S. Korea ups top income tax rate, but eases tax levy on stock investments

2020.07.23 09:08:42 | 2020.07.23 09:09:16

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The South Korean government will hike income taxes for top earners from current 42 percent to 45 percent but ease tax burden on retail investors in stock investments during its annual tax code revision.

According to the revised tax code plan announced by the Ministry of Economy and Finance on Wednesday, the top income tax rate will be raised by 3 percentage points to 45 percent starting next year for an income category of above 1 billion won ($835,422). The current maximum tax rate is 42 percent on income of over 500 million won.

In the new tax code, a new category for income between 500 million won and 1 billion won is created and those in the category will be subject for 42 percent income tax. The income tax rate for below 500 million won will remain unchanged and vary between 6 to 40 percent depending on income.

“After much consideration, we have decided to raise tax rate on high income earners that are more capable [of paying taxes] to strengthen social solidarity and wealth redistribution,” said Finance Minister Hong Nam-ki.

The adjustment will affect 16,000 individuals next year whose taxable income exceeds 1 billion won, allowing the government to collect 900 billion won in additional annual tax revenue.

The top income tax rate of 45 percent is the highest level in 23 years. In 1995, 45 percent tax rate was applied to income exceeding 64 million won.

The adjustment is the second of its kind under Moon Jae-in administration. The first – a 2 percentage point hike from 40 percent – was announced for top earners in July 2017.

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But the government decided to ease tax levy on retail stock investors after individual investors have strongly complained that its earlier proposal of hiking taxes on capital gains from stock investments will take away opportunities from petty investors to build up financial wealth by betting on stocks. Since the market crash in March, local retail investors have aggressively picked up battered stocks in union against massive sell offs by foreign and institutional investors, helping the local stock market rebound quickly.

In June, the government proposed to impose taxes of 20 to 25 percent on annual capital gains exceeding 20 million won for retail investors who trade listed shares, but it has amended to tax on stock capital gains exceeding 50 million won starting 2023.

The Moon administration also decided to levy so-called cryptocurrency tax as new source of taxation starting next year. Taxes so far have not been imposed on capital gains from virtual currency trading such as bitcoin but from next year they will be regarded as “other income” and be subject to 20 percent tax on transfer gain.

The latest income tax adjustment will bring Korea to have the same income tax rate level as that of some G7 countries including Japan, France, Germany, and United Kingdom. However, there are criticisms that the rate far exceeds the average of 36 OECD countries of 35.7 percent and higher than the United States (37 percent) and Italy (43 percent) for top earners.

Some even concern that the rise in top income tax rate could lead to reduced investment from large companies and spending from high income earners, negatively affecting the economy as a whole. The tax code revisions will be submitted to the National Assembly by Sept. 3 for parliamentary approval.

By Lee Ji-yong and Lee Eun-joo

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