Newsletter
BOND WITHHOLDING TAX DIFFERENTIAL IS NOT A PROFIT AND LOSS ITEM
According to Paragraphs 1 and 2 of Article 24-1 of the Income Tax Act, where a profit-seeking en-terprise holds a government bond, corporate bond, or financial bond, interest income should be com-puted according to the bond holding period and the face value and interest rate of the bond, and the tax amount so computed on the interest income may be deducted from the income tax amount payable according to the enterprise's final income tax return. In addition, according to Article 31-2 of the Enforcement Rules of the Income Tax Act, the tax amount should be computed according to the face value, face interest rate, and holding period of the bond and the prescribed withholding rate.
On this basis, for all bond transactions, regardless of whether they are outright sale transactions or repurchase/reverse repurchase (RP/RS) transactions, the purchaser should calculate the seller's interest income according to the period of time for which the seller held the bond, its face value, and its face interest rate, and should withhold tax on the seller's behalf at the prescribed withholding rate of 10%. When the seller files its final business income tax return, it may then offset the withheld tax amount against its income tax liability.
However, in practice, when a bond trading firm conducts an RP/RS bond trade with an enterprise, it withholds tax from the enterprise's bond interest income according to the value of the transaction and the mutually agreed interest rate and bond holding period. This has the effect that the actual amount of tax withheld differs from the tax amount calculated on the basis of the bond's face value and face in-terest rate, the holding period, and a withholding rate of 10%, which is the amount that the enterprise may deduct from its tax liability when filing for business income tax.
In an interpretation dated 3 June 2008, the Ministry of Finance stated that this differential between the statutory withholding tax amount and the actual sum withheld is not an item that should be included in the profit and loss calculation when computing an enterprise's taxable income according to Article 24 of the Income Tax Act.