Tax rates doubled, yet tax bills surged up to sevenfold... The "corrective tax" sweeping the financial sector.

The sharp increase in education tax burdens expected for major financial groups this year is attributed to the combination of the government's hike in education tax rates and rising operating profits driven by a boom in the KOSPI market.

Due to the government's revision of tax laws, the education tax rate for financial and insurance companies with a taxable base (annual business income) exceeding 1 trillion won has been increased from 0.5% to 1%, effective January 1 this year. This change introduces a new bracket for income exceeding 1 trillion won under the previously single-rate system, applying a doubled tax rate. The National Assembly Budget and Policy Office estimated last year that this increase would raise the total tax burden on the financial sector by approximately 1.3 trillion won annually.

When the lid was actually lifted, the situation proved even more serious. The five major financial institutions (KB Financial Group, Shinhan, Hana, Woori, and NH Financial) are expected to face an education tax "bomb" exceeding 80 billion won in the first half of this year. This amount is 2.2 times the level paid last year. Although the taxable bracket was limited to amounts of 1 trillion won or more, securities firms where loss-offsetting does not apply have seen increases of over seven times compared to last year.

According to the five major banks, they paid a total of 497 billion won in education tax this year based on last year's performance. Financial institutions settle and pay the annual education tax by February of the following year, based on the finalized results for that year. Based on the first half of last year, it was found that they paid an education tax of 260 billion won. This year, it is estimated that they will pay 483.9 billion won in just the first half.

Experts point out that the fundamental problem lies not in the result of a surge in education taxes within the financial sector due to an increase in education taxes, but rather in the weak rationale for the initial tax hike and the unreasonable structure of tax calculation.

The education tax is a levy collected to fund educational needs, established to secure resources for expanding facilities aimed at improving the educational environment and enhancing teachers' working conditions. However, controversy has persisted over the lack of any connection between the profits of banks and insurance companies and educational funding. Recently, while the demand for educational financing has declined due to low birth rates and a shrinking school-age population, the carryover amounts and unused funds in local education budgets have reached 6 trillion won annually.

The government explained the rationale for the revision by stating that "since the introduction of the education tax in 1981, there have been no changes to the taxation system, so we considered factors such as the growth rates of the financial and insurance sectors up to now." The logic behind raising the tax rate is that the financial and insurance sectors have shown high growth; however, criticism has been raised that the basis for taxation is weak. Within the financial sector, this move has been widely perceived as part of the government's crackdown on financial institutions, leading to remarks describing it as "a harsher education tax than a windfall tax."

There are concerns that the education tax imposed on the financial sector effectively functions as a value-added tax (VAT), and creating a progressive structure for it is problematic. Professor Kim Woo-cheol of the Department of Taxation at the University of Seoul stated, "The education tax was introduced with the concept of replacing VAT in the financial sector, yet there is no instance where a progressive structure has been applied to VAT. This is an extremely inappropriate structure."

Criticism was also raised that the financial sector should have voiced its opposition more actively against the government's unreasonable tax reform. The sharp increase in education taxes for securities firms stems not from the rate hike itself, but from structural flaws in the method of calculating the taxable base, which does not allow for netting of gains and losses. Insurance companies also hold exposures to managed assets in listed securities, sharing some of the same structural flaws as securities firms.

Professor Kim said, "If a progressive structure is introduced, it was essential to firmly demand taxation based on net income applying the offset of gains and losses." He added, "When the tax reform plan was unveiled last July, the financial sector should have more actively shaped public opinion and advocated for institutional improvements. It is questionable whether they moved proactively. Once a bill has passed the plenary session, raising issues at the time when taxes must be paid makes it difficult to reflect those concerns."

In the opposition camp, a bill to amend the Education Tax Act with the aim of normalizing excessive education tax burdens was introduced, but whether it will lead to actual institutional improvements in the current situation where the ruling party holds fewer seats than the opposition remains uncertain. People Power Party lawmaker Choi Eun-seok introduced a bill last month to completely abolish the 1.0% rate for the portion exceeding 1 trillion won in taxable income and apply a single tax rate of 0.5% across all brackets, as before. Choi (Rep.) stated that "in a situation where education financing is more than sufficient, there is no justification for punitively raising tax rates only for the financial and insurance sectors."

An investigation reveals that the top six securities firms, excluding those affiliated with financial holding companies this year, are expected to bear education taxes amounting to 340 billion won. In the financial investment industry, it is argued that the education tax effectively functions as a so-called 'windfall tax' levied on excess profits. Furthermore, concerns have been raised regarding the irrationality of the tax structure, noting that securities firms acting as liquidity providers (LPs) in the ETF (exchange-traded fund) market face increased taxes the more faithfully they fulfill their LP roles.

◆ Securities firm education tax surges sevenfold year-on-year

According to the financial investment industry on the 11th, a simulation of six comprehensive financial investment companies (CFICs) estimates that the education tax burden for this year will be 339.4 billion won. This represents an increase of more than seven times compared to last year's education tax of 46 billion won. The six CFICs are Mirae Asset, Korea Investment, Samsung, Meritz, Kiwoom, and Daishin Securities.

The scale of this year's education tax was estimated by applying the increased 1% education tax on stock trading profits and collective investment securities trading profits, as reflected in first-quarter results. Following the passage of last year's amendment to the Education Tax Act, the education tax rate for financial institutions with a taxable base exceeding 1 trillion won was doubled from 0.5% to 1%.

Securities firms, which had expected strong performance due to the bullish stock market in the first half of the year, encountered an unexpected obstacle: the education tax. With a decline in trading volume anticipated in the second half and the added burden of the education tax, poor performance is now expected.

The securities industry lowered Kiwoom Securities' target price citing the burden of education tax despite its strong performance in the second quarter. Jang Young-im, a researcher at SK Securities, explained, "Taxes and public fees increased from 18.2 billion won in the first quarter to 83.9 billion won in the second quarter, with approximately 60 billion won estimated to be education tax." She added, "For Kiwoom Securities, which has strengths in ETF LPs, the cost burden has become heavier compared to the past, making the premium factor somewhat weaker." Samsung Securities also saw its target price adjusted downward despite recording its largest-ever quarterly profit in the second quarter. This reflected factors such as controlling shareholder net income falling short of market expectations due to the impact of the education tax.

◆ "Taxes should be levied based on 'profit' after deducting costs"

The industry argues that the education tax calculation formula is unreasonable. This is because the more securities firms perform the role of LPs in the ETF market, the higher the taxes they incur. In particular, as the expansion of ETF (exchange-traded fund) assets driven by a booming stock market has increased the "market-making" role of securities firms, there are strong complaints that this has instead backfired with an education tax bombshell.

Securities firms simultaneously act as liquidity providers (LPs) and engage in hedging trades in the ETF market. They submit buy and sell quotes for each listed security (LP) while executing offsetting positions to mitigate price volatility risks (hedging), thereby playing a role in building infrastructure within the ETF market. Even if securities firms generate profits from LP trading, they may incur losses from hedging trades, meaning that overall, the total profit from combined LP and hedging activities may not be substantial. For example, even if a trading profit of 10 billion won is achieved depending on index fluctuations, a loss of 5 billion won could occur.

The issue is that the education tax is levied only on trading profits, without reflecting losses. LP transaction revenues and hedge transaction revenues are taxed separately, meaning that as securities firms engage in more LP transactions, their education tax burden increases sharply. As illustrated, while actual net gains amount to only 5 billion won, taxation is applied to 10 billion won in revenue. In the first quarter of this year, out of a total ETF trading volume of 1,049 trillion won, LP transactions accounted for 24%, reaching nearly 256 trillion won, significantly increasing the burden on securities firms responsible for LP operations.

An industry official pointed out that "economic one-day LP and hedge transactions are evaluated separately, so operating losses (costs) are not reflected in the taxable base," adding that "the burden of education tax increases regardless of a securities firm's actual operating profit."

Concerns are also raised that if the trading of ETF LPs is dampened by each company's education tax burden, investors' losses could increase. This is because the education tax burden increases with LP transactions, making it difficult to actively play a role in creating the ETF market. If LP trading declines and bid-ask gaps occur in ETFs, prices become distorted, increasing the risk of investor losses.

In response, industry experts argue that when calculating the tax base for education taxes, LPs and hedge transactions should be taxed based on actual profits. They contend that netting profits and losses—calculating gains after deducting business expenses from business revenue—is preferable.

The industry has urged tax authorities and the National Assembly to apply the netting method for transactions with strong market-creation characteristics centered around the association. Since this was not reflected in the government's tax reform plan, the goal is to have the netting method incorporated during the National Assembly's budget deliberation process.

Banking institutions are shouldering not only the burden of increased education taxes but also various contributions and financial support obligations stemming from government policies. Following the previous administration's push for mutual prosperity financing in the range of 2 trillion won, the Lee Jae-myung administration has continued with contributions to bad banks, increases in contributions for people-centric finance, and expansion of inclusive finance, leading to a cumulative accumulation of policy-related costs for the banking sector.

According to the financial sector on the 11th, the banking sector contributed 360 billion won to the new Leap Forward Fund established last year as of January. The Leap Forward Fund is a bad bank that purchases long-term delinquent debts of 5 billion won or less with arrears exceeding seven years for debt restructuring and write-off. The banking sector's contribution of 360 billion won accounts for more than 80 percent of the total private contributions of 44 billion won.

The capital contribution to the Financial Services for Low-Income Citizens, which provides products such as Haeotsal-loan for low-credit borrowers, has also increased. Following the revision of the Enforcement Decree of the Financial Services for Low-Income Citizens Act implemented in April, the common contribution rate for banks was raised from 0.06% to 0.1% of outstanding household loans. Accordingly, the annual capital contribution by banks is expected to increase by 134.5 billion won from the previous level, reaching 381.8 billion won. This accounts for 60% of the total financial sector's capital contribution of 632.1 billion won.

Measures to further increase the contribution rate are also being discussed in the National Assembly. According to a review report by the National Assembly's Political Affairs Committee, if the rate is raised to 0.2 percent, bank contributions could reach a minimum of 672.8 billion won; applying a 0.3 percent rate could increase them to a maximum of 1.092 trillion won.

As contributions increase, banks have also found it increasingly difficult to pass these costs on through loan interest rates. Since the revised Banking Act and its enforcement decree took effect on July 1, banks are no longer allowed to reflect statutory costs such as new guarantee fund contributions, existing guarantee fund contributions, regional new guarantee fund contributions, Seogeumwon contributions, and education taxes in their loan interest rates.

Additional burdens are also looming on the horizon. First, the establishment of a Fund for Stability in Finance for Low-Income Groups is being pursued. The current obligation to contribute at a rate of 0.1% is scheduled to expire on October 8. Once the fund is established, it will create a structure where the financial sector continuously shares the costs required for policy-based finance for low-income groups.

The no-fault liability system for voice phishing is a factor adding to the burden. A bill stipulating that financial institutions must compensate victims within a certain range, regardless of whether there was intent or negligence on their part, is currently pending before the National Assembly. The bill includes provisions such as setting the compensation cap at up to 5 billion won.

Beyond direct contributions, the burden of inclusive finance is also growing. The five major financial holding companies—KB, Shinhan, Hana, Woori, and NH Agricultural Cooperative Bank—have pledged to supply a total of 70.7672 trillion won in inclusive finance by 2030. These five financial institutions provided 11.2912 trillion won in inclusive finance in the first half of this year alone, and additionally conducted their own debt restructuring for overdue receivables amounting to 2.2653 trillion won. Some cases of inclusive finance have led to actual contributions. NH Agricultural Cooperative Bank plans to contribute 100 billion won this year to establish the NH Microfinance Foundation.

Banks report that the burden of "inclusive finance" under the current administration is greater than the "mutual prosperity finance" initiative of the previous government. Under the preceding Yoon Suk-yeol administration, banks provided funds totaling 2.1 trillion won on the pretext of mutual prosperity finance. Of this amount, 1.5 trillion won was used for interest refunds to individual business owners and small business operators, while 221.4 billion won was allocated as a contribution to the Financial Services Commission's Small Business and Cooperative Agency. Even considering only direct financial burdens such as interest refunds and contributions, excluding low-interest loans and various social service funds, the total exceeds 1.7 trillion won.

A banking official stated, "If the previous government's mutual prosperity finance was a one-time support measure, it has now shifted to a structure where costs must be continuously borne through contributions to civilian finance and the expansion of inclusive finance." The official added, "If banks' profitability and capital adequacy come under greater strain, burdens will inevitably be passed on to shareholders or customers in various forms."