[why&next] Wanggaemi Departure vs Under 1%... The Biggest Challenge of the Regular National Assembly 'Financial Investment Tax'

Deputy Prime Minister Choo Kyung-ho Also Supported the Vote 2 Years Ago
Yoon Seok-yeol Government Pushes for 2-Year Deferral of Financial Investment Tax
"Bear Market Will Shrink Further" vs "Tax Where There Is Income"

[Asia Economy Reporter Ji Yeon-jin] "Out of 274 present, 236 in favor, 24 opposed, and 14 abstained, I hereby declare that the partial amendment to the Income Tax Act has been passed."

It was the moment when the amendment to the Income Tax Act, which included the introduction of the Financial Investment Income Tax (Fin-Invest Tax), was passed at the first regular session of the 21st National Assembly held after 8 p.m. on December 2, 2020. The bill, which was the ninth item on the agenda at the plenary session that day, was swiftly processed immediately after the explanatory proposal by Rep. Go Eom-jin of the Democratic Party of Korea. At the time, Chu Kyung-ho, then a member of the People Power Party and concurrently Prime Minister and Minister of Strategy and Finance, also voted in favor. The supplementary provisions of the bill promulgated on February 17 of the following year set the implementation date of the Financial Investment Income Tax as January 1 of the next year.

The Fin-Invest Tax has emerged as the biggest challenge in this year’s regular session. Although the Yoon Suk-yeol administration pushed for a two-year postponement of the Fin-Invest Tax from the start, the opposition party blocked it just over a month before its implementation. Pressured by criticism from individual investors, both ruling and opposition parties entered negotiations, but fierce controversy over the so-called "tax cuts for the rich" continues. We examined the background of this year’s postponement proposal and the key issues causing intense confrontation between the parties just over a month before implementation.

The Fin-Invest Tax is a system that levies a 20% tax (25% on amounts exceeding 300 million KRW) on profits exceeding 50 million KRW earned from investments in stocks, bonds, and funds. It taxes financial investment income by including stock transfer gains and non-taxable income (such as bond transfer gains, redemption gains from domestic stock-type funds, and transfer gains from domestic stock-type ETFs), which are not currently included in the concept of financial income.

It was first included in the "Financial Taxation Modernization Plan" announced by the Ministry of Strategy and Finance on June 25, 2020, during the Moon Jae-in administration. The purpose of the Fin-Invest Tax is to achieve tax equity and ensure smooth fiscal revenue. South Korea had not taxed profits of general investors to promote the stock market. However, individual investors holding more than 1 billion KRW in a single stock were considered "major shareholders" and were subject to capital gains tax. The government at the time promoted the introduction of the Fin-Invest Tax under the justification of "taxing where income exists."

However, it faced strong opposition from individual investors who had driven the market through the "Donghak Ant Movement" after plunges in the stock market due to COVID-19 in March of the same year. The government’s original plan was to impose the Fin-Invest Tax on profits exceeding 20 million KRW from stock investments. Facing tax resistance from individual investors, the government submitted an amendment to the Income Tax Act to the National Assembly a month later, expanding the financial income deduction amount to 50 million KRW. This was the first victory for the Donghak Ants against the government.

At that time, individual investors’ attention was focused on the major shareholder criteria for imposing stock capital gains tax. The government had passed an amendment to the Income Tax Act lowering the major shareholder threshold from 1 billion KRW in 2017 to 300 million KRW, scheduled to take effect in 2021, but a petition opposing this was raised just before its implementation. Hundreds of thousands signed it in a short time, and Hong Nam-ki, then Minister of Strategy and Finance, retreated a day after the petition, stating that the major shareholder threshold for capital gains tax would remain at 1 billion KRW. Following the expansion of the Fin-Invest Tax deduction and the extension of the short-selling ban period, the Donghak Ants achieved a three-win streak.

The Fin-Invest Tax, confirmed for implementation next year, came under scrutiny again at the beginning of this year’s presidential election. Yoon Suk-yeol, then the People Power Party candidate, pledged to abolish stock capital gains tax and the Fin-Invest Tax. After President Yoon’s election, the economic policy direction announced by the Ministry of Strategy and Finance included a plan to postpone the implementation of the Fin-Invest Tax by two years to 2025. Deputy Prime Minister Chu Kyung-ho stated at his confirmation hearing in May, “Considering the current domestic and international conditions of the stock market, the need for productive capital inflow, and investor acceptance, the Financial Investment Income Tax taxing stock capital gains is scheduled to be implemented next year, but given the current conditions, I think a two-year postponement is necessary.”

Last year, the KOSPI index maintained the 3,000 level at year-end but dropped to the 2,300 level by June this year due to Russia’s invasion of Ukraine and the start of U.S. monetary tightening. Individual investors have suffered significant losses, to the extent that they are demanding a complete ban on short selling again. From the second half of the year, high exchange rates, high interest rates, economic recession, and worsening corporate earnings have overlapped, and the government and ruling party argue that the Fin-Invest Tax could act as a negative factor in an already difficult stock market. They warn that large individual investors earning over 50 million KRW from stock investments might withdraw funds from the domestic stock market.

On the other hand, the opposition party holds the position that it is natural to pay taxes when there is income. Just as capital gains tax is levied on real estate price increases, stocks should also be taxed. They argue that concerns about the Fin-Invest Tax dampening stock investment sentiment were sufficiently discussed when the system was introduced. They also emphasize that the Fin-Invest Tax targets less than 1% of all stock investors. According to an analysis of realized profits and losses of customers from the five major domestic securities firms disclosed by Rep. Yoo Dong-soo of the Democratic Party, only 0.8% of investors earned profits exceeding 50 million KRW.

They counter that since losses from stock price declines are basically excluded from taxation and there is a mechanism to deduct investment losses for five years when calculating profits, the tax should be implemented as planned.