'Financial Tax System Modernization Plan' to be Announced This Month
Gradual Expansion Until 2023
Securities Transaction Tax Reduced by 0.05%p Annually
Loss Carryforward Deduction Between Financial Products Allowed for 3 Years
[Asia Economy Reporter Jang Sehee] The government is considering a plan to comprehensively expand the scope of taxation on capital gains from stock transfers while gradually lowering the securities transaction tax. It also plans to allow the offsetting of capital gains and losses from financial investment income and the carryforward deduction for three years.
According to the Ministry of Economy and Finance on the 16th, the ministry plans to announce the "Financial Tax System Advancement Plan" containing these details within this month. A government official said, "This financial tax reform will focus on the level of tax burden and the activation of market transactions," adding, "Since a decline in tax revenue is inevitable due to the economic slowdown, efforts to expand the tax base are also necessary."
First, individual investors will be included in the scope of capital gains tax, which is currently limited to major shareholders. The ministry is reviewing a plan to impose capital gains tax on all listed stocks for stock transactions with a shareholding ratio of 1% or more or holdings worth 1 billion KRW or more per stock. Currently, only investors who meet the major shareholder criteria pay 22-33% of the capital gains as capital gains tax.
However, considering market shocks, the government plans to gradually expand the introduction of capital gains tax. It is known that starting next year, the scope of major shareholders required to pay stock capital gains tax will be expanded from the current 1 billion KRW per stock to 300 million KRW or more. The timing to expand this to all individual investors is likely to be in 2023.
In exchange for expanding the scope of capital gains tax, the government plans to gradually reduce the securities transaction tax. The current securities transaction tax rate of 0.25% is being seriously considered to be lowered by 0.05 percentage points annually over the next 3 to 5 years. Last year, the government reduced the securities transaction tax rate from 0.3% to 0.25%, a 0.05 percentage point cut. It is known that the current financial tax reform plan does not include a plan to abolish the securities transaction tax.
A government official said, "Annual securities transaction tax revenue has been maintained at around 6 to 8 trillion KRW," adding, "Since the current securities transaction tax revenue is larger than the capital gains tax revenue, abolishing it would make it difficult to compensate for the zeroing out of securities transaction tax." Some also point out that abolishing or reducing the securities transaction tax could lead to an increase in speculative short-term trading and a decrease in tax revenue as side effects.
Professor Koo Ki-dong of Shingu University recently contributed to the Korea Institute of Public Finance's tax and finance brief, stating, "If the securities transaction tax is abolished and capital gains tax is strengthened, two problems will arise: an expansion of short-term investment and a decrease in tax revenue," and added, "It is desirable to continue the coexistence of securities transaction tax and capital gains tax to control short-term investments and contribute to market stabilization and securing tax revenue."
Additionally, as part of the financial tax reform, the government plans to implement the offsetting of gains and losses and the carryforward deduction among financial products such as stocks and funds. It plans to allow the offsetting of gains and losses among products currently subject to capital gains tax, such as stocks and derivatives.
Furthermore, the government is seriously considering introducing a "loss carryforward deduction" that allows the carryforward deduction of losses for three years during the tax period. This means that even if an investor earns profits from derivatives investments this year, if they have incurred losses for three years, those losses will be deducted, and only the remaining profits will be taxed. Currently, most countries, including the United States (indefinitely) and Japan (3 years), recognize loss carryforwards.
Meanwhile, the government plans to announce the final plan at the end of this month, considering the consistency with other tax systems such as comprehensive income tax and capital gains tax, as well as the level of tax burden.
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