Following the government's announcement to double the education tax imposed on financial companies' revenue, backlash from the financial sector is growing. In particular, securities firms are expressing strong discontent, claiming they are more unfairly treated compared to banks and insurance companies.
The foreign exchange and derivative transactions mainly conducted by banks and insurance companies are taxed based on the net profit, which is calculated by subtracting losses from transaction profits and is included in the total revenue. However, this profit and loss offsetting does not apply to stocks that securities firms often deal with. Even if a securities firm incurs a final loss when offset, only the amount of profit from winning stocks is counted as revenue.
According to the tax authorities on the 18th, the Korea Financial Investment Association recently submitted a proposal for the improvement of the education tax taxation system, stating that there is an issue with tax equity among the '2025 tax reform plan' to the Ministry of Economy and Finance. This follows last month's announcement by the Ministry of Economy and Finance that it would impose an education tax of 1.0% on financial companies that earned over 1 trillion won in revenue. Here, revenue is a concept similar to sales.
As of the end of last year, there are 60 companies that meet this condition. This includes the four major financial groups (KB Kookmin, Shinhan, Hana, Woori Financial Group), as well as securities firms such as Meritz, Mirae Asset, Samsung, Kiwoom, and Korea Investment & Securities. The current tax rate they are subject to is 0.5%. With the education tax rate doubling, the education tax paid by the financial sector is expected to increase by 1.3 trillion won annually.
In the proposal, the Korea Financial Investment Association emphasized that tax equity is not maintained as profit and loss offsetting is only applied to securities. This means that the losses from securities are not reflected in the revenue that is the basis for imposing the education tax.
For example, if A Securities earns 10 billion won in profit from Samsung Electronics but incurs a loss of 30 billion won from LG Energy Solution, A Securities is considered to have a loss of 20 billion won (30 billion - 10 billion); however, the 10 billion won earned from Samsung Electronics is counted as revenue. In this regard, the Korea Financial Investment Association noted, 'There is a problem with tax equity among banking, insurance, and financial investment (securities) sectors regarding the education tax.'
The government counts the net profit from foreign exchange and derivative transactions, which banks mainly handle, as revenue. Unlike securities, foreign exchange and derivatives recognize losses, excluding them from the taxable amount. Insurance companies also recognize the amount of revenue after deducting reserves from premium income. However, there is no such deduction for securities trading.
The Korea Financial Investment Association also stated that the exclusion of securities trading from profit and loss offsetting restricts the qualitative growth of the capital market. Securities firms hedge the risk of price declines while trading equity-linked securities (ELS) using two methods. Securities firms either directly purchase bonds or stocks that are contrary to ELS assets (self-hedging) or enter into a swap contract (back-to-back hedge) with other financial firms to exchange earnings. With this revised tax law, the incentive for back-to-back hedging has increased.
Self-hedging generates profits from securities trading, so all of the profit earned is subject to the education tax. However, back-to-back hedging is considered a derivative through a swap contract, which offsets the advantage and loss, counting them as revenue. In terms of taxation, back-to-back hedging is more favorable than self-hedging. The Korea Financial Investment Association remarked, 'Domestic financial firms have sufficient hedging capabilities, yet they may outsource hedging to foreign financial firms due to tax issues,' adding that 'this results in unnecessary costs and hinders the development of domestic financial firms' self-hedging capabilities.'
The Korea Financial Investment Association has also pointed out that paying both the security transaction tax and the education tax amounts to double taxation. The Ministry of Economy and Finance began collecting the education tax from financial and insurance companies in 1981, and securities firms became subject to the education tax starting in 2009. Until now, securities firms have avoided the education tax due to the security transaction tax, but since banks and insurance companies have asserted that 'securities firms must also pay the education tax,' they have since been required to pay it. The association stated, 'Currently, securities firms pay the security transaction tax even when incurring losses on stock sales,' noting that 'imposing the education tax constitutes double taxation on stock transactions.'
The Korea Financial Investment Association has requested the Ministry of Economy and Finance to allow the taxation standard to be based on net profit after offsetting profit and loss from securities trades. They also requested the allowance of carryforward deductions in cases where net losses occur from securities, derivatives, and foreign currency transactions.
The tax revision bill announced by the Ministry of Economy and Finance is expected to be finalized in the National Assembly after passing through the Cabinet meeting at the end of this month. There is time for modifications, but the position of the ministry remains firm. The Ministry stated, 'The education tax is not a tax on earnings but a tax on sales,' adding that 'foreign exchange and derivatives have special characteristics that allow for profit and loss offsetting and are unrelated to the tax system.'