Following the announcement of a proposed biannual tax revision bill earlier this week, a market report suggested Friday that the tax hike would have a minimal impact on the current state of the stock market.

The government announced Wednesday that it is proposing a 5 percent increased capital gain tax on Kospi investors starting April 2021. Major shareholders will face a 25 percent tax for shares selling at a gain of more than 300 million won ($267,090) a year, compared to the current rate of 20 percent.

Capital gains of less than 300 million won a year will remain subject to the 20 percent tax rate.

“With the criteria for large shareholder stocks falling and the range of taxation looking to expand, there has been some shock to the market,” said the report by Korea Investment & Securities. “However, in the short term, it is unlikely that individual investors will be able to sell their stakes in large amounts.”

“There is the possibility of a negative impact on investment sentiments if the tax rate is raised, as well as if the amount subject to taxation is expanded, however, the additional regulations would be enforced from April 2021 and does not apply to current shares,” the report added. 

The day after the government’s announcement, the securities sector index fell 5 percent to 750 points.

As for concerns over how the expanded taxation revision may impact major foreign shareholders, experts say they do not anticipate any significant changes, as Korea already has a dual tax treaty with most countries, so most foreign corporations would not be affected by the revision of the domestic tax law.

Korea current has a double taxation avoidance tax treaty clause with 91 countries, including the United States, Britain and France. Therefore, although foreign ownership of stocks is expanding, most of the parties will be unaffected by the tax hike.

According to an official at the Korea Capital Market Institute, if the government’s heavier taxation bill for major shareholders is approved, the move may push away domestic investors. On the other hand, foreigner investors exempt from double taxation may look at the situation as an opportunity to expand their investments.

The Kospi has reached record heights this year on the back of strong foreign investors looking to revitalize the undervalued stock. The Kospi hit an all-time high of 2,451.53 on July 24.

President Moon Jae-in’s tax revision bill is slated to be submitted to the National Assembly on Sept. 1.

The president’s plan to impose higher taxes on the “superrich” and large businesses is part of the administration’s efforts to raise funds to boost the country’s employment rate and support small and medium-sized businesses.

According to the Ministry of Strategy and Finance on Wednesday, starting January next year, the income tax rate will be increased to 42 percent from the current 40 percent for those with taxable income exceeding 500 million won per year.

Those earning 300 million won to 500 million won will be subject to a 40 percent tax rate. 

The Finance Ministry added that the proposed bill is expected to affect some 129 companies in Korea and is expected to increase the government’s corporate tax revenue by some 2.6 trillion won starting next year.

By Julie Jackson (juliejackson@heraldcorp.com)