Exploring Possibility and Limit of Using Mark－to－Model for Valuing Loan Guarantee for Tax Purpose
Asian Tax Journal Vol. 11 No. 2 (2010), pp. 325-347
Abstract
Korean tax laws provide that financial guarantee is an economic goods and it should be taxed to prevent the free transfer of wealth. Notwithstanding the rule, there is no applicable guideline when a market price for the financial contracts is not available. The purpose of the study is to investigate the possibility and limit of using Mark－to－Model for valuing loan guarantee for tax purpose. Mark－to－Model refers to the practice of pricing an asset at a price determined by financial model, in contrast to allowing the market to determine the price, where a market is not available. Since the loan guarantee provider has the same economic profile as the put option writer, loan guarantee can be valued using option pricing model. When it comes to the guarantees for listed companies, we can apply Ronn and Verma method, based on Merton model. However, the validity of the Mark－to－Model of the financial guarantees for unlisted companies or private enterprise critically depends on the accuracy of the input variables, such as the market values and volatilities of the underlying assets, as well as the accuracy of the financial model to estimate the price. Moreover, in the choice of input variables for the model, trade－offs between relevancy and reliability are required. Since definitely described formula is not suitable to reflect the complex economic reality, the use of industry expertise would be highly recommended in the stage of the implementation process.
Keywords
- loan guarantee
- option pricing model
- comprehensive gifts
- the complementary valuation