South Korea reviews ISA reforms, stock manipulation bill amid investor backlash

South Korea's ruling party is undertaking a full review of proposed reforms to the Individual Savings Account (ISA) and a bill aimed at preventing stock price manipulation, signaling a response to significant investor concerns. The government had initially presented these plans as measures to vitalize the capital markets and prevent tax loopholes for major shareholders, but President Yoon Suk Yeol's directive for a comprehensive re-evaluation suggests a shift in approach.

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The government is reconsidering the ISA reform plan and the stock price manipulation prevention bill due to investor sentiment.

The core of the investor criticism regarding the ISA reforms centers on the proposed reduction of benefits for existing general ISAs, particularly the limitation of the account's maturity period to five years. Previously, general ISAs allowed for indefinite tax deferral on interest and dividend income after a three-year mandatory period, enabling compounding effects through reinvestment. The proposed change requires account termination and re-enrollment after five years, which investors argue disrupts long-term wealth accumulation strategies. Additionally, the proposed elimination of the carry-over of unused annual contribution limits disadvantages self-employed individuals or those with irregular incomes.

While the government introduced a new 'productive finance ISA' with an increased 10-year contribution limit of up to 200 million won and no tax-free limit, its restriction to domestic stocks and funds has drawn criticism from "West-bound investors" (seohakgaemi), who focus on overseas investments. Some observers worry that this situation mirrors the earlier withdrawal of the financial investment income tax (fintax), suggesting a pattern of policy shifts influenced by public opinion.

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The core of the investor criticism is that the 'productive finance ISA' reduces benefits for the existing general ISA.

The proposed 'stock price manipulation prevention act' also faces scrutiny over its practical effectiveness. The current system calculates the value of listed stocks for inheritance and gift taxes based on an average of stock prices over a four-month period around the transaction date. The government's revised proposal aims to identify companies suspected of intentionally lowering stock prices by defining stock price manipulation if their price-to-book ratio (PBR) falls within the bottom 25% for KOSPI or 10% for KOSDAQ over 12 out of 13 semi-annual periods. If deemed manipulative, taxes would be levied based on the 'normal price' rather than the depressed value. Critics argue this approach is insufficient, potentially allowing manipulation to persist over longer periods, and that proving intentional manipulation will remain difficult for the National Tax Service.

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The proposed bill to prevent stock price manipulation is facing criticism over its low effectiveness.