The first tax reform plan of the Lee Jae-myung government has focused more on tax increases than on measures to invigorate the stock market, leading global investment banks (IBs) to express concerns in unison. There are assessments stating that the KOSPI index's survival above 3,000 is also in jeopardy if policy expectations do not materialize.
According to the financial investment industry on the 4th, Citi Securities has maintained an overweight opinion on the global asset allocation strategy while reducing the investment ratio in Asian emerging markets to neutral. The reason cited is the announcement of Korea's tax reform plan.
Goldman Sachs also pointed to the tax reform plan for 2025 as the background for the KOSPI and KOSDAQ indexes dropping by 3.9% and 4%, respectively, on the 1st. The presidential office's stance, stating that it is difficult to view the fluctuations in the stock indices as having occurred after the announcement of the tax reform plan, differs.
Major global IBs noted that the tax reform plan includes ▲ corporate tax increases ▲ expansion of the threshold for stock transfer income tax for major shareholders ▲ increases in the securities transaction tax rate, which do not align with the stock market revitalization policy direction represented by the Lee Jae-myung government's goal of a KOSPI index of 5,000. Citi Securities criticized the tax reform plan as being "the opposite of policies intended to support the Korean stock market."
In particular, the content of separate taxation for dividend income in the tax reform plan fell short of market expectations. The essence is that dividends that have a payout ratio of over 40%, or a payout ratio of over 25% while increasing the dividend amount by 5% compared to the previous three years, will be separated from total income.
The problem is that the requirements are stringent, limiting the applicable items. It's also an issue that the maximum tax rate for separate taxation of dividend income proposed in the tax reform plan reaches 35% (excluding local income tax). The market had expected a maximum tax rate of 25% as proposed by Democratic Party of Korea lawmaker Lee So-young earlier.
Credit Lyonnais Securities Asia (CLSA) stated, "This tax reform plan is confusing investors as it is in a different direction from what the president has publicly declared regarding the reevaluation policy of the Korean stock market," adding, "The inheritance and gift tax reduction has not even been discussed, and separate taxation on dividend income is set at a high rate with limited conditions, which is not sufficient for major shareholders to expand their dividend payouts."
Global IBs believe that since the KOSPI and KOSDAQ indices rose this year due to policy expectations, investor sentiment may be damaged by this tax reform plan, leading to market instability.
CLSA expressed that due to disappointment, it is difficult to expect meaningful rebounds for the KOSPI index at the level of 2,929, which has a price-to-book ratio (PBR) of 0.9 times. Morgan Stanley also stated, "This tax reform plan raises more questions about the government's capital market and governance reform," noting, "Reforms need to continue for the KOSPI index to maintain above 3,000."
Although global IBs foresee that there could be some revisions to the tax reform plan due to significant backlash from investors, they expect that volatility will be high depending on its content. The tax reform plan is set to be submitted to the regular National Assembly before September 3 after passing through a Vice Ministerial meeting and a Cabinet meeting following the legislative notice.
In addition to the tax reform plan, there were opinions that the U.S. Donald Trump administration's tariff policy could impede a rebound in the Korean stock market if it puts pressure on exchange rates and domestic corporations' performance. JPMorgan stated, "For the Korean stock market to be reevaluated (Re-rating), structural reforms, along with improved corporate performance and inflows of foreign capital, must be supported."