A Study on the Inconsistency between Corporate Accounting and Corporate Tax Law in the Revised Taxation upon Business Acquisition
Asian Tax Journal Vol. 12 No. 4 (2011), pp. 421-459
Abstract
Although the current book -tax conformity rules that allow calculating taxable income through tax adjustment based on net income resulted from corporate accounting has caused a number of problems including the distortion of corporate accounting, there are some unavoidable reasons for continuing this practice. However, there are differences between corporate accounting and tax accounting that cannot be covered by the present tax adjustment system or areas of inconsistency between the two accounting methods. In this study, I researched the consistency between corporate accounting and tax adjustment focusing on the revised taxation on merger along with issues related to the declaration adjustment of depreciation expenses. The revised corporate tax law has caused several issues including the inconsistency among relevant laws or the absence of relevant articles related to the newly added asset adjustment account and the tax adjustment of profit and loss resulted from a merger and acquisition. Also, the revised law demands companies subject to external audit to conduct tax adjustment in book -closing, causing an issue of fairness when compared to those companies that are not subject to external audit; therefore, when an eligible merger occurs, offsetting the portion of depreciation expenses, which belongs to asset adjustment account, during tax adjustment of asset adjustment account could be a crucial reason for allowing the declaration adjustment of depreciation expenses. This study can be summarized as follows;First, the content of the first clause of the fourth of Article 80 of the enforcement ordinance of corporate tax law, which requests to include asset adjustment account of which value is bigger than 0 into profit, contradicts the fourth clause of the fourth of Article 80 of the same enforcement ordinance that demands the inclusion of asset adjustment account of which value is bigger than 0 into profit if regulations of post management are breached. It is because asset adjustment account had to be deductible as necessary expenses originally, if it has to be included into earnings when regulations of post management are breached. This contradiction has occurred as the adjustment of the differences from corporate accounting through asset adjustment account has been ignored while too focusing on tax deferral by means of asset adjustment account. Secondly, any profit or loss incurred by an eligible merger and acquisition is required to be included into profit at once based on increased net asset theory since there is no applicable regulation in corporate tax law. However, this is unreasonable because this practice is more disadvantageous than the case of ineligible merger which requires 5 year split inclusion into profit. It is likely that the revised corporate tax law has fai led to notice that profit or loss caused by an eligible merger and acquisition can occur because the logic of corporate tax law itself has been emphasized too much without fully considering corporate accounting. Thirdly, the de facto enforced request for adjustment in book -closing of depreciation expenses of companies subject to external audit is undesirable in terms of fairness matter, comparing to companies that are not subject to external audit. This is considered to be one of the most typical cases that corporate tax accounting is incapacitated by corporate accounting. When asset adjustment account is not greater than 0 in case of an eligible merger, the same amount of depreciation expenses as the asset adjustment account is considered to be deductible (△ reserve) upon tax adjustment; this can be a potent reason for the introduction of the declaration adjustment of depreciation expenses.
Keywords
- taxation upon business acquisition
- inconsistency
- eligible merger
- asset adjustment account
- profit or loss caused by a merger and acquisition
- depreciation expenses