On August 9, 2012, the Ministry of Knowledge Economy issued a formal prospective legislation announcement concerning a draft bill to partially amend the Securities Transaction Tax Law. The content of the draft bill (the “Draft Amendment”) mainly concerns the introduction of a derivatives transaction tax. In the event that the Draft Amendment is passed into law by the Korean National Assembly, the contemplated derivatives tax will begin to apply to derivatives transactions in the year 2016 (i.e. to derivatives transactions conducted after December 31, 2015) and the basic tax rate for the derivatives transaction tax is currently contemplated to be 0.01% (1/10,000). The key features of the Draft Amendment can be summarized as follows:
- The Draft Amendment provides for the current Securities Transaction Tax Law to be renamed as the “Securities and Derivatives Transaction Tax Law” and for the securities transaction tax imposed thereunder to be referred to as the “securities and derivatives transaction tax.”
- The Draft Amendment provides (in Article 1 and Article 2, Paragraph 3 of the Draft Amendment) that the securities and derivatives tax will be applied to categories of derivatives to be specified in the provisions of the Enforcement Decree (as amended from time to time) for the Securities and Derivatives Transaction Tax Law. In this regard, it is currently understood that the Enforcement Decree will designate certain categories of exchange-traded derivatives, i.e. KOSPI200 futures and KOSPI200 options (which have underlying assets based on stock price indices) as taxable derivatives for the purposes of the securities and derivatives transaction tax.
- According to the Draft Amendment, a tax rate of 0.01% (1/10,000) is to be imposed upon applicable derivatives transactions. However, the Draft Amendment also provides that the tax rate may be reduced, and may even be set at 0%, in accordance with relevant provisions of the Enforcement Decree if deemed urgently necessary for the purpose of maintaining the soundness of the capital markets (Article 8 of the Draft Amendment). In this regard, it is currently understood that the Enforcement Decree will be drafted to provide for the securities and derivatives transaction tax on KOSPI200 options to be imposed at the basic rate of 0.01% (1/10,000) and on KOSPI200 futures at a reduced rate of 0.001% (1/100,000).
- In order to give the market time to make adequate preparation for the introduction of the derivatives transaction tax, the tax will not go into effect until the beginning of the year 2016 (Draft Amendment Article 1). For the purpose of applying the tax to derivatives in the form of futures contracts, the tax basis will be the contracted amount of the relevant futures contract.
For options, the tax basis will be the transaction amount (Draft Amendment Article 7, Paragraph 1, Subparagraph 2). For transactions conducted through a securities account between any financial investment company and a private individual who does not collect the applicable transaction tax, the financial investment company will be responsible for collecting and furnishing relevant transaction data to the tax authority (Draft Amendment Article 9-2 and Article 16).
- The prospective legislation announcement period ends on [September 18, 2012], after which it is expected that the content of the Draft Amendment will be finalized and the related draft Enforcement Decree will be prepared.