By Kathy Chu, The China Post
TAIPEI, Taiwan — In hopes of giving the local securities market a much needed stimulus, the Securities Transaction Tax (STT) on warrant trading of securities firms for hedging purposes is expected to be lowered to 0.1 percent from its current 0.3 percent, according to the Financial Supervisory Commission (FSC) yesterday.
Yesterday, the Executive Yuan approved the amendment draft of the tax cut, and now awaits deliberation by the Legislative Yuan. Once approved by the parliament, the tax cut will be valid for the next five years.
Warrants are a derivative security that gives the holder the right to purchase securities — usually equity — from the issuer at a specific price within a certain time frame.
The Securities and Futures Bureau of the FSC plans to lift the ban on day trading for stocks held for hedging purpose, as well as warrants owned by the investors, six months after the tax cut takes effect. Day trading is an investment activity that seeks profit by making rapid trades within a day. A day trader often closes out all trades before the market closes and does not hold any open position overnight.
The warrant trade volume is expected to triple after the current ban is lifted, said Schive Chi, minister without portfolio and former chairman of Taiwan Stock Exchange Corp. Currently, warrant trading accounts for 1.3 percent of total TAIEX volume.
As hedging costs are decreased by the tax cut, securities houses will have more incentive for warrant day trading, which would boost the total warrant trade volume and, in turn, create more tax revenue, according to Schive Chi.
According to Director-general of the Taxation Agency Hsu Tzu-mei, the warrant transaction tax in 2011 totaled NT$1.33 billion. Although the tax cut will decrease by NT$0.89 billion in terms of current trade volume, total tax revenue from warrant transactions may increase by NT$0.5 billion as the trading volume is expected to triple after the tax cut is introduced.
In Hong Kong, warrant trading now accounts for 25 percent of the stock market, while between 80 to 85 percent of warrant transactions are day trading. Securities trading for non-investment purposes are tax-free in neighboring countries, he added.
The proposed tax cut is a pilot run and transaction taxes on other securities might follow suit if this cut turns out to be a success in terms of increasing STT tax revenue and boosting the local securities market, Schive Chi added. The Ministry of Finance has proposed to lower taxes for futures trading yesterday and the cut will take effect after the proposal is approved by the Executive Yuan, according to Minister of Finance Chang Sheng-ford yesterday.