The KOSPI index, which seemed poised to hit an all-time high, has been fluctuating around the 3200 mark for about a month. Meanwhile, the U.S. Nasdaq index and Japan's Nikkei index have reached record highs. As the announcement of the first tax reform plan by the Lee Jae-myung administration approaches, dissatisfaction is growing among individual investors.
One source of discontent is the separate taxation of dividend income. Separate taxation of dividends allows for a lower tax rate on dividend income, excluding it from other interest income and aggregating it. The tax reform plan includes a provision applying the maximum tax rate on separate taxation of dividends at 38.5% (including local income tax). This is 11 percentage points lower than the existing maximum tax rate of 49.5% on comprehensive taxation of financial income.
From the government's perspective, it can be seen as complaining about the 'privilege' of separate taxation. However, the issue is that 38.5% is not low compared to other countries.
According to Kiwoom Securities, the average maximum tax rate on individual dividend income among member countries of the Organisation for Economic Co-operation and Development (OECD) is 24.4%. The rates for the United States and Japan are 23.8% and 20.3%, respectively. The maximum tax rate of 27.5% proposed by Representative Lee So-young of the Democratic Party of Korea is also above the average, making it difficult for investors to perceive a higher maximum tax rate as a benefit.
In addition to the separate taxation of dividends, there are expectations for adjustments regarding various issues within the tax reform plan, such as corporate tax increases and strengthening the criteria for major shareholders subject to capital gains tax. The issue of inheritance and gift tax, which the market identifies as essential for reevaluating stock values, has yet to get started.
Domestic securities firms as well as global investment banks have suggested this year's upper limit for the KOSPI index at 3500 to 3800, considering policy momentum. Conversely, this implies that if the policy momentum weakens, the KOSPI index could stagnate or decline from its current level.
HSBC immediately expressed an 'underweight' opinion on the Korean stock market, noting that it has increased significantly. According to Reuters, Morgan Stanley also noted in a message sent to clients that hedge funds had increased their short positions in the Korean market in August.
While there is a general opinion that there are not many variables to turn the KOSPI index downward, investors in sectors or stocks likely to fluctuate based on the contents of the tax reform plan should keep at least one response strategy in mind.