A Study on the Capitalization of Interest Cost in the Local Tax Law
Asian Tax Journal Vol. 12 No. 3 (2011), pp. 163-189
Abstract
The local tax law doesn't have any detailed provisions for interest cost capitalization that is included in the acquisition tax base, but apply the detailed provisions on the GAAP. So, the interest cost capitalization on the local tax law have not only induced many complicated tax matters, but also may bring new tax problems because of the duality of the GAAP in 2011. This research reviews many existing tax matters and new tax problems that are related to the interest cost capitalization in the local tax law, and suggests the improvement plan that the interest cost capitalization is not included in the acquisition tax base. This improvement plan is based on the following reasons. First, from the view of the calculation method of interest cost capitalization, as it is assumed that the debt is previously used than internal fund in the acquisition fund except for the specific construction borrowing interest, the acquisition cost may be overvalued rather than it is. Second, due to no sufficient source of assets, taxpayers who are dependent on a loan are asked to pay more of an acquisition tax, which negatively affects the mind of the substantial tax equality principle. At last, the GAAP and the corporate tax adopt interest cost capitalization for matching cost with revenue and proper income calculation, but acquisition tax in the local tax law catches tax payment capacity in the process of asset acquisition. Therefore, in the point of the purpose and intent of interest cost capitalization for proper income calculation, the acquisition tax cannot harmonize with interest cost capitalization.
Keywords
- capitalization of interest cost
- interest capitalization
- borrowed concept
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