Currency traders watch monitors near a screen showing US President Joe Biden at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Thursday (July 25). – AP
SEOUL: South Korea announced a raft of proposed tax benefits, including a cut to one of the world’s heaviest inheritance levies and an extension of support for chipmakers, as it seeks to boost stocks and stimulate an economy under pressure from aging demographics and slowing consumption.
President Yoon Suk Yeol’s government plans to lower the ceiling on the inheritance tax to 40 per cent from 50 per cent and scrap a rule that requires controlling shareholders to pay even more, the Finance Ministry said Thursday (July 25).
The change, if approved by the opposition-controlled but increasingly favorable parliament, would mark the first reduction of the nation’s inheritance tax rate since 1995 and affect the reigning families at major firms from Samsung Electronics Co. to Hyundai Motor Co.
South Korean investors have long blamed poor corporate governance for pushing stocks below their book values and contended that levies on inheritances create an incentive for controlling shareholders to keep stock prices artificially low. Earlier this year Yoon cited the tax rate as a reason why the nation’s markets lag the performance of foreign rivals.
His administration has since launched a Corporate Value-up initiative aimed at buoying the local stock market and attracting more foreign capital. Yoon pledged to reinforce those efforts with tax incentives. The reforms announced Thursday include rewards for companies expanding shareholder returns in a push to encourage them to channel more cash into share buybacks and dividends.
South Korea’s US$1.9 trillion equities market has seen the political sway of retail investors grow since the coronavirus pandemic, as lower interest rates helped fuel a stock boom. Their numbers rose to 14 million in 2023 from roughly 6 million in 2019, according to depository data. That’s almost 30 per cent of the population.
The government also intends to extend tax breaks for key technology industries such as semiconductors by three years and put off planned taxes on cryptocurrency holdings for another two years, the ministry said.
The measures follow other financial reforms that extended the won’s trading hours as part of a campaign by policymakers to win inclusion for Korea in the FTSE World Government Bond Index.
Not every reform has been welcomed by foreign investors. South Korea has extended its blanket ban on short selling through March 2025. The ban has been in place since November 2023 as officials try to crack down on illicit trading practices.
The government reiterated Thursday it will seek to scrap plans to impose a capital gains tax on financial investment income. This pledge has faced controversy in parliament, where the main opposition Democratic Party continues to have control after winning the April election.
The party, led by Yoon’s 2022 election opponent Lee Jae-myung, has signaled its openness to reforms including an inheritance tax cut. One of the keys to the opposition retaking power in 2027 is winning the support of middle-class homeowners and business leaders who have traditionally sided with the ruling People Power Party.
Backing the tax reforms could help Lee expand his popular support base. He has already professed his willingness to help ease capital gains taxes and property levies on high-end homes.
The latest proposals also promise tax breaks for couples getting married at a time when South Korea struggles with the world’s lowest fertility rate. Policymakers also plan to ease tax burdens for employers that provide financial support for workers having children, the ministry said.
The plans would come with a cost, reducing government revenue by roughly 4.4 trillion won (US$3.2 billion) over the course of five years, the ministry said.
Finance Minister Choi Sang-mok said in a statement that the fiscal impact could wind up being lighter if businesses reap greater earnings from an ongoing export rally and policies to boost consumption and investment start to pay off.
The government plans to submit its proposals to parliament after they are formally endorsed at a cabinet meeting in late August, according to the Finance Ministry. – Bloomberg
