Research on Taxation of Foreign Bank Branches
Asian Tax Journal Vol. 11 No. 2 (2010), pp. 209-237
Abstract
The Adjustment of International Taxes Act (“AITA” hereafter) is enacted to prevent growing international tax avoidance and competition and, as a result, to increase cooperation among the tax authorities of various countries. Although recent tax law amendments improved interpretation and practical application of several clauses of AITA, there are still a lot of AITA rules too complicated for taxpayers to follow. Considering complex properties of foreign bank branches－property of foreign corporation and that of banking industry, this study suggests practical plans to revise tax laws to help effectively operate them through the tax system. First, thin capitalization rules should keep the rate of “limitations of the deduction of interest” stable, and define clearly the concept of “debt” and the condition for it, and allow them to calculate the balance of debt in Korean Won and to classify the “Capital B” as equity, not liabilities. Second, head office expense allocation rules should define clearly the key concept of “rational relationship” through the tax authority’s information letter and detailed notice, and allow the expense to be calculated with the exchange rate of either transaction date or payment date, not average annual exchange rate. Moreover, the tax authority should make a rule for allocation of domestic head office’s expenses. Third, deemed capitalization rule should be amended to prepare the case when the closing date of foreign bank’s head office and that of its domestic branch are different, and exempt the branch from additional tax when the branch’s tax return is incorrect due to the head office’s delayed fiscal year－end financial closing. Last, obligation of documents submission rule should simplify the legal forms in AITA for taxpayers’ understanding, and not allow the forms to be submitted redundantly to the tax authority, and adopt the advance ruling.
Keywords
- foreign bank branches
- thin capitalization
- head office expense allocation
- deemed capitalization
- obligation of documents submission