Tug-of-war surrounding Financial Investment Income Tax

The tug-of-war over implementing the Financial Investment Income Tax (FIIT) has entered its second round. After the first round ended one year and four months ago with a '2-year postponement,' the government and ruling party are now advocating for its abolition—a goal officially announced by the president earlier this year. On the other side, the opposition insists on sticking to the original plan, asserting that "it should be implemented as planned." Despite recent parliamentary elections, the political landscape remains unchanged, with the opposition still holding a majority. Abolishing the tax law would necessitate legal amendments, an impossibility without opposition support.

Whispers within both the National Assembly and the government suggest that both sides might compromise, potentially leading to another postponement of the FIIT implementation. Yet, both camps currently oppose further delay. Eui Hyun Lee, head of the Financial Supervisory Service, has labeled any postponement a "cowardly decision," maintaining that "the government's position remains unchanged." Jin Sung-joon, the policy chairman of the Democratic Party, emphasized that any delay—whether a postponement or abolition—means failing to tax the wealthy, affirming that "the FIIT will be implemented without issues starting from 2025 as planned." However, as in the first round, the government, ruling party, and opposition have maintained parallel positions up to the brink of consensus.

When will this current standoff conclude? A review of the previous episode might provide clues. In September 2022, the government proposed a bill to postpone the FIIT's start date from January 1, 2023, to January 1, 2025. The amendment was passed, and the implementation was officially delayed on December 23, just nine days before the scheduled commencement. "We must wait to see what unfolds when the regular session of parliament begins in September," a government official noted. As with the initial tug-of-war, the FIIT may yet again become entangled with other fiscal reforms and budgetary debates, potentially dragging on until year's end.

Investor anxiety is palpable. Mr. A, a 30-year-old office worker, shared, "There's widespread concern that the FIIT's implementation could crash the domestic stock market, prompting me to consider shifting my investments to U.S. stocks." Should the FIIT come into effect, investors earning over 50 million won annually from stocks and funds would face a tax rate of 20-25% on their earnings. A mass exodus of major investors from the domestic market due to increased tax pressures could have dire consequences. Bond investors face even more significant challenges; although capital gains from bond transactions are untaxed, the FIIT would change this, imposing taxes on gains exceeding 2.5 million won.

Entities that have already incurred expenditures in anticipation of the FIIT share the frustration. Since its announcement in late 2020, the top ten securities firms in the country have collectively spent approximately 45 billion won on consultancy and system development. Withholding is a primary method of FIIT collection, so these firms have had to develop and implement the requisite systems. The National Tax Service has also invested 23 billion won in tax enforcement systems.

Reflecting on the first round of negotiations, a capital market expert remarked, "If a law passed by bipartisan consensus can be easily overturned due to changing political dynamics, foreign investors might perceive Korean policies as unpredictable and unstable." The ongoing flip-flopping over the FIIT underscores this unpredictability. Both the government and opposition must remember that swiftly resolving this issue by year-end is crucial for maintaining the dwindling trust.