After the government announced that it would introduce a 'foreign tax credit' for overseas fund investments through pension accounts starting next year, investors who invested in overseas funds through individual savings accounts (ISAs) have expressed dissatisfaction. The foreign tax credit is a system that deducts the amount of tax already paid abroad from the tax due on dividends.
The government said it would apply the foreign tax credit retroactively for taxes paid abroad this year when introducing the system in pension accounts. However, it will not provide retroactive benefits for the ISA. This has sparked controversy among ISA investors about the perceived unfairness. The tax authorities attribute this to the different legal frameworks governing the foreign tax credit for the two accounts, but the criticism of a 'rubber ruler' seems unavoidable.
According to tax authorities on the 17th, the Ministry of Economy and Finance has decided to amend tax laws to apply the foreign tax credit to indirect income from pension accounts, such as fund revenues. It means that when dividends come from overseas funds held in the pension account, a portion will be considered as taxes already paid locally, thereby reducing the tax owed in Korea. Currently, there is no such system in place, and pension account investors are required to pay taxes both locally and in Korea.
The government plans to present a tax amendment proposal at a Cabinet meeting at the end of this month, which will be submitted to the regular National Assembly. If the government's plan goes through, the effective date of this amendment will be January 1 next year. It will only be next year that the double taxation issue for pension accounts will be resolved, but the Ministry of Economy and Finance has decided to apply it retroactively to those subject to double taxation this year once the amendment is implemented.
Earlier this year, the Ministry of Economy and Finance recognized that double taxation occurred in pension accounts and ISAs for overseas funds. The ministry revised its enforcement ordinance to address the double taxation problem arising from ISAs starting in July this year. However, it did not offer any substantial compensation for the double taxation that occurred in the first half of the year.
The pension accounts could not be resolved as quickly through the same method. Unlike ISAs, which only required amending the enforcement ordinance, a legal amendment is necessary, which means the system can only be revised at the earliest by early next year. As the timeline extends, the government has decided to apply retroactively the amounts that were double taxed this year next year. Consequently, holders of ISA accounts are expressing their dissatisfaction regarding the fairness of the measure.
The government cited the small amount of double taxation in ISAs as a reason for not applying retroactively. The Ministry of Economy and Finance estimated, considering the number of ISA accounts, the share of overseas funds held in ISAs, and the total amount refunded as dividends by the National Tax Service, that the tax amount overpaid per account is about 85 won. A ministry official explained, "Considering (implementation costs such as system construction), it was determined that it would be better to amend the enforcement ordinance to apply it quickly to ISAs."
An official from the securities industry noted, "While there were 100,000 ISA subscribers in December last year, that number has plummeted to around 50,000 this year," adding, "It is regrettable that the double taxation issue has not been resolved in ISAs as they are shorter-term investment products with more investment assets compared to pensions."
Professor Kim Woo-chul from the University of Seoul pointed out, "There seem to be unavoidable reasons due to legislative and technical limitations," but he also noted that "the lack of retroactive application for only ISAs could be a source of dissatisfaction from the taxpayer's perspective."