"Windfall Tax" Controversy Ignited by "Profiteering from Interest"... Will Lending Rates Rise Again?

원본보기 아이콘

The government is set to double the education tax rate imposed on the financial sector starting next year, which is expected to increase the total taxes paid by financial institutions by more than 1 trillion won. This tax hike follows President Lee Jaemyung's warning against "profiteering from interest," and the financial sector is voicing strong complaints, calling it a de facto "windfall tax" with punitive measures. There are growing concerns that this move will likely lead to higher lending rates, ultimately increasing the interest burden on financial consumers.

According to the financial industry on August 11, the government has decided, through the "2025 Tax Reform Plan," to raise the education tax rate from the current 0.5% to 1.0% for financial and insurance companies with annual revenue exceeding 1 trillion won, starting next year. The education tax, introduced in 1981, is collected to expand educational facilities and improve teachers' working conditions, and the 0.5% rate has been maintained for 44 years. Of the total 5 trillion won in education tax currently collected, the financial sector has been responsible for about 2 trillion won. With the rate hike, the sector is expected to shoulder an additional 1.3 trillion won. It is estimated that each major commercial bank will see its annual education tax burden rise to between 100 billion and 200 billion won.

The main issue is that the increased education tax could be passed on to financial consumers. The structure of lending rates is such that the final rate is determined by adding a "spread," which banks set at their discretion to cover various costs, to the "base lending rate," which reflects market and funding rates, and then subtracting any preferential rates. According to the Korea Federation of Banks' "Model Code for Enhancing the Rationality of Lending Rate Systems," the "spread" consists of eight components, including "legal costs," under which the education tax is included. Therefore, the structure of lending rate calculation allows for the possibility that an increase in the education tax rate will be passed on to consumers through a higher spread.

The government and the ruling party have stated that they will prevent such costs from being passed on to financial consumers, but it remains uncertain whether this will actually lead to lower lending rates. During his candidacy, President Lee pledged to amend the Banking Act to ensure that legal costs, such as various contributions, would not be passed on to consumers when calculating the spread. The Democratic Party of Korea also submitted a bill at the end of last year to revise the Banking Act, aiming to prohibit the inclusion of various legal costs, including contributions to guarantee institutions, in lending rates.

However, skepticism prevails that various costs will ultimately be shifted to consumers. Even if legal costs such as the education tax are excluded from the lending rate calculation, there is a high possibility that banks will find alternative ways to pass on the burden, such as increasing fees or reducing preferential rates.

An official from the financial sector stated, "The spread is at the discretion of each bank, so regulating it by law amounts to excessive intervention in management. In the end, banks are likely to use indirect methods such as raising various fees, lowering preferential rates, or reducing deposit rates."

Another industry official added, "Even if the spread is reduced by adjusting its components, it does not necessarily lead to a lower final lending rate. The Korea Federation of Banks' model code is a self-regulatory guideline with little binding force, and since the current administration is pushing for stricter household debt management, banks have no choice but to maintain high lending rates to curb demand."

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.