New tax bill perturbs financial firms

Wealthy people and financial firms, especially credit card companies and life insurers, will suffer a blow from a revised tax bill announced Wednesday that imposes higher taxes on financial incomes and reduces the number of tax-free financial products.

Immediate annuities, a major cash cow for life insurers, will no longer be tax-free under the revised bill starting next year amid criticism that they were being used by the rich as a means of tax avoidance. Those who keep the immediate annuity contracts for 10 years are currently exempt from taxes on profits.

Thanks to the tax exemption, six major life insurers here collected some 1.11 trillion won ($985.68 million) in premiums through immediate annuities in the first five months of this year.

The new tax bill also affects credit card firms as the rate of tax-deductible credit card spending will be lowered from 20 percent to 15 percent next year while that for cash spending goes up from 20 percent to 30 percent.

“The lowered rate of tax-deductible credit card spending will deal a major blow to the credit card industry following the reduction of credit card commissions,” said an official at the Credit Finance Association that represents credit card firms.

The derivatives market is also expected to be hit hard as the revised bill introduces a transaction tax on derivatives from 2016.

A 0.001 percent levy will be placed on the Korean Composite Stock Price Index 200 index futures trades, and a 0.01 percent levy will be charged on KOSPI200 index options transactions. Index futures and options are said to represent some 96 percent of derivative trades on the Korean stock exchange.

The average daily trading volume of derivatives already dropped 35.4 percent from a year ago to 54.48 trillion won this month due to recently introduced regulations.

“Once the transaction tax is imposed, the markets for options and futures is projected to shrink by 24 percent and 19 percent, respectively,” said an official at the derivatives division of the Korea Exchange.

The newly unveiled fiscal package also lowers the threshold for the taxation of financial income to 30 million won from 40 million won and increases the minimum corporate tax rate payable by the largest companies from 14 percent to 15 percent.

By Kim So-hyun (sophie@heraldcorp.com)