"No Taxation Basis"... National Assembly Raises Caution on Introducing Hoengjae Tax

Current Status and Challenges of Windfall Tax Introduction
Legislative Research Office Report... "Retroactive Legislation"
Windfall Tax Introduced on Mining Companies, Not UK Oil Companies

Voices calling for the introduction of a windfall tax on domestic oil companies and banks have emerged mainly from opposition parties, but there are concerns in the National Assembly that caution is needed considering the existing tax system. Although some foreign countries have introduced windfall taxes, the circumstances differ from those in Korea.

On the 28th, the National Assembly Legislative Research Office pointed out the problems of the windfall tax discussion raised mainly by the opposition in its report titled "Current Status and Tasks of Windfall Tax Introduction Discussions."

A windfall tax is a tax introduced to impose taxes on the portion of profits that companies earn abnormally and unfairly due to external effects or other abnormal market factors. It is currently implemented in the European Union (EU), the United Kingdom, and other countries. According to the National Assembly Bill Information System, Representative Yang Kyung-sook of the Democratic Party and Representative Yong Hye-in of the Basic Income Party each proposed amendments to the Corporate Tax Act, and Representative Lee Sung-man of the Democratic Party introduced a package bill including the Act on Protection and Support for Small Business Owners. Lee Jae-myung, leader of the Democratic Party, also advocated for the introduction of a windfall tax during this year's New Year's press conference.

On January 12, in front of the Shinhan Bank headquarters in Jung-gu, Seoul, officials from the Progressive Party Seoul City Branch shouted slogans during a press conference urging for a reduction in loan interest rates and the introduction of a windfall tax.
[Image source=Yonhap News]

In this regard, the Legislative Research Office pointed out, "The most important aspect to focus on when discussing the introduction of a windfall tax is that clear criteria must be presented regarding under what conditions and to what extent the excess profits of a company can be taxed." Given the characteristics of Korea's corporate tax system, which has a four-tier progressive taxation system on excess profits, the larger the operating profit, the greater the tax burden. Therefore, there must be clear grounds for taxation to impose a separate tax on excess profits.

It also highlighted the controversy over retroactive legislation if taxation is applied to last year's operating results. The Legislative Research Office criticized, "This means taxing retroactively on a tax year for which the tax obligation has already been established," adding, "Considering the Constitution and related tax law provisions, it is difficult to accept this from a legislative perspective."

There are also points that the circumstances differ between foreign countries and Korea. For example, in foreign countries where windfall taxes are imposed on oil companies, the tax is levied on 'oil extraction companies,' whereas the companies discussed domestically are refining companies, which is a different situation. In the UK, which has introduced a windfall tax, refining companies that only refine without oil drilling were not subject to the windfall tax.

Regarding the introduction of a windfall tax on the banking sector, the Legislative Research Office stated, "Despite recent interest rate hikes, the domestic financial sector has stricter regulations on interest rates, fees, and other aspects by financial authorities compared to global banks, limiting the scale of excess profits," and added, "There is also a counterargument that domestic commercial banks already have a much higher social contribution ratio compared to other international financial institutions." Regarding net interest margins resulting from base rate hikes, it added, "If the net interest margin during a specific period rises significantly compared to previous margins due to differences in the timing of reflecting loan and deposit interest rates, a method of using the increased margin as the tax base can also be considered."