Lee Yeon-woo is a financial journalist at The Korea Times. Her wide range of reporting includes policies, macroeconomics, stock market, companies and even crypto. She is passionate about connecting the dots in Korean finance and making it easier for foreign nationals to understand. Based on her previous experience as a national reporter, she also has a keen interest in social issues within the sector, including gender equality and ESG. Your tips and insights are always appreciated. You can send them to yanu@koreatimes.co.kr.
EXPLAINER Why Lee ordered rethink of ISA and 'stock price suppression' rules
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By Lee Yeon-woo
President Lee Jae Myung ordered a full review of the government's proposed overhaul of individual savings accounts (ISAs) and measures targeting the deliberate suppression of share prices. The order came on Friday, just four days after the government unveiled its tax reform plan on Aug. 3.
What went wrong?
Cuts to existing ISA benefits
ISAs offer tax breaks on interest and dividend income, making them a widely used vehicle for retail investors seeking to build wealth. Up to 2 million won ($1,416) of investment income is tax-exempt, while income above that threshold is taxed separately at a preferential rate of 9.9 percent.
As part of an effort to channel more money into domestic markets, the government proposed a new "productive finance ISA." Investment income from the account would be fully tax-exempt, with no cap, while investors could contribute as much as 20 million won a year and 200 million won in total over a maximum period of 10 years.
But the proposal would scale back benefits available under existing ISAs. The government plans to shorten their maturity and scrap the ability to carry unused annual contribution limits into subsequent years.
Investors have so far been able to extend the maturity of their accounts effectively indefinitely, allowing investments to compound over the long term before paying the tax. That strategy would no longer be possible under the proposed changes.
The new ISA would also exclude Korea-listed exchange-traded funds tracking overseas indexes such as the S&P 500 and Nasdaq 100.
"They talk about modernizing the capital market, but this amounts to pushing everyone into blindly investing in Korean stocks," said Rep. Ahn Cheol-soo of the main opposition People Power Party.
Share price suppression rules seen falling short
The practice of conglomerate owners keeping share prices low to reduce inheritance and gift taxes has long been cited as one contributor to the "Korea discount."
Under the government's proposal, shares found to have been deliberately depressed would be valued at least 30 percent above their market value for tax.
A company could be flagged if its price-to-book ratio ranked in the bottom 25 percent of the KOSPI or the bottom 10 percent of the Kosdaq for at least 12 of the most recent 13 six-month periods. A National Tax Service review committee would then determine whether the company had deliberately suppressed its share price and whether the special tax treatment should apply.
The government says the screening process is necessary because a low PBR alone doesn't necessarily mean a company has intentionally depressed its share price to facilitate a transfer of control.
Critics say the thresholds could allow companies to manage their PBR during certain periods to avoid being flagged, potentially creating new distortions in share prices. An earlier bill introduced by Rep. Lee So-young of the ruling Democratic Party of Korea would have applied the rule to all companies with a PBR below 0.8, regardless of the reason for their low valuation.
The proposed tax treatment has also drawn criticism for being too lenient. If deliberate share price suppression is found, the taxable value would be the higher of either 130 percent of the current assessed value or the highest average share price calculated over periods ranging from the previous six months to six and a half years. Critics say that approach could create a perverse incentive for controlling shareholders to keep share prices depressed for longer.