“Financial investment income tax, should it be abolished or implemented?” Spreading controversy in political circles only adds to confusion among ‘financial companies and investors’

As the departure of major shareholders accelerates in the ruling party, the damage to ‘minority shareholders’ becomes obvious
Opposition party criticizes ‘tax cut for the rich’, which actually only eases the tax burden on high-net-worth investors
The ruling and opposition parties must confirm as soon as possible whether to abolish the financial investment income tax to minimize uncertainty

Debate in the political world continues over whether to introduce the financial investment income tax which was scheduled to be introduced next year. While the government and the ruling party argue that the introduction of an unreasonable tax system will increase the volatility of the domestic stock market, ordinary investors will suffer damage, while the opposition party criticizes the ruling party for focusing on a ‘tax reduction for the rich’ policy aimed at the general election. As the implementation of the financial investment income tax has virtually become a political issue since the introduction of the bill was passed in 2020, it appears that the political world should confirm whether or not to introduce it as soon as possible to avoid increasing uncertainty for shareholders and financial companies.

“financial investment income tax will increase domestic stock market volatility””

According to the political world on the 16th, there are recent voices in the ruling party opposing the introduction of afinancial investment income tax ahead of the general election. According to the Ministry of Strategy and Finance, there are approximately 15 major shareholders who must pay taxes when the financial investment income tax is implemented. If they move to advanced stock markets such as the United States and Japan, damage to as many as 1,400 million minority shareholders is expected due to increased market volatility.

The reason why there are concerns about major shareholders leaving the domestic stock market when the financial investment income tax is introduced is that, except for France, it is difficult to find a country that imposes triple taxation including stock transaction tax, transfer tax, and inheritance tax among major countries. There is no transaction tax in the United States and Japan, and in countries such as China, Taiwan, Hong Kong, and Singapore, there is a transaction tax but no transfer tax.

Another reason for concern is that the conditions for large domestic players to move into overseas stock markets are well established. In the case of the U.S. stock market, all securities companies rushed to develop trading systems, and in the Japanese stock market, trading is currently possible at 9 securities companies. In addition, Taiwan, which introduced a stock transfer tax as early as 1998, withdrew its policy to impose a transfer tax when the stock market fell sharply just one month after the tax system was introduced.

Some point out that the government should consider introducing a tax system with stock market stability as its top priority. A ruling party official pointed out, “If a tax bomb is dropped on a market that is already highly volatile due to the Korea Discount, it is questionable who will be responsible for the shock and damage,” adding, “Introducing a financial investment income tax actually means eliminating the only advantage of investing in domestic stocks.” did.

“government, In fact, only policies for the ‘top 1%’ ahead of the general election propel”

Meanwhile, the opposition party’s position is that the implementation of the financial investment income tax cannot be delayed any longer. They are countering that the impact on the market will not be significant because taxation is not unconditional on all capital gains, but only when investment income from stocks and funds is more than 5,000 million won per year.

In particular, the opposition party is emphasizing that the issue of the tax base of 5,000 million won must be taken into consideration. A Democratic Party official said, “Investors whose capital gains from financial investments exceed 5,000 million won belong to the upper class in Korea,” adding, “The idea of ​​not imposing the tax that was supposed to be levied on the rich whose financial income exceeds a certain level ahead of the general election is not right. “It’s unreasonable,” he pointed out.

Some point out that if the financial investment income taxx is abolished, tax revenues will decrease significantly compared to if the financial investment income tax were implemented. According to the ‘Tax Law Amendment Analysis’ report received from the National Assembly Budget Office by Rep. Yang Kyung-sook of the Democratic Party of Korea on the 3rd, if the financial investment income tax is implemented in January 2025 as agreed upon by the ruling and opposition parties, tax revenue is expected to increase by 1 trillion won over the three years until 2027. It is expected. In other words, if this system is not promoted, an average of 3 trillion won less tax revenue could be collected each year.

In addition, the government has been gradually lowering the securities transaction tax since last year, raising concerns about a lack of tax revenue. An official from the Solidarity for Economic Reform said, “If the financial investment income tax is abolished, it will not be able to improve tax fairness and rationalize financial income taxation, but will only ease the tax burden on high-income investors, contributing to a decrease in tax revenue.” He added, “The people will treat the abolition of the financial investment income tax as if it were a solution to Korea’s discount. He criticized, “It is outdated populism to mislead and use it for elections.”

financial investment income tax, which has emerged as a ‘hot potato’ in the political world, should stop arguing and come to a conclusion

The implementation of the financial investment income tax, which was passed by agreement between the ruling and opposition parties in 2020, has now become a political issue. The Democratic Party agreed not to relax the stock transfer tax in 2022 and to postpone the introduction of the financial investment income tax for two years, but claimed that the government unilaterally broke the agreement last month when it suddenly decided to relax the stock transfer tax major shareholder standard through revision of the enforcement ordinance. there is. In response, the opposition party is emphasizing the withdrawal of the financial investment income tax deferral, while the government and the ruling party, even the president, are calling for the abolition of the financial investment income tax.

As the debate continues, the abolition of the financial investment income tax is expected to face difficulties in the future. This is because a revision of the law, not a revision of the enforcement ordinance, is needed. The industry is concerned that if the abolition of the financial investment income tax is not confirmed for a long time, not only investors but also financial companies will experience great confusion. The place that is most worried is by far the securities firms. This is because if the financial investment income tax is implemented starting next year, the computer system necessary for taxation must be established. Some securities companies have already begun building computer systems through consulting and investment in 2022, but stopped this in response to the financial investment income tax postponement, losing billions of won in the process.

Confusion among private equity fund investors is also expected. According to the tax law amendment that includes a two-year postponement of financial investment income tax, profits from fund redemption are financial investment income, and profit distributions received from fund holdings are dividend income subject to comprehensive financial income taxation. At this time, in the case of profit distribution, the tax rate is applied up to 2%, and in this process, there is a high possibility that individual investors in private equity funds who want to avoid comprehensive financial taxation may make early redemption. If this happens, there is a risk that stock market volatility will greatly increase as a large number of stocks are sold on the market.

The reason why the financial investment income tax debate never ends is because the pros and cons are clear. There is no perfect detergent. Ultimately, it must be abolished or introduced after gathering public opinion. Above all, the government and the ruling and opposition parties must confirm whether to introduce it as soon as possible and prevent confusion among investors and financial companies from spreading.