Korea feared to lose $109 bil. if financial investment income tax goes into effect
The implementation of the planned financial investment income tax scheme would deal a fatal blow to the Korean stock market, the Korean Corporate Governance Forum warned on Friday.
In its statement released earlier in the day, the association consisted of financial experts and scholars urged the government and political circles to delay the implementation of the financial investment income tax, which is slated to take effect in 2025.
The forum estimated that the implementation of the tax scheme would result in outflows of approximately 150 trillion won ($109 billion) from the Korean stock market, which accounts for about 6 percent of the entire market cap of domestic stock markets.
“Is it really the government and political circles’ intention to kick away the ladder of earning financial income, which is the only remaining source of building wealth for ordinary citizens, who have already been frustrated by the country’s skyrocketing real estate prices? They should carefully examine the impacts from the implementation of the tax scheme,” the forum’s statement reads, denouncing the tax scheme for being “penny wise, pound foolish.”
The financial investment income tax is a system where individuals must pay a capital gains tax of 20 percent on profits from financial investments, such as stocks, bonds, funds and derivatives, exceeding a certain amount — 50 million won for stocks, and 2.5 million won for other financial products.
The tax rate will increase to 25 percent when the annual returns from financial investments exceed 300 million won. The tax’s implementation has been postponed for two years until next year through a previous bipartisan agreement.
“If the tax is implemented, a considerable amount of money will flow out of the domestic stock market towards overseas markets through investors’ portfolio adjustments, resulting in a further loss of upward momentum for Korean stock prices,” the forum’s statement went on, stressing that Korean stocks are essentially in complete competition with other stock markets, such as the United States and Japan.
“Despite the fact that U.S. and Japanese stock markets grew by over 80 percent during the past five years, when the local stock markets have not even risen 20 percent during the same period, one of the core reasons behind domestic investors’ remaining in the Korean stock market was tax benefits,” the forum noted. “If dozens of trillions of won flow out of the local market to be relocated in overseas stock markets, the ‘Korea discount’ will deepen further.”
The forum also pointed out that the implementation of the tax scheme will chip away at the government’s ongoing Corporate Value-up Program, raising questions about what measures the government has in place to address the clearly anticipated negative impact of the tax implementation.
“In order to impose financial capital gains taxes at the same level as other advanced countries like the U.S., it is necessary to first establish a legal framework where minority shareholders’ rights will be fully protected at the level of those mature capitalist countries, such as a corporate board’s fiduciary duty for general shareholders,” the forum emphasized.
Furthermore, there were concerns that if the profits distributed by private equity funds were classified uniformly as dividend income, subjecting them to the comprehensive taxation of financial income with a maximum tax rate of 49.5 percent, investors who invested in private equity funds indirectly might resort to a “fund run” phenomenon to avoid the higher tax burden.
The forum also questioned, “Why is it that the capital gains tax imposed on controlling shareholders, which has been continuously deferred since 2000 for various reasons, is not being rushed through for implementation, while the financial investment income tax on ordinary retail shareholders is being hurriedly pursued?”
The Yoon administration and ruling party advocated for the complete abolition of the tax, while the opposition criticized it as a “tax reduction for the wealthy” and pledged to proceed with the plan as scheduled.
During a press conference marking his second anniversary in office the previous day, President Yoon Suk Yeol requested cooperation from the opposition, stating, “If we do not abolish the financial investment income tax, significant capital is likely to leave the domestic stock market.”
The president added that the multiple layers of taxes on dividend income, inheritance and gifts are already considerably higher compared to advanced countries.
However, Rep. Jin Sung-joon from the main opposition Democratic Party of Korea, who leads the party’s policy committee, said Friday that the taxation should be implemented as scheduled on Jan. 1, 2025.