Abstract
Notwithstanding the characteristics of the unlisted preferred shares, supplementary formula based valuation methods in the Inheritance and Gift tax law(“IGTL”) has been uniformly applied and been subject to taxation accordingly. The valuation methodology is referred to the Corparte Income Tax Act and Individual Income Tax Act. This uniform application of the methodology does not correspond to the tax rulings issued by tax authorities and does not conform to the substance over form rule.
This study introduced a case that Company A relied on the tax ruling that held preferred shares should be valued at a reasonable price considering the characteristics of shares. Based on the ruling, Company A valued the preferred shares in a way different from the statutory methodology considering the fact that dividend rate was fixed and the preferred stock repurchased at face value. However, in a tax court, Company A was assessed more tax under the judicial decision that the preferred shares are in the form of shares in the Commercial Law and there is no valuation methodology other than the formula based valuation methodology for shares under the IGTL.
This study provides the following suggestions to resolve the issues of such preferred share valuation. First, if the dividend rate is fixed and the repayment amount is fixed, the method of valuation of the debt securities should be allowed to be used. In the case of the redemption preferred shares with the right of conversion, the method of valuation of the convertible bonds should be allowed to be used. Second, if the asset valuation committee under the IGTL decides on the value of preferred shares, the current limit on the range of valuation shall be waived, and the discount rate in the alternative valuation method on the committee shall be the discount rate of the debt securities which has the similar credit rating with a company to be valued.
This study is differentiated from the prior studies in analyzing the valuation methodology in a case where a company issues preferres shares.
This study introduced a case that Company A relied on the tax ruling that held preferred shares should be valued at a reasonable price considering the characteristics of shares. Based on the ruling, Company A valued the preferred shares in a way different from the statutory methodology considering the fact that dividend rate was fixed and the preferred stock repurchased at face value. However, in a tax court, Company A was assessed more tax under the judicial decision that the preferred shares are in the form of shares in the Commercial Law and there is no valuation methodology other than the formula based valuation methodology for shares under the IGTL.
This study provides the following suggestions to resolve the issues of such preferred share valuation. First, if the dividend rate is fixed and the repayment amount is fixed, the method of valuation of the debt securities should be allowed to be used. In the case of the redemption preferred shares with the right of conversion, the method of valuation of the convertible bonds should be allowed to be used. Second, if the asset valuation committee under the IGTL decides on the value of preferred shares, the current limit on the range of valuation shall be waived, and the discount rate in the alternative valuation method on the committee shall be the discount rate of the debt securities which has the similar credit rating with a company to be valued.
This study is differentiated from the prior studies in analyzing the valuation methodology in a case where a company issues preferres shares.
| Translated title of the contribution | Research on the Valuation Methodology of Preferred Shares for the Korean Tax Purposes |
|---|---|
| Original language | Korean |
| Pages (from-to) | 201-221 |
| Number of pages | 21 |
| Journal | 국제회계연구 |
| Issue number | 78 |
| DOIs | |
| State | Published - 2018 |