Insurers Also on Alert Over Education Tax Hike... To Submit Opinions to Authorities

General and Life Insurance Associations to Submit Members' Feedback to Authorities
Secondary Financial Sector Faces "Coexistence" Burden... Private Lenders Say "Effectively Forced to Take Losses"

As the government has decided to double the education tax levied on large financial and insurance companies, insurance companies have also agreed to gather opinions on supplementary measures such as adjusting tax rates and tax base brackets, which they plan to submit to the tax authorities.

According to the financial sector on August 10, the General Insurance Association and the Life Insurance Association are currently collecting feedback from their 19 and 22 member companies, respectively, regarding the increase in the education tax.

The General Insurance Association plans to hold a face-to-face meeting with its member companies either the next day or around August 12 to finalize a consensus proposal, which will then be submitted to the Ministry of Economy and Finance. The Life Insurance Association also aims to complete the collection of opinions this week and deliver its proposal to the authorities next week.

Starting next year, the government will raise the education tax rate applied to financial and insurance companies with annual profits exceeding 1 trillion won from the current 0.5% to 1.0%. The plan also includes the principle of applying different rates depending on the type of income.

According to the insurance industry, the education tax paid by the top five general insurers?Samsung Fire & Marine, DB Insurance, Meritz Fire & Marine, Hyundai Marine & Fire, and KB Insurance?amounts to about 200 billion won, while the top six life insurers?Samsung Life, Hanwha Life, Kyobo Life, etc.?pay about 150 billion won. If the proposed plan is implemented as is, these amounts would rise to 400 billion won and 300 billion won, respectively.

Within the general insurance sector, there are opinions that an additional tax base bracket should be introduced and that the tax rate should be set lower than 1.0%. It is known that 8 to 9 general insurers fall within the '1 trillion to 10 trillion won' bracket. The life insurance sector also plans to inquire with the authorities about the possibility of applying differentiated tax rates based on the type of income.

The likelihood of these suggestions being accepted is low. Previously, the Korea Federation of Banks recommended to the Presidential Committee on National Policy Planning in June that the education tax, as a purpose tax, should have a clear link between revenue and expenditure, but that the connection between financial and insurance taxpayers and the beneficiaries of educational funding is weak. However, the committee did not accept this recommendation.

As the new administration pursues not only an increase in the education tax but also various "coexistence" policies such as contributions to a bad bank and support for small business owners, there are growing concerns in the secondary financial sector that business difficulties will increase. The secondary financial sector holds a significant volume of long-term delinquent loans?those overdue for more than seven years and under 50 million won?which are targeted for write-off by the bad bank.

In the savings bank industry, there are calls for the authorities to clarify the roles of the primary and secondary financial sectors in the implementation of coexistence finance policies. The mutual finance sector also voices difficulties in maintaining financial soundness and other regulatory requirements.

In particular, the private lending industry is strongly opposing the authorities’ directive to purchase and write off delinquent loans overdue for more than seven years at a uniform price of 5% of face value, when the minimum purchase price is usually at least 25% of face value. They argue that even among delinquent loans overdue for more than seven years, purchase prices can vary, and that the authorities are effectively forcing them to accept losses without consideration of these differences.

The financial authorities are expected to announce detailed plans for securing funding for the bad bank in the third quarter. The announcement will also include specific participation measures for the secondary financial sector, including the private lending industry.