I wrote about the good tax benefits of Singapore.
Let’s compare this with tax systems in Korea and see it implications for financial freedom.
1) Inheritance tax, gift tax
Korea has the highest inheritance and gift taxes in the world (50%).
First, in Korea, tax is levied on the person receiving the money. In Singapore, however, tax is levied only once the value of money is created via economic activity. It is no longer taxed even if money is passed onto others. You can see the illustration below.
(Blue circles indicate person and company; black box indicated where tax is levied; arrow indicates flow of money)
On the other hand, in Korea, whenever money goes to another economic entity, in principle, it is taxed. In other words, if the recipient of the money changes, a corresponding tax is levied.
(Blue circles indicate person and company; black box indicated where tax is levied; arrow indicates flow of money)
Let’s look at an example. Korean investors pay dividend tax when receiving dividends, but this dividend has already been subject to corporate tax. Therefore, it can be regarded as a double taxation.
But in Korea, a corporation pays a corporate tax because a company makes money, and investor pays dividend because an investor makes money (there is a tax system that reconciles this double taxation a bit). However, there is no dividend tax in Singapore at all.
The same goes for inheritance tax. In Singapore, the money earned by individuals through economic activities has already been taxed, so even if it is inherited, it is no longer taxed. On the other hand, in Korea, the person receiving the inheritance has to pay inheritance tax again, which is also another form of double taxation.
The inheritance tax problem is
1) Due to excessive taxation, it becomes difficult to accumulate wealth via wealth accumulated over generations
2) In achieving financial freedom, the effectiveness of receiving help from others, especially family members, is sharply reduced by taxes. This is illustrated in the compounding effect below.
2) Compound interest
Einstein said, “Compound interest is man’s greatest invention.” The word compound interest is a combination of the Chinese character for overlapping (復) and the Chinese character for interest (利).
The key to achieving financial freedom is to make most use out of this compound interest. As mentioned earlier, there is no capital gains tax and no dividend tax in Singapore.
On the other hand, Korea currently imposes a tax rate of up to 49.5% for dividend tax up to 20 million won, which is taxed separately at 15.4%, and any dividend income above this boundary is combined with income tax. The capital gains tax for stock is expected to be introduced in 2023, and for real estate is already high (can go up to 80%).
So what does this all mean?
Let’s assume you are earning about 4% per annum and investing for 10 years.
Let’s also assume that I received a gift from my family about 300 million won, and Korea pays a capital gain tax of about 20% from 2022.
In Singapore, there is no gift tax and no capital gains tax, so the simple calculation gives 300,000,000 * (1+0.04) ^10 = 444,073,285. about 450 million won in 10 years.
Under the same assumption, assuming that Korea pays 40 million won in tax, equivalent to gift tax, and pays about 20% capital gains tax (actual tax rate may vary depending of specifics of persons) 10 years later,
260,000,000 * [(1+0.04*(1 – 0.2)] ^10 = 356,262,672, about 350 million won.
In the example above, the tax burden is not large since it is several hundred million units, but if the amount rises and dividend tax is taken into account, the compounding effect of wealth accumulation sharply decreases even more.
Because the compounding effect on an investment is greatly reduced by taxes, it becomes more and more difficult to achieve financial freedom.
