[1mm Finance Talk] "We Wanted Abolition Instead"... Why the Financial Sector Is Opposing the Education Tax Hike

Education Tax on Financial Sector to Double Next Year
"Low Relevance to Business" Despite Calls for Abolition or Reform
Industry Stunned by Increased Tax Burden

"We proposed abolishing the tax, but what came back was a tax increase. If the issue is that we are making too much money, we are simply asking that it be used for its intended purpose, but our voices have not been heard. I am even more worried about what lies ahead."

The financial sector is expressing deep concern after the government announced plans to raise the education tax on financial institutions such as banks as part of the '2025 Tax Reform Plan.' The level of concern is even higher than when the government previously called for shared prosperity contributions or mobilized funds for policies like the bad bank (long-term delinquent loan write-off programs). This is because the education tax is not a one-off expense, has little relevance to the financial sector, and had even been proposed for abolition. With the likelihood of a long-term increase in tax burden, there are growing worries that this effectively marks the start of a 'windfall tax' (excess profit recovery).

According to the government and financial industry sources on August 5, it is estimated that the annual tax burden on financial institutions will increase by about 1.3 trillion won as a result of this education tax hike. The government expects that the tax burden will rise for around 60 financial institutions, including banks, insurance, and securities companies. Commercial banks, which have relatively larger revenues, are expected to pay an additional 100 billion won in taxes each year.

Currently, financial institutions such as banks pay 0.5% of their revenue as an education tax. The education tax was imposed in lieu of value-added tax, which is exempted because it is difficult to assess the value added by individual financial institutions. The revenue amount defined by the Education Tax Act includes interest, dividends, fees, guarantee fees, gains from the sale of securities, and insurance premiums earned by financial institutions. This is close to gross sales, without deducting expenses.

The government has raised the tax rate this time, citing the increased tax-paying capacity of financial institutions since the education tax was first imposed in 1981. For revenue up to 1 trillion won, the existing 0.5% tax rate will apply, but for revenue exceeding 1 trillion won, the rate will double to 1%. This is effectively a tax increase targeting large financial institutions.

Banks and other financial institutions, which have posted record-high earnings, have so far complied with government requests for shared prosperity contributions and policy funding. However, there is strong resistance to the latest increase in the education tax rate. One financial industry official said, "There is little connection between the financial institutions paying the education tax and the education budget that benefits from it. Moreover, with the declining school-age population, demand has dropped, and the funds have consistently been rolled over or left unused. For these reasons, we have previously proposed abolishing the tax or redirecting it to financial education or financial market stabilization funds, but instead, the tax has been increased."

Unlike shared prosperity contributions and bad bank policy funds, which are one-off and have some discretion in their use or ultimately affect the financial sector, the situation is different this time. The Korean Association for Tax Studies also pointed out in a report last March, "The education tax currently paid by financial institutions cannot be considered a benefit expected by their customers," and "it does not align with the principles of taxation."

Even without a tax rate hike, the amount paid by financial institutions has increased every year, accounting for 34% of the education tax as of 2023. Even in 2022, when the total education tax decreased, the amount paid by financial institutions increased, and their share has steadily expanded. In particular, the education tax paid by banks surged from 380 billion won in 2021 to 750 billion won in 2023.

Furthermore, as the tax reform plan includes lowering the threshold for major shareholders subject to capital gains tax from 5 billion won per stock to 1 billion won, the financial sector points out that this will result in a double burden following the tax increase. A financial sector official said, "If there is another round of massive sell-offs at the end of the year to avoid major shareholder status, it will become even more difficult to manage stock prices. If the funding burden increases, it could ultimately disrupt the virtuous cycle of returning profits to shareholders as much as we earn."

The biggest concern in the financial sector is that this education tax hike could signal the beginning of a 'windfall tax.' This tax increase has reaffirmed the government's critical view of the profit structure of banks. A financial sector official pointed out, "There is a growing perception that the government could make additional demands at any time in the future, depending on its needs."