How to Rationally Revise the Transaction Tax Exemption for Market Makers
Asian Tax Journal Vol. 24 No. 6 (2023), pp. 9-36
Abstract
Market makers are the financial institutions to execute legal obligations of repetitive securities and derivatives transactions in order to provide enough liquidity to the capital market. Thus, in case the security transaction tax is imposed on market makers’ transactions (“market making”) they have the difficulties of higher expenses, and as consequently the government gives them the tax benefit of the exemption of security transaction taxes, while the critical opinions on the ineffectiveness of market making and the excessiveness of the tax benefits are continuously brought up. It is necessary to proactive discussions the desirable tax laws revisions on the tax benefits to respond the possible change of tax environments because possible expansion of market making gives rise to business troubles to market makers. This study suggests rational tax laws revisions on market making to cope with potential deterioration of the tax benefits. Based on analyses of this study, how to rationally provide tax benefits to market makers are suggested as below. First, the target of market making should be expanded to high－liquidity securities and separate contracts should be signed at different level of liquidity in order to strengthen market makers’ incentives because actual market making practice is subject to the problems of hedging restraint and short incentives caused by concentration of low－liquidity securities and low profitabilities. Furthermore, additional tax incentives of the deduction of security transaction taxes should be adopted in corporate income tax. Next, the current tax benefits to market makers prescribed in the Special Taxation Restriction Act should be relocated in the Security Transaction Tax Act removing the tax risk from the adoption of sunset clause. Finally, the governance of the tax benefit should be reorganized in order to reflect faithfully the features of capital market and prescribe clearly the liabilities of market making because the present governance has the problem of inconsistent responsibilities on market making, in the way that the taxing authorities, the Korea Exchange and the Korea Securities Depository are in charge of management, supervision and payment of the tax benefit, and the taxing authorities are hardly equipped with enough capacity to carry out those responsibilities en bloc.
Keywords
- Market makers
- Market making
- Security transaction tax
- Capital market
- Tax benefit
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