Tax Policy on Interest Rate Swaps Will Change
By Na Jeong-ju
Staff Reporter
The National Tax Tribunal ruled Tuesday that the tax authority should drop its decision to impose educational taxes on interest rate swaps by banks, if the transactions have produced losses.
The ruling will pave the way for new taxation guidelines on swap transactions, and may ignite debate on whether imposing educational taxes on swap income is appropriate.
The National Tax Service (NTS) levies 0.5 percent in educational taxes on earnings from interest rate swaps. The office has collected the taxes whenever banks made profits, but failed to take losses into account.
``Banks can make money, but can lose money as well through interest rate swaps,'' an official from SC First Bank official said. ``The ruling means the NTS should decide on tax rates after calculating profits and losses on all transactions for a set period. To date, banks have paid taxes whenever they produced profits.''
The tax office imposed 1.1 billion won in educational taxes on an unidentified foreign bank in South Korea based on its calculation of its profits from interest rate swaps in 2003-2005.
The bank filed a complaint with the tax tribunal, saying the NTS decided on the amount without considering the 213 billion won of losses it incurred during the period.
The tribunal said in a ruling it is wrong for the NTS to impose taxes every time banks make profits from swap transactions, and instead it should tax after completing settlement of all their earnings and losses. Such a policy can hamper the growth of the swap market, and discourage market participants, it said.