[Why&Next] Taxation and Budget Caught in Political Logic... Great Confusion for Both People and Companies

National Assembly Building / Photo by Dongju Yoon doso7@

[Asia Economy Sejong=Reporter Son Seon-hee] Along with next year's budget bill, the government's tax reform plans including the financial investment income tax (Geumtu Tax), corporate tax, and inheritance tax are facing difficulties during the National Assembly's deliberation process. Concerns are rising that if the budget bill is not passed by the legal deadline of next month 2nd and extends until the end of the year, it will be difficult to apply the reforms next year, causing great confusion among taxpayers. The already bleak economic outlook for next year is further dampened by policy uncertainty, which critics say will further shrink corporate business activities.

The Geumtu Tax, which has recently sparked debate, is a representative case. It is a system that levies taxes when profits from stock investments exceed 50 million KRW, having passed the National Assembly in December 2020 through bipartisan agreement and scheduled to be implemented in January 2023. Once introduced, anyone earning more than 50 million KRW from stock investments, regardless of whether they are major shareholders, must pay 20% tax, and 25% if profits exceed 300 million KRW.

The government recently submitted a tax law amendment bill to the National Assembly to postpone the implementation of the Geumtu Tax for two years until 2025, citing increased burdens on individual investors due to the stock market decline over the past two years. On the other hand, the Democratic Party of Korea proposed a compromise plan to reduce securities transaction tax and withdraw the raising of the major shareholder threshold in exchange for a two-year postponement of the Geumtu Tax, showing significant disagreement with the government.

With only about a month left until the Geumtu Tax implementation, the government and opposition parties still hold firm opposing positions, plunging not only individual investors but also the securities industry, which must prepare the taxation system, into confusion. A representative from a major domestic securities firm said, "We have completed system construction, but suddenly postponing it is surprising," adding, "We cannot keep system development and operation personnel on standby for two years, and everything is uncertain."

The corporate tax situation is similar. Although the business community initially welcomed the government's announcement to lower the top tax rate from the existing 25% to 22%, the possibility of passage is uncertain considering the 'minority government' National Assembly seats. The credibility of policy implementation has further declined as the government's previously announced special comprehensive real estate tax measures were weakly blocked. Since hundreds of billions to trillions of KRW in management funds depend on whether the corporate tax reform passes, it is a very important factor in companies' next year's management strategy formulation, but even the government is relying on a 'big deal' at the leadership level between ruling and opposition parties without a proper strategy.

The core issues of this year's tax reform plans, such as the Geumtu Tax and corporate tax, remain difficult for the ruling and opposition parties to reconcile. Ultimately, conflicts over tax policies have entangled next year's budget bill, making it highly likely that the legal deadline for deliberation will not be met. A Ministry of Economy and Finance official said, "Since the situation is at an impasse, negotiations including the budget bill are necessary," adding, "It seems that (major tax policies) will be decided around the end of the year."