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Transaction Tax on Financial Derivatives Controversy Surrounds Proposal
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Transaction Tax on Financial Derivatives Controversy Surrounds Proposal
  • By matthew
  • May 2, 2013, 12:19
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The Ministry of Strategy and Finance (MOSF) aims to impose taxes on the transactions of financial derivatives, signaling a bumpy road ahead.

However, the financial industry, the Financial Services Commission (FSC) and even the ruling Saenuri Party are against imposing taxes on futures and options in the domestic financial market. Therefore, keen attention is being drawn to whether the plan will actually be implemented.

The MOSF said in a report to the president on April 3 that the government should impose taxes on deals involving financial derivatives in accordance with the “tax-follows-profits” principle and from the perspective of equitability.

According to the proposal, a 0.001% levy will be placed on deals of futures and a 0.01% on deals of options. The government has not levied taxes on such deals in the hopes of growing the Korean financial market. However, there is now no need for such tax exemption because the Korean market for futures and options is already among the biggest in the world, claimed the MOSF.

However, the financial industry is baffled by this, believing last year’s measures to stabilize the derivatives market have shrunk international trade and that the proposed new taxes will inevitably shrivel the market. According to the Korea Exchange (KRX), last year, derivatives trading volume fell53.3% year-on-year to 1,836 million contracts, with the nation’s global ranking falling from second place to third.

The revised tax bill was submitted to the National Assembly last year, but fizzled out due to industry worries regarding foreign capital outflux and public sentiment in Busan, where the KRX headquarters are located, just ahead of the presidential election.

Shin Je-yoon, Chairman of the FSC, is also on the industry’s side. Shin said during a parliamentary confirmation hearing, “Imposing a tax on derivatives will shrink market activities and turn away capital flow to the over-the-counter or overseas markets. Experts’ opinion is that tax revenue will not be increased so much if trade volume is reduced.”

The MOSF’s proposal for taxes on derivatives is apparently aimed to increase tax revenue. The Ministry expects to earn 100 to 120 billion won from the new taxes. However, experts point out that losses will be bigger than gains. The new taxes will cause a small increase in tax revenue but have a large side-effect in regards to shrinking the market and discouraging foreign investors.

The chairman of the political affairs Committee at the National Assembly, who holds the key to the introduction of the new taxes, made it clear that he is against them. The ruling Saenuri Party’s lawmaker Kim Jung-hun said in a seminar on April 3, “The government is trying every option to expand tax revenue because it needs to secure a huge welfare budget. The derivatives transaction tax will not work as expected. No country except Taiwan has ever implemented such a tax.” Kim stopped the so-called “derivatives transaction tax bill” from passing the National Assembly in 2011. Kim Moo-sung, the then floor leader of the Grand National Party (the previous name of the current Saenuri Party), was also against the bill.