Education tax hike on financial firms: Social duty or tax overreach?

Planned doubling of Korea’s education levy draws sector-wide opposition

Yeouido financial district in Seoul (Getty Images)

South Korea’s plan to double the education surtax on major financial companies is facing headwinds, with mounting criticism over the added burden as the proposal heads for parliamentary review.

Industry sources said Thursday the Ministry of Economy and Finance recently met with officials from banks, insurers and brokerages to gather feedback on the planned increase.

The measure announced earlier this month would raise the levy on financial income — including interest, dividends, fees and trading gains — from 0.5 percent to 1 percent. The industry has responded in unison, arguing the move unfairly singles out the sector.

The education surtax is meant to mandate social contributions from a profitable industry that reaps large revenues from the broader economy, while providing a stable fiscal channel for education funding.

While the surtax also applies more broadly, layered on top of corporate and income taxes and imposed on goods such as alcohol and cigarettes, the latest hike targets only large financial companies with operating revenue above 1 trillion won ($720.8 million).

The revision would mark the first change since the tax was introduced in 1981. “The financial sector has since seen explosive growth, and the education tax increase reflects that growth,” a Finance Ministry official said.

With the amendment, about 60 financial companies would pay a combined 1.3 trillion won in additional tax, of which about 500 billion won would come from the five major commercial banks. The banks’ total education tax burden is expected to reach around 1 trillion won.

Industry groups have pushed back collectively — a rare show of unity across the banking, insurance and credit sectors — arguing the change was imposed without consensus and unfairly targets financial firms with a windfall levy. Each association has filed petitions urging the government to reconsider.

They contend that the surtax increase cannot be justified under the progressive taxation principle — normally applied to direct taxes — claiming that it undermines tax neutrality and further burdens companies that have met their obligations.

It is also unreasonable to apply the hike to the financial sector across the board, without regard for intra-industry differences, they said. The card industry, for instance, saw net income plunge 18 percent on-year in the first half of the year, in contrast to record earnings in banking and growth in insurance.

For insurers, the risk is more than a simple tax burden, as greater pressure from liabilities could weaken capital adequacy ratios and strain operations.

The associations stressed that the unfair standards must be addressed before any hike is made. Most critically, under the current system, companies may face higher taxes even when profits fall due to rising costs, since the levy is imposed on total revenue rather than net income.

The sharp drop in student numbers from Korea’s plunging birthrate is also raising questions over the need for more education tax revenue. With enrollment falling, regional education offices that receive the surtax are left with unused funds piling up into the trillions of won each year.

Companies warn that the unjustified burden could be passed on to the public. Because the surtax is treated as a cost in banks’ lending rate calculations, a higher levy could ultimately translate into higher borrowing costs for customers.

While the tax hike is unlikely to be scrapped for now, the government said it is actively reviewing feedback from businesses. “A tax hike seems inevitable, but companies are making their voices heard, so the government will take them into account in future revisions,” an industry official said.

Reports indicate the government is considering easing standards, such as applying the rate to net income rather than total revenue, a change that would exempt many firms, including most of the card industry. It is also reportedly weighing an exemption for the dividend income financial companies receive through subsidiaries or securities holdings.

The new rate is scheduled to take effect in 2026, pending National Assembly approval of the tax code revision to be submitted next week.