Abstract

At the time when financial products are becoming ever more sophisticated and complicated, the recent emergence of copious new financial products has engendered seemingly unending disputes between the taxing authorities and taxpayers. In light of such magnifying disputes, this paper seeks to highlight a case of tax dispute involving Equity Linked Warrant (ELW) so as to explore issues raised in the dispute as well as potential solution for those issues. A taxation dispute sized around hundred billon won between the taxing authorities and foreign securities companies has recently been made an issue. In short, the foreign securities companies were imposed corporate tax upon being audited because there were discrepancies in how the companies, as liquidity providers of ELW, reported profit and loss of their financial products through their management of accounting and tax affairs. This case highlights the inability of the existing tax law to deal with rapid changes in the financial market. This case involving a large sum of levied taxes has larger implications in that growing number of financial companies are now finding themselves exposed to unexpected tax risk, and it seems necessary that institutional countermeasures aimed to prevent further tax risks be implemented. The paper recommends that, in order to reduce structural issues caused by discrepancies between current accounting practices and management of tax affairs in documenting ELW trades, the government recognize profit and loss of companies’ financial assets. As highlighted in this case, surtax levied as a result of the government not recognizing accrual basis of accounting in situations where companies saw no profit during an accounting period should be addressed quickly. This paper, by recognizing in depth causes of disputes between the taxing authorities and taxpayers, exploring the ways through which tax issues related to new financial products can affect the overall financial market, and shedding light on problems and potential improvement of the current tax law, should serve as a meaningful contribution to suggest how disputes over ELW can be addressed.

Keywords

• New financial product
• ELW
• liquidity provider
• tax risk

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  Su Sung Kim

  16(4) 35-61

  Abstract Full Text for PDF