Value-Up Separate Taxation Applies Only to Dividend 'Increase Amount'... Can It Overcome the 'Tax Cut for the Rich' Controversy?

The government has decided to apply separate taxation only to the increased amount of dividends in order to prevent controversy over tax cuts for the wealthy in the 'Corporate Value-Up Program.' This is intended to avoid repeating the unnecessary tax cut controversy for the wealthy that arose from the 'Dividend Income Increase Tax System' promoted during the Park Geun-hye administration in 2014. At that time, separate taxation was applied to the entire dividend amount of companies that worked to enhance corporate value, but this time, tax benefits will be given only to the increased portion to minimize controversy.

Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, who is visiting Washington, USA to attend the meeting of Finance Ministers and Central Bank Governors of the Group of Twenty (G20), is speaking at a press briefing with accompanying reporters on the 19th of last month (local time).

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According to related ministries on the 7th, the Ministry of Economy and Finance has decided to apply separate taxation only to the increased dividend amount of companies that have increased their value through the government’s Corporate Value-Up Program. For example, if a company that used to pay 10 billion won in dividends increases it to 20 billion won, investors can receive separate tax benefits only on the increased 10 billion won of dividend income.

The Dividend Income Increase Tax System promoted in 2014 applied separate taxation to the entire 20 billion won dividend of companies that made efforts to increase corporate value. A Ministry of Economy and Finance official said, “The part criticized as a tax cut for the wealthy in the 2014 Dividend Income Increase Tax System was that benefits were given to the entire dividend amount,” adding, “Instead of giving tax benefits to the entire amount, we are considering giving benefits only to the increased portion to minimize controversy over tax cuts for the wealthy.”

Separate taxation on dividend income is a legislative matter for the National Assembly. Amendments to the Income Tax Act and the Corporate Tax Act by the National Assembly are required. However, the opposition party views the separate taxation and corporate tax reduction plans as special favors to major shareholders and large corporations. Since the opposition party holds an overwhelming majority in the 22nd National Assembly, which begins its term on the 30th, persuading the National Assembly is expected to be difficult.

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Choi Sang-mok, Deputy Prime Minister for Economy and Minister of Economy and Finance, announced at a press conference held in Washington D.C., USA, on the 19th of last month (local time) that companies that have increased their value will receive corporate tax credits, and investors will receive separate taxation benefits on dividend income. He also emphasized that unnecessary tax cut controversies for the wealthy in value-up tax support would be prevented.

The Ministry of Economy and Finance explained, “We will design the system so that tax burden relief benefits increase proportionally to each company’s increased shareholder return efforts,” adding, “Through this, it will function as an effective incentive to encourage companies to expand shareholder returns while preventing unnecessary tax cut controversies for the wealthy.”

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The main point of interest is the tax rate. Inside and outside the government, there is speculation that a tax rate around 20-30% is likely to be applied. According to the current Income Tax Act, if financial income such as dividend income and interest exceeds 20 million won annually, comprehensive financial income taxation of up to 49.5% must be paid. If dividend income is separately taxed, it is highly likely that a higher tax rate than the current dividend withholding tax rate (15.4% including local income tax) will be applied to dispel controversy over tax cuts for the wealthy. Accordingly, a tax rate of 20-30%, higher than the current withholding tax rate (15.4%), is expected to be applied.

The Ministry of Economy and Finance also plans to lower the current withholding tax rate (15.4%) so that small shareholders who are not subject to comprehensive financial income taxation can also enjoy tax reduction benefits. In 2014, the withholding tax rate was lowered from 14% to 9% so that small shareholders could also benefit. Therefore, the specific tax rate may differ from the forecast. Furthermore, since Deputy Prime Minister Choi emphasized providing tax burden benefits proportionally to increased shareholder return efforts, it is also possible that the separate taxation rate will be differentiated into two or three stages. A Ministry of Economy and Finance official stated, “We are discussing specific conditions and tax rates.”

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