Ruling party faces backlash on tax code revision

Korea Herald

2 days ago

The ruling Democratic Party of Korea is facing backlash amid speculation that Friday's sharp drop in the Korea Exchange's main board Kospi may be associated with the Lee Jae Myung government's push to impose taxes on a wider scope of investors to address the tax revenue shortfall.
On Sunday, Rep. Park Sung-hoon of the main opposition People Power Party said in a statement that the ruling bloc has "waged war against individual investors out of nowhere" through the proposed tax code revision, which he blamed for the Kospi's fall by 3.88 percent on Friday from the previous day's close, marking the sharpest decline in four months.
About 99.17 trillion won ($71.36 billion) of market cap evaporated solely on Friday from 850 listed companies on the Kospi combined, according to the Korea Exchange, a day after the liberal administration on Thursday introduced a tax code revision to broaden the tax base.
Also, over 90,000 people as of Sunday afternoon had signed an online petition posted just three days earlier Thursday to call on the ruling bloc to slam the brakes on the tax bill revision ― meeting the requirement of 50,000 signatures within 30 days for the matter to be brought to a parliamentary review.
The proposed revision of the Income Tax Act indicates that those identified by year-end as stock investors holding at least 1 billion won in a listed company's shares will be levied a capital gains tax of at least 20 percent upon taking profits from selling shares until the end of the company's business year that follows. The same investor's losses in another company's stocks cannot be used to offset capital gains taxes from his or her profits, under South Korea's tax code.
The online petitioner warned of a situation in which investors rush to sell off securities as the end of the year approaches ― even at a loss ― to offset capital gains tax, which it said would stymie the moderate rise of Kospi.
"Is it realistic (to predict) that you'll be holding 1 billion won worth of shares (of a company by the year-end)? Most investors will begin selling shares when their stock holdings of a company begin to value about 700 or 800 million won," read the petition.
Currently, those holding shares worth 5 billion won or more are imposed capital gains tax for their sales of securities. This follows the former administration's move by disgraced ex-President Yoon Suk Yeol to raise the bar for investors in South Korean companies to become a "major stockholder" under the Income Tax Act. In December 2023, the minimum threshold for a stock investor to be classified a "major stockholder" for capital gains taxation was raised to 5 billion won, up from the 1 billion won mark set in April 2020.
"Am I paying (more taxes) because I'm holding a greater amount of stocks, not because I took bigger gains? If so, I'll surely exit the South Korean stock markets and turn to ones in the United States," the petition also read.
The proposed tax code revision ― predicted to collect 35.6 trillion won in taxes ― also suggests that the securities transaction tax rate be raised from 0.15 percent to 0.2 percent.
Na Jeong-hwan, a strategist at NH Investment & Securities, said in a note to investors Friday that fears of tax code changes "sparked questions about the government's policy to boost the stock market."
The ruling bloc appears to have mixed views over the new tax code proposal.
Democratic Party Rep. Jin Sung-joon, who leads the party's policymaking process, downplayed concerns that the tax code changes could stoke a bear turn in the stock market.
Referring to an underperformance in domestic stocks under the Yoon administration, despite the eased capital gains tax rule, Jin said via Facebook on Saturday, "Many investors and experts are saying that if we change who is to be levied capital gains by rolling back (the tax relief of the Yoon administration) our stock market could experience a collapse, but precedents suggest otherwise."
Presidential spokesperson Kang Yu-jung also played down a connection between the fluctuation in the stock market and the tax code revision announcement, saying in a briefing Friday that a cause-and-effect analysis on Friday's stock slide "must be carried out more delicately."
However, before Friday's plunge, Rep. Lee So-young of the Democratic Party in a Facebook post Thursday raised doubts that those holding 1 billion won of stocks of a company should be deemed a major stockholder for capital gains taxation, adding that the move could disrupt investors, while the degree of increase in the tax revenue from the changes remains unclear.
Rep. Kim Han-kyu of the Democratic Party also said Saturday that striking fairness in taxation schemes is important, but now is the time to focus on the Lee administration's campaign pledge for the Kospi to reach 5,000. The Kospi stood at 3,119.41 points at Friday's close.