This is why it is said that the financial investment income tax may encourage short-term trading rather than long-term investment.

Meanwhile, there were also criticisms that the financial investment income tax does not comply with the principle of ‘taxing income.’ This is because no tax is paid if gains do not exceed KRW 50 million.

Ruling and Opposition Parties Agree on 2-Year Postponement, Gradual Reduction of Securities Transaction Tax

Joo Ho-young, floor leader of the People Power Party, and Park Hong-geun, floor leader of the Democratic Party of Korea, are posing with the agreement document at a press conference announcing the comprehensive agreement on next year's budget and tax law held at the National Assembly in Yeouido, Seoul, on the afternoon of the 22nd.
[Image source=Yonhap News]

The financial investment income tax was also a contentious issue during this year's budget process. The government proposed postponing the financial investment income tax, originally scheduled for next year, by two more years. The rationale was that the current global financial environment and domestic stock market conditions are unfavorable. On the 20th, Kim Joo-hyun, Chairman of the Financial Services Commission, said, “There are too many unstable factors right now,” and “If it is not urgent, postponing is to avoid accelerating market anxiety.”

On the other hand, the opposition insisted that the financial investment income tax should be implemented as originally planned next year. As discussions between the ruling and opposition parties proceeded and some cautious voices emerged within the Democratic Party, the financial investment income tax was postponed for two years as per the government's plan. However, Justice Party lawmaker Jang Hye-young expressed opposition at the National Assembly, stating, “Today, the National Assembly is facing a crisis where it postpones the introduction of the financial investment income tax and absurdly lowers only the transaction tax, thereby risking the collapse of the carefully built capital gains taxation system that both ruling and opposition parties have pursued together for over a decade.”

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