OECD Korean seminar on taxing financial arrangements

Shee Boon Law, Senior Policy Analyst in the Policy Advice Division and Lecturer in Accounting at Victoria University, was an instructor at a recent OECD tax training seminar for non-member countries. The seminar, on the taxation of financial instruments, was held at the OECD's multilateral tax centre in Korea, one of four such OECD centres that host regional seminars and workshops. He describes the course and the region's growing interest in the subject in the wake of the recent financial crisis in OECD Tax Training Seminar, Korea.

OECD Tax Training Seminar, Korea 11-16 October 1999

Korea-OECD Multilateral Tax Centre provides an excellent avenue for exchanges of information and approaches to dealing with different tax issues. Under the supervision of Director Kim Seok-Won, the tax centre recently hosted a tax training seminar on the taxation of innovative and derivative financial instruments.

The purpose of the course was to provide an introduction to the legal, accounting and tax issues involved in the taxation of financial instruments. The course provided background on the role of financial instruments in financial markets and how they work. Conventional debt based instruments and derivative financial instruments such as forwards, options and swaps were examined, and tax policy problems posed by the use of these instruments were analysed.

The OECD and three member countries (Turkey, US and New Zealand) provided instructors for this training course. The various tax policy options available to deal with innovative financial instruments and approaches adopted by OECD member countries were reviewed by the instructors. The basic messages from the collective experience of the OECD member countries were that conventional tax rules tend to create characterisation and timing problems when applied to innovative financial instruments. In addition, owing to the globalisation of financial service activities, imposition of transaction taxes on derivative financial instruments for revenue reasons may be futile.

Twenty-one participants from OECD non-member countries including Bangladesh, China, Chinese Taipei, Hong Kong, Indonesia, Philippines, Thailand and Vietnam engaged in active discussion of the problems posed by innovative financial instruments. As a result of the recent financial crisis, many are reviewing their tax rules for financial institutions and services. The fundamental policy problem that many countries face is in achieving the right balance between the revenue needs of a developing country and a sensible, effective taxation regime for financial institutions and services.

The other emerging policy issue in the wake of the recent financial crisis is the role that taxation should play in encouraging equity financing as oppose to debt financing. Where debt-like instruments are characterised as equity instruments and given preferential treatment for taxation purposes, there is an inherent bias in favour of debt financing. A proper re-characterisation of these debt-like instruments for taxation purposes should thus correct the bias against equity financing and restore neutrality. Some countries are now looking to develop special rules to deal with both innovative and derivative financial instruments.