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THE INVESTOR
January 22, 2020
Big Reunion

Stocks & Bonds

Can S. Korea redefine capital gains for taxation?

  • PUBLISHED :September 25, 2019 - 14:41
  • UPDATED :September 25, 2019 - 14:41
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Not all capital gains from financial investments are subject to taxation under the tax rules in South Korea, as the financial market here has seen more sophisticated products.

Futures and options, excluding four benchmarking Kospi 200 stocks, are not subject to taxation under the capital gains tax code. Income from sales of derivatives-linked securities face a dividend tax or exempt from taxation. The South Korean Supreme Court has a record of canceling capital gains taxation from short-selling activities.

Moreover, the definition of capital gains differs, by the length of time an investor has invested in the shares and the stock volume held.

This has left investors with room for unfair taxation. To salespeople of financial products, knowing how to take advantage of the tax arbitrage is regarded as a selling point.

Now that capital gains tax is under the limelight as a way to offset losses from securities transaction, there are growing calls to refurbish the capital gains tax rules here and redefine what is subject to taxation.


Benchmarking income tax system


Korea in June lowered securities transaction taxes by 0.05-0.2 percentage point, in its first major cut in over two decades. As a result, sales of stocks trading on major bourses -- Kospi and Kosdaq -- will be imposed a 0.25 percent securities transaction tax.

This allows equity investors to shed tax payment, imposed no matter whether they gained or lost from the investment.

Korean lawmakers -- Rep. Choi Woon-yeol of the ruling Democratic Party and Rep. Choo Kyung-ho of the main opposition Liberty Korea Party -- are looking to finalize their bills to abolish the securities transaction tax.

To offset shrinking revenue, the first step is to reform the capital gains tax and make the code simpler, said speakers at a recent parliamentary debate held in the National Assembly.

What stands in the way to do so is the code’s “positive system,” under which certain specified actions are merely subject to taxation, as well as a comprehensive income tax system, whose tax base consists of income, capital gains and legacies,” said Kang Nam-kyu, head of Seoul-based Gaon Law.

“For investors, a lack of predictability in taxation is a big problem,” Kang said. “There is no neutrality in taxation principles here.”

Given the assumption that securities transaction tax is no longer at play in Korea, Kang raised the need to shift away from a “positive system” so that all income from financial investments -- ranging from equities to derivatives and properties, as well as interests and dividends -- are under a consolidated taxation standard.

“We need a general revamp in the way we tax financial investment,” Kang said, adding the way to do so would be close to a dual income tax system, which defines all forms of gains from financial income as net income along with wages and distinguishes the concept of net income from gross labor income.

Speakers, however, said the shift from a comprehensive income tax system into dual income tax system is “an ideal act.”

“The comprehensive income tax system here is associated with the state’s initiative to impose more taxes on the wealthy,” Kim said.

“In Japan, it took over a decade to abolish securities transaction tax and consolidate the source of taxation under the capital gains tax code,” said Kim Yong-min, head of Jin Finance & Tax Institute and professor at Yonsei University.

Will securities transaction tax perish?

Some other speakers during the debate, however, raised doubts whether the securities transaction tax will completely disappear in the nation.

From a tax collector’s perspective, rooting out securities transaction tax is not only difficult but also unreasonable.

An Jong-seok, senior fellow at Korea Institute of Public Finance, said income and transaction are two different sources of tax revenue in principle, and therefore cannot be replaced with one another.

Moreover, there is a limited scope for capital gains tax to serve as an alternative means of revenue, instead of the securities transaction tax.

“It is unlikely that the government’s revenue from capital gains tax will rise from foreign investors, as most of the countries have signed tax treaty agreements and therefore are exempt from the rule,” he said.

“It means, more retail investors in Korea will be bearing all the burden.”

A Korean government official said repealing the securities transaction tax rules is not an option.

“The government has not ever discussed the possibility of removing the securities transaction tax,” said Chang Young-kyu, who heads the Finance Tax Division at the Ministry of Economy and Finance. “We also doubt that the transaction tax has anything to do with stock market liquidity.”

By Son Ji-hyoung (consnow@heraldcorp.com)

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