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Gov’t rakes in stock transaction taxes

As Kospi tanks, many say a capital gains levy would be a better idea
Dec 27,2018
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Criticism of Korea’s stock-trading transaction tax is growing as the government is expected to earn a record amount from the tax, despite woeful performances by the local stock markets this year.

A transaction tax of 0.15 percent is levied on any sale of a security on the Kospi - whether an investor makes a profit or a loss. For the Kosdaq, Konex and K-OTC the rate is 0.3 percent.

The tax has served as a steady source of revenue for the government, ballooning with the growth of stock market trading.

After the main Kospi index broke through the 2,600 level and reached record heights in January, it plummeted below the 2,000 level in October as trade tensions between the United States and China heightened. The Kospi fell 15.40 percent between Jan. 2 and Dec. 21, while the secondary Kosdaq index dropped 14.94 percent over the same period. The falls wiped out a total 304 trillion won ($ 270.1 billion) in market capitalization.

Regardless of the fall, the amount of stock trading for this year may set a record - and so will the amount of transaction tax raked in by the government.

According to data from the Korea Financial Investment Association (Kofia), Korea Exchange and the Korea Securities Depository on Dec. 25, the total amount of tax levied this year through Dec. 21 was an estimated 5.94 trillion won. That is an estimate based on the total value of stocks traded on the Kospi, Kosdaq, Konex and K-OTC.

Last year, the government raked in 4.63 trillion won in transaction tax. This will be the first year in which the taxes will total more than 5 trillion won since they were started in 1978.

When adding special taxes levied on Kospi trades to pay for infrastructure in rural areas, the total transaction tax levied on investors through Dec. 21 jumps to 8.31 trillion won, higher than last year’s 6.57 trillion won.

The transaction tax has even raised concerns among financial regulators.

Last month, Financial Services Commission Chairman Choi Jong-ku raised the idea of abolishing the tax. Discussions, however, have halted as the Ministry of Economy and Finance has expressed opposition.

The tax places a hefty burden on individual investors. According to Kofia, the share of individual investors trading last year was 47 percent on the Kospi and a whopping 87.2 percent on the Kosdaq.

Some institutional trading, such as arbitrage trading by Korea Post, are exempt from the stock-trading tax.

Individual investors have even filed petitions with the presidential office asking for the tax to be abolished.

“A stock transaction tax doesn’t exist in most developed countries such as the United States,” said Hong Ki-yong, a business professor at Incheon National University. “Countries that do have the tax such as China, Hong Kong, Taiwan and Singapore have a tax rate of 0.1 to 0.2 percent, lower than Korea’s rates.”

“A transaction tax is closer to a fee and does not comply with the taxation principle of ‘taxation of income,’” said Hong. “A move toward lowering the tax rate or abolishing it gradually is appropriate.”

“The problem with the stock-trading tax is that the burden is especially heavy for individual investors who have high transaction rates,” said Moon Seong-hoon, a business professor at Hallym University.

“It doesn’t matter when the stock market is bullish, but when there are a lot of transactions and increasing losses such as this year, investor complaints can only grow,” Moon continued. “This is the reason why countries such as the United States, Japan and those in Europe tax capital gains rather than transactions.

“Taking into account the example of Japan, which lowered its stock-trading tax over seven years and raised the capital gains tax, there is a need to gradually change the tax system,” added Moon.

“If an investor is losing money, there should be a supplementary system to postpone capital gains taxes over three to five years,” advised Moon.


BY CHO HYUN-SOOK [chae.yunhwan@joongang.co.kr]