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South Korean Deputy Prime Minister and Finance Minister Hong Nam-ki speaks during a meeting on revising the 2020 tax code at the National Assembly on July 22. (provided by the Ministry of Economy and Finance)

The South Korean government is raising the tax rate on the highest bracket of income earners (above 1 billion won, or US$834,397, in annual income) by 3 percentage points, from 42% to 45%. As of 2023, investors will be charged between 20-25% of tax if they make more than 50 million won (US$41,720) from selling stock.

These and other changes appear in the revised 2020 tax code, which was given final approval by a tax review board at the Ministry of Economy and Finance on July 22. Presuming that the revised code, which seeks to revitalize the economy and help overcome the COVID-19 crisis, is passed by the National Assembly in December, its measures will take effect, in phases, starting next year.

Under the current income tax regime, the first 12 million won (US$10,014) in the tax base is assessed at the lowest tax rate of 6%, with the tax rate increasing in each bracket. The highest bracket had a taxed income of 500 million won (US$417,233) and above at the rate of 42%. Under the revised plan, the government creates a new bracket of 1 billion won (US$834,439) and above, bumping up the maximum tax rate by 3 percentage points to 45%. This tax rate will take effect with income earned in January 2021.

“The polarization of wealth distribution has been exacerbated recently by the COVID-19 pandemic. We are raising the tax burden on high-income earners who can afford it, namely the top 0.05% of taxpayers [11,000 individuals in terms of wage and salary income and aggregate income], in the interest of social solidarity,” explained the Ministry of Economy and Finance.

Revisions in income tax rates

Facing public opposition, the government backpedaled on a plan to impose a capital gains tax on trading stocks from publicly listed companies. The revised tax code states that, starting in 2023, those who make more than 50 million won (US$41,718) in stock transactions will pay a 20% tax on profit between 50 million and 300 million won (US$41,718-250,302) and 25% on profit above 300 million won.

The government’s initial plan, as announced last month, was to assess tax on stock profits above 20 million won (US$16,687), but pushback from individual stockowners prompted President Moon Jae-in to order a revision of the plan, ultimately exempting the first 50 million won in profit. The government’s original plan would only have applied to the top 5% of stockholders, but the revision brings that percentage down to the top 2.5%.

The government is also fast-tracking its plan to cut the financial transaction tax (currently 0.25%) by one year, from 2022 to 2021. The transaction tax rate will be lowered by 0.02 points to 0.23% next year and then by 0.08 points to 0.15% in the following year.

The July 10 real estate measures, which ratcheted up a range of taxes on multiple home owners (including the comprehensive real estate holding tax, capital gains tax, and acquisition tax) were also included in the revised tax code. Bitcoin and other cryptocurrencies had been a blind spot in the tax code, but starting in Octover 2021, profits on cryptocurrency transactions will be subject to a 20% income tax.

Starting in July 2021, the government will broaden eligibility for the simplified VAT (value-added tax) reporting system by increasing the maximum yearly revenue from 48 million won (US$40,056) to 80 million won (US$66,760). At the same time, the government will raise the VAT exemption limit from 30 million won (US$25,035) to 48 million won (US$40,056) in yearly revenue. Both measures are designed to ease the tax burden on the working class and small business owners.

“Over the next five years, these adjustments will increase the tax burden of high-income earners and large corporations by 1.88 trillion won [US$1.57 billion] while lowering the burden on the working class, the middle class, and small and medium-sized enterprises by 1.77 trillion won [US$1.48 billion],” the government predicted.

By Lee Kyung-mi, staff reporter

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