A Study on the Problems and Suggestions of the Current Taxation on FinTech Transactions －Focusing on P2P loans－
Asian Tax Journal Vol. 21 No. 3 (2020), pp. 127-159
Abstract
Since the 2008 global financial crisis, Fintech has received much attention as a new alternative to utilizing the financial system in existing models. As expected from the technology developed in the fourth industrial revolution, Fintech has converged the existing finance with IT technologies and their service can be largely divided into payments, remittances, asset management, and loans. The development of the P2P transactions enabled the lending of fintech services without going through financial institutions. The volume of P2P－accumulated loans reached about 6.2 trillion won at the end of June 2019, more than a 10－fold increase from the end of 2016. This is a stable investment by investors with extra funds, and transactions are brisk because borrowers have relatively low interest rates. Individuals who are not registered as lenders for the P2P loan investment returns are taxed on interest of non－business loan in view of transactions between individuals. Individual business operators or corporations registered as loan businesses are classified as business income and can be deducted as a deduction by deducting the related expenses into the required expenses. This raises the issue of taxing the loan differently by categorizing it as business income or interest of non－business loan (interest income) depending on whether the loan is registered. In addition, the legal statements for P2P loan transactions can be classified into investment contract securities, equity securities, and equity－type collective investments, with all P2P loan transaction returns taxed as interest of non－business loan. The government revised the plan to temporarily cut the withholding tax rate to 14 percent for two years from 2019 on interest income earned by individual investors from eligible P2P investments, a vague part of classifying all gains from P2P investments as interest of non－business loan. In this study, we find problems and make suggestions of the current taxation on fintech transactions. First, it is mandatory to register a loan in order to make a P2P loan transaction without having to be classified according to whether or not a loan is registered. In the event of a one－time transaction, obtaining a business registration may be a hassle, so the process of registering a business license should be simplified and legislated so that it can be done over an electronic system network. Next, it is reasonable for P2P loan transactions to be classified as investment contract securities, equity securities, and equity investment in accordance with their business model and taxed on dividend income rather than interest of non－business loan. It is reasonable to classify P2P loan transactions as the nature of investment rather than loan of money as they pose a risk of not being repaid in the distribution stage of P2P brokerage houses. Finally, the services provided by P2P Platforms are easier than the procedures provided by existing financial institutions, which generate returns from investments online or mobile, and thus require the same withholding tax rate of 14 per cent as financial institutions. The government lowered the tax rate to “on interest income from eligible P2P investments.”. Failure to comply with this qualifying requirement makes it reasonable to regulate P2P platform companies by capital market law or other laws.
Keywords
- Fintech taxation
- P2P loan
- interest of non－business loan
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