A Study of Deemed Gift Tax on the Profit from Related Party Transactions
Asian Tax Journal Vol. 13 No. 2 (2012), pp. 229-252
Abstract
In spite of conversion of the Inheritance Tax and Gift Tax Act into the completecomprehensive taxation principle in 2003, transactions to support related parties especially within conglomerates have increased sharply to result in introduction of deemed gift tax on the profit from related party transactions. This study indicates defects and directions for improvement in relation to the new taxation system as follows. First, deemed gift tax on the profit from related party transactions seems to be criticized as tax on unrealized gain because it is levied based on operating profit of benefited company before shareholders receive dividends or get transfer gain of shares. Second, 3% rule of marginal holding rate should be reviewed whether it is appropriate level sufficient to prevent tax evasion behaviors. It is desirable to deduct lump sum amount from deemed gift profit rather than applying constant rate deduction. Third, holding rate of controlling shareholder and its relatives in supporting company should be considered in determining taxable income in addition to their holding rate in benefited company. Fourth, different characteristics in each industry should be reflected in determining normal transactions rate rather than applying single rate of 30%. Fifth, net income may be considered as an alternative because after－tax operating income doubles complexity in the process of calculating taxable income. Tax benefit such as carry forward deduction should be considered to compensate for operating losses. sixth, income tax on dividend after imposing deemed gift tax may cause double taxation issue. It is necessary to consider all aspects of related party transactions, positive as well as negative. A balanced policy management is required to accomplish intended goal of regulating abusive tax evasion behaviors, while preventing undesirable economic consequences such as investment decrease or decline of entrepreneurship.
Keywords
- related party
- transactions to support related parties
- deemed gift tax
- unrealized gain
- deemed gift profit
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