|A dealer stands in front of an electronic trading board on the trading floor of KB Kookmin Bank in Yeouido, Seoul, June 15. Korea Times file|
Abolishing transaction, raising minimum amount deductible bone of contention
By Lee Kyung-min
A heated debate is expected between lawmakers and the government over the latter's proposed plan to impose capital gains tax to a broader scope of retail investors in a set of tax code revisions to financial investment instruments, notably stocks.
The Ministry of Economy and Finance said Friday June 26 that starting 2023 those who earn over 20 million won ($16,000) in capital gains following transactions of listed shares will face a 20 percent tax on anything earned over 20 million won, the maximum deductible amount. The rate will be 25 percent if the earnings are over 300 million won. It also said stock transaction tax will be lowered in stages to 0.15 percent from the current 0.25 percent between 2022 and 2023.
The key bone of contention will be whether to abolish stock transaction tax, the imposition of which will raise the issue of "double taxation," according to lawmakers, if capital gains tax remains in place.
The ruling Democratic Party of Korea (DPK) and the main opposition United Future Party (UFP) in unison are demanding the abolishment of the tax, claiming it is "gainless" and goes against the principle of "there should be tax where there is income," and is therefore unfair to investors that have not seen any gains ― let alone those that have seen losses.
"Imposing transaction tax simultaneously with capital gains tax is a clear double taxation. Abolishing it altogether is needed before the gains from stock transaction are subject to capital gains tax," Rep. Yoo Dong-soo of the DPK said.
A similar stance is maintained by the UFP with the discussion led by Rep. Choo Kyung-ho, the former first vice minister of economy and finance.
"People are set to lose their initial investment faster if transaction tax remains in place, a major reason they feel frustrated due to what they view as wrongful and unfair enforcement of the related law when they have to pay heavy capital gains tax," Choo said.
Yet the ministry says an outright abolishment will lead to a significant drop in tax revenue from foreign investors which accounted for about a third of the market trading volume in 2019, with 1 trillion won in taxes paid.
Also feared is an unleashing of "unlimited" high-frequency trading (HFT), certainly to spike following the removal of transaction tax. With digital transactions, a large number of orders can be processed in a fraction of a second using complex algorithms.
"Transaction tax has largely been a deterrent against what could be limitless trading, functioning as a buffer to market manipulation," a ministry official said. "Without the tax, speculative forces will become rampant, ending up hurting retail investors without such a high-tech-based means of investment."
The ministry says the revision impacts only a fraction of investors who are already exempt from transaction tax.
"The number of those earning over 20 million won in gains from stock transactions is about 300,000, only about 5 percent of the 6 million retail investors in Korea. The government recognizes transaction tax as 'required expenses' and exempts them from capital gains tax to avoid double taxation," the official said.
Lawmakers also say some forms of tax incentives should be granted to those who hold certain shares for a long time, in a similar way to how home owners benefit.
But the ministry says the claim has no merit given the long-term valuation of real estate, including private dwellings, is tied to inflation and depreciation over time, unlike financial assets including stocks which do not have to factor in such concerns.