ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

An Analysis of the Problem of Revenue Recognition between the Corporate Tax Law and Generally Accepted Accounting Principle for Buyers’ Early Construction

  • Heo, Woo－Kyung Hongik University
  • Jun Yong Shim Myongji University
  • Siyoung Son Now Accounting Corporation

Asian Tax Journal Vol. 23 No. 4 (2022), pp. 37-60

Abstract

This study examines the problems caused by different processing of Accounting Standards for Non－Public Entities and corporate tax laws when there is an early start of the pre－sale corporation. In the case of a general long－term construction, both Accounting Standards for Non－Public Entities and corporate tax laws do not require separate tax adjustments, but problems arise due to different processing of corporate accounting standards and tax laws if the buyer of the part of the land starts his own construction before the pre－sale corporation completes the construction. The pre－sale corporation also applies Accounting Standards for Non－Public Entities to account for buyer’s early construction, but the tax authorities apply Article 68 (1) 3 of the Enforcement Decree of the Corporate Tax Act for buyer’s early construction. The following problems arise when the Enforcement Decree of the Corporate Tax Act is applied to the early construction part of the buyer. First, the tax adjustment burden due to the difference between corporate accounting and corporate tax law is excessive, resulting in an increase in tax compliance costs. Second, corporate tax payments are likely to increase compared to total construction gains and losses. If the delivery standard is applied to early construction, a tax amount to be paid is generated at the beginning of the construction and a tax amount to be refunded at the end of the construction is generated. If this is not refunded, corporate tax will increase compared to the total construction profit and loss. Third, if the early construction generates initial construction profits and therefore the corporate tax has to be paid, the pressure of a large cash outflow on the pre－sale corporation increases. Lastly, the use of the progress standard for long－term construction under the Corporate Tax Act presupposes that the progress rate can be reasonably predicted, but since the progress rate changes due to exogenous factors such as the early construction of the buyer. The Corporate Tax Act does not specify the criteria for recognizing profits, but only requires the recognition by ‘confirmation of rights and obligations’. However, legal disputes are frequent because the timing of “confirmation” may vary for each individual case. Accepting corporate accounting standards may be more conforming to the real taxation principle, except in cases where legal problems such as tax equity and fair taxation may arise. In the case of the United States and Japan, in principle, corporate accounting is accepted in the period of attribution of profits. It may be a criterion that is more consistent with the real taxation principle to specify the progress criteria in the corporate accounting standards and accept the progress criteria for early construction to the pre－sale corporations that comply with them.

Keywords

  • Pre－sale construction
  • Profit recognition
  • Early construction
  • Standard of progress

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