Spain and Italy Also Levy Windfall Taxes on Banks... What About Banks in Our Country?

European Countries Introduce Windfall Tax, Possibility of Discussion in Korea
National Assembly Proposes Bill, Lawmakers from Both Parties Show Interest
"May Drive Away Foreign Investors" vs "Should Be Replaced with Social Contribution"

[Asia Economy Reporter Sim Nayoung] The possibility of discussions on a windfall tax on banks has increased in South Korea. President Yoon Seok-yeol's remark about a 'bank money feast' has set the stage. Interest is being shown across party lines.

"Discussions on a windfall tax are emerging, but that alone is not enough. Even the United States, a leader in free-market economics, has laws penalizing excessive profits." (Kim Sang-hoon, People Power Party lawmaker, January 12 Emergency Committee meeting) "As the base interest rate rises, banks have made enormous profits and should be subject to a windfall tax." (Lee Seong-man, Democratic Party lawmaker, February 7 government questioning).

The government still maintains a negative stance. Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho responded to Lee's claim by saying, "Instead of a windfall tax, paying more progressive corporate tax to contribute to co-prosperity finance is sufficient."

'Windfall Tax' to 'Recover Excess Profits'

A windfall tax is a tax levied on companies that earn large profits due to sudden domestic or international environmental changes. It is in the context of recovering excess profits. Banks in South Korea have become targets because they achieved record profits by raising loan interest rates following last year's base rate hike. The net income of the four major financial groups (KB, Shinhan, Hana, and Woori Financial Group) reached 15.9 trillion won last year. An executive at a commercial bank said, "While people are suffering from COVID-19 and economic recession, banks are making a lot of money and giving out large bonuses, which worsens public opinion, and the president seems to be reflecting this public sentiment by directly criticizing banks."

The windfall tax in Europe also began mainly among politicians. The European Central Bank (ECB) opposed it on the grounds that "the banks' payment ability would be impaired," but could not stop it. The Spanish Senate passed a bill last year imposing a windfall tax on banks and large energy companies. The core is to impose a 4.8% tax if banks' net interest income and net fees exceed 800 million euros (about 1.0991 trillion won). The Italian parliament also passed a bill imposing a charge if payment companies and banks do not reduce electronic transaction fees for store owners. Countries imposing windfall taxes in Europe include the UK, Belgium, Poland, the Czech Republic, and Hungary.

Europe and South Korea: Different Situations

Similar bills were also proposed in the South Korean National Assembly last year. Yong Hye-in of the Basic Income Party proposed a partial amendment to the Corporate Tax Act applying a 50% tax rate to oil companies and banks. Lee Seong-man of the Democratic Party proposed an amendment to impose a 20% tax rate on oil companies. Both bills are currently under review in the relevant standing committees.

Voices are emerging that discussions on a windfall tax should be cautious from the start because the situations in South Korea and Europe differ. A senior official from the financial authorities said, "European banks can afford to be subject to a windfall tax because there is no concern about capital outflow. Since President Yoon has criticized banks, their stock prices have plummeted, and further intervention could cause foreign investors to withdraw."

Baek Jong-ho, a researcher at Hana Financial Management Research Institute, said, "Unlike global banks, domestic financial institutions face strong regulations on interest rates and fees by financial authorities, limiting the scale of excess profits," and suggested that instead of a windfall tax, it is desirable to strengthen the public functions of the financial sector through comparative disclosure of loan-deposit interest rate spreads and the establishment of social contribution funds.