By Park Hyong-ki
Staff Reporter
The securities industry opposes to transaction taxes on derivatives trading, something the government is considering introducing.
Brokerages said such a move could put the brakes on the growth of the country's derivatives market, which has been gaining momentum.
Analysts at brokerages say they cannot figure out why the government is so eager to introduce taxes on derivatives transactions, claiming that derivatives are traded primarily for hedging purposes.
``If the tax system takes effect, there is no reason for investors ― whether local or foreign ― to invest in derivatives in Korea given that trading of options and futures is mainly for hedging and arbitrage,'' said Park Moon-seo, an analyst for Eugene Investment & Securities.
Park said that the only other country that applies taxes on derivatives trading is Taiwan.
But the Korea Exchange (KRX) said that even Taiwan is actively moving to further lower its derivatives transaction tax.
According to the exchange, foreign and institutional investors account for about 75 percent of derivatives trading, and if the government introduces a tax, foreign capital will exit the market.
``The market will see an increasing exodus of capital moving abroad should the taxation become effective,'' said Woo Yeong-ho, president of the futures market division for the KRX. ``Applying tax goes against the current global trend.''
Analysts say it can also hurt the trading of not only options or futures, but also equity-linked securities and equity-linked warrants, which are beginning to see growth.
The options market is the world's biggest, while the futures market ranks fifth.
There are practically no taxes applied on the derivatives market as analysts say it illogically goes against its fundamentals of hedging and arbitrage.
The stock market operator also noted that given the country already poses a variety of taxes, including income tax and transaction tax, there is no reason to apply double taxation.
The opposition comes as the Korea Institute of Public Finance recommended a policy to the Ministry of Strategy and Finance on derivatives trading taxation.
In its policy recommendation paper submitted to the ministry, the institute said the government should impose a tax on such trading considering the market size has grown over the years.
``Given that the futures market is among the top worldwide, there is a problem that the government does not impose a tax on derivatives trading,'' it said.
The ministry is apparently in favor of imposing a tax at a level that does not affect the overall stock market and its volatility.
Meanwhile, the financial authority is siding with the securities industry saying taxation could further impede the influx of foreign capital.