ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Tax Reform Proposal for Tax AvoidanceSchemes through Business Income,Derivatives and M&A

  • Kyu Eon Jung Korea University
  • Young-Ki Jeong College of Business Administration, Hongik University
  • Tae Hwa Yoon School of Business and Accounting, Kyungwon University

Asian Tax Journal Vol. 8 No. 3 (2007), pp. 143-164

Abstract

In this article we reviewed the current tax avoidance schemes through business income, derivatives and M&A transactions. And we tried to find a way to improve current problems. Based on the findings in the tax avoidance transactions, we are proposing the following improvements. First, the period of the income deduction for credit card usage must be extended. Second, buyer produced tax invoice filing period must be extended from 15 days to three months and scale up the maxim amount for the filing from 5,000 thousand Won to 50 million Won. Third, cash transaction confirmation filing period must be extended at least for three months. The tax treatment of derivative instruments is quite complicated because no single rule applies. But all taxpayers, regardless of their method of accounting, must recognize as income the ratable daily portion of periodic swap payment for the taxable year to which that portion applies. However, the exact amount that dealer must pay to the swap counterpart can not be determined with certainty, taxpayer must determine the amount that would be payable as of tax year even though its payment obligation is not until swap payment day. Also taxpayers is required to recognize the gain (but not the loss) upon entering into a constructive sale of any appreciated financial position in stock, swap transactions as if the position were sold, assigned or otherwise terminated at its fair market value on the date of the constructive sale. To prevent proliferation of tax voidance schemes in M&A transactions, we propose following tax reforms. First, lower issuing stock ratio to 90% which is same as the criteria for pooling of interest method. Second, should not break the governance structure during certain period after business combination. Assets and liabilities transferred from M&A transaction must be also maintained for certain period from business combination registration day. Third, unfair transaction rule should be applied for significant low price net asset sale transactions.

Keywords

  • Tax avoidance schemes
  • Business Income
  • Taxation for Derivatives
  • Swaps
  • Business Combination Taxation

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