Lessons from Schedule M－3 of U.S. and Their Implications for Disclosure on Book－Tax Differences in Tax Return of Korea
Asian Tax Journal Vol. 14 No. 3 (2013), pp. 123-157
Abstract
The purpose of this paper is to propose the reformation of Schedule 15, Reconciling of Book and Tax Income(“Schedule 15”), implemented the standardization in the reporting of book- tax differences (“BTD”). In the related literature, book-tax differences were viewed as indicators of tax avoidance. In other words, the companies associated with tax avoidance have bigger BTD relative to the companies not associated with tax avoidance. Because of the case of Enron structuring transactions that reduced the amount of taxes paid without reporting any corresponding decrease in pretax book incomes, Internal Revenue Service(IRS) and Department of the Treasury (Treasury) developed new schedule M-3 with a view towards increasing transparency and standardization in the reporting of BTD for tax years ended December 31, 2004. With the introduction of New schedule M-3, it enables BTD to be analyzed and is comprised of about 100 items of sufficient detail of BTD. BTD is not important to be considered in Korea because there is an insignificant magnitude of differences between book and tax income under current Korea tax system. In contrast to the US tax system that accounting concepts under both tax and financial reporting are different, the Korea tax system has little difference between book and tax income. Additionally, even if the book-tax differences exist, these differences can be adjusted by doing the year-end adjusting journal entries under Korea tax system. Nevertheless, existing research provides that tax avoidance and BTD have a positive relation to the companies in Korea. Moreover, as the adoption of IFRS, it is inevitable to have the differences in between book income and tax income. Accordingly, it is necessary to develop Schedule 15 containing standardization in the reporting of book and tax differences and enabling BTD to be analyzed systematically. In this context, this paper proposes the improvement of Schedule 15, Reconciling of Book and Tax Income. Schedule 15 shows the items of BTD in Korea tax system and plays a similar role of Schedule M-3. The matter in the improvement of Schedule 15 is that the items of BTD shown the companies’ transactions should be standardized by listing more uniform detailed categories of reconciliation, Therefore, this paper attempts to propose new Schedule 15 containing 14 detailed items of BTD that have large difference between tax and accounting standard and are likely to be reflective of tax avoidance through the sample of the company in real. This paper has limited to propose new Schedule 15 as one of the tools of BTD’s analysis by standardizing BTD that could possibly appear regarding tax avoidance under current tax and financial reporting system. However, this paper implicates that the study of BTD regarding tax avoidance and its usefulness should be examined from the perspective of tax practitioners and government bodies including NTS to increase its utilization.
Keywords
- Schedule 15
- Book-Tax Differences
- Tax Avoidance
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