Unfathomable arbitrariness in govt. plan to lower criteria for major shareholder's requirement

Finance Minister Hong Nam-ki, center, speaks during a National Assembly annual inspection session held at the ministry's main building located in Sejong City's government complex, Wednesday. / Yonhap

By Anna J. Park

One of the most controversial current financial issues has been the government's plan to lower the criteria for being considered a major shareholder.

While the finance ministry delayed the imposition of a capital gains tax of 20 percent to 25 percent on all stock retail investors who earn more than 50 million won ($43,000) starting in 2023, the government has been reiterating its intent to stick to its original plan to lower the minimum requirement of a major shareholder within this year and to begin imposing a capital gains tax on them from next year.

Current tax law states that a person or a group of direct family members who own more than 1 billion won worth of stocks in a given company is considered a major shareholder and is subject to a capital gains tax of 22 percent to 33 percent.

The finance ministry's plan is to change the minimum requirement of 1 billion won to 300 million won by the end of the year, saying that this change was already announced when related ordinance was drafted two years ago.

Retail investors' fury over finance ministry's arbitrariness

However, retail investors are infuriated over the finance ministry's move, and their rage is quite understandable.

A series of reasonable questions naturally pop up in a layperson's mind upon hearing the news. First, where does that figure of "300 million won" ― a whopping 70 percent change from this year's requirement ― come from? Secondly, why does the government need to drastically lower the minimum requirement for being a major shareholder in the span of just a few years?

Just three years ago, the minimum amount of stocks that a person or owner family had to own was 2.5 billion won, which is more than eight times the government's planned 300 million won. The government lowered the criteria to 1.5 billion won in 2018, and to 1 billion won in 2020.

It is hard to fathom why the minimum requirement of being a major shareholder should be reduced so radically in such a short period of time. What is the exact logical and calculative basis for such a change? Unfortunately, no finance ministry officials could fully provide a clear explanation or rationale behind the seemingly arbitrary numbers.

What was more troublesome than this sudden and arbitrary change of standard was the fact that the tax would be levied on the aggregated sum of stocks owned by all direct family members, such as spouses, parents, children and grandchildren.

Retail investors, angered about such unreasonable taxation standards, filed an online petition at the official website of Cheong Wa Dae in early September, gaining 216,844 people's signatures as of 3 p.m. Thursday.

Finance ministry considers individual taxation

One consolation for the retail investors' resentment would be that the finance minister said the ministry is currently looking into a possible change of the taxation standard, from the current aggregation among family members to an individual basis. The comment was made during Wednesday's National Assembly annual inspection session held at the finance ministry's building in Sejong City.

Other than this point, the finance minister didn't budge from his original position that the government's plan should be pushed ahead as it planned for the sake of policy consistency and equity in taxation. His inflexible position was criticized in a rare unison voice by lawmakers from both political camps.

Although it's understandable that equitable taxation between capital gains and labor income should be respected, the finance ministry could take a much more sophisticated approach to minimize the shock to local stock markets and to gain public trust. For example, gradually lowering the minimum level to 500 million won or 700 million won for 2021, instead of suddenly going for the 70 percent cut, could've been an option. Also given the unique circumstances of COVID-19 this year, delaying the imposition for a couple of years to 2023 when the capital gains tax will be levied upon all investors could've reduced investors' psychological barriers for the changed taxation rule.

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