The issue of 'double taxation' occurring in pension accounts is expected to remain unresolved into the next year, unlike the Individual Savings Account (ISA). From the second half of this year, double taxation will not occur with the ISA, but investors in pension accounts are likely to pay taxes on overseas dividends to both the local government and South Korea until the end of this year.
If the amendment of the law is delayed, the period of double taxation could lengthen further. The Ministry of Economy and Finance is considering a plan to refund the amounts taxed doubly if the implementation of the law is delayed.
According to financial authorities on the 24th, the Ministry of Economy and Finance plans to submit a tax law amendment aimed at resolving double taxation in pension accounts to the National Assembly this year. Considering the time required for the amendment to pass through the National Assembly, the implementation of the law is expected at the earliest on January 1 next year. If conflicts between parties disrupt the National Assembly, the implementation date could be postponed further.
Currently, investors who hold overseas funds such as U.S. exchange-traded funds (ETFs) in their pension accounts pay dividend income tax in the respective countries. To withdraw the pension, they must also pay an additional pension income tax of 3.3% to 5.5% to the National Tax Service.
Until last year, the National Tax Service compensated the dividend income tax paid locally, preventing such double taxation controversies. In cases where a 1 million won dividend income is generated from investing in U.S. ETFs, since the dividend tax rate in the U.S. is 15%, only 850,000 won should have been deposited into the account. However, the National Tax Service filled in the amount equal to the tax paid to the U.S., maintaining the total at 1 million won, collecting tax only once when the pension is received. As a result, investors were able to manage 1 million won and benefit from tax deferral, rather than just 850,000 won.
However, the Ministry of Economy and Finance has faced issues since it applied the changed foreign tax credit method from this year, citing excessive government support as the reason. The new method eliminates the National Tax Service's payment step. As a result, since the beginning of this year, investors have had to pay taxes both locally and domestically. The Ministry's plan is to amend the law again to resolve the double taxation issue, but the longer the implementation is delayed, the more losses investors will incur by having to pay taxes they should not.
Therefore, the Ministry of Economy and Finance is looking into whether to apply 'retroactive application.' Even if the amended law is implemented next year or the year after, there is a possibility it could estimate the amount of double taxation incurred before that and refund it to investors. A Ministry official noted, 'While retroactive application is rare, it is not entirely unprecedented.'
In fact, last July, the Ministry of Economy and Finance retroactively applied the marriage tax credit, which provides a maximum tax credit of 1 million won to couples who report their marriage. Originally, only couples who registered their marriage in January of this year would be eligible for the benefits. However, to prevent prospective couples from delaying their marriage registration, the Ministry expanded the eligibility range to include couples registered before the first half of 2024, as well as into the second half of the year.
The specific direction of the law amendment is similar to that of the ISA. In January, the Ministry of Economy and Finance decided to collect the tax that ISA investors must pay at maturity after deducting the amounts they have already paid abroad. In this process, because the rates of dividend income tax vary by country and trading within accounts is active, the Ministry decided to apply a uniform rate of 14%, as it could not accurately determine the specific amounts paid abroad by individual investors. This means regardless of how much dividend income tax a South Korean investor has paid locally, they will be regarded as having paid 14%. The dividend income tax rate in the U.S., which South Korean investors favor, is 15%, while it is 10% in China and Japan.
Some have raised concerns that since the tax rate for pension accounts is about a third lower than that of ISAs, it is not possible to apply the same deduction rate. A lower deduction rate means not being able to fully recognize taxes paid abroad, which is a shock for investors. The Ministry of Economy and Finance is seriously considering applying the same 14% deduction rate to pension accounts as to the ISAs.
Meanwhile, the controversy over double taxation of ISAs has evolved to some extent. This is because the regulations related to ISAs do not require the consent of the National Assembly, and the Ministry of Economy and Finance can simply amend the enforcement decree. The amended enforcement decree will only apply to foreign dividend income occurring after July 1.
However, even if the double taxation issue is resolved, tax deferral benefits cannot be expected. This is because the process where the National Tax Service compensates the foreign dividend income tax paid by investors will still be eliminated. From this year onwards, investors will only be able to operate the amount net of the dividend income tax, thus losing the tax deferral advantage.