The Taxation of Bond Premiums
Date Issued
2013
Date
2013
Author(s)
Chen, Pei-Yu
Abstract
A controversy about the taxation of bond premiums arises when bonds are purchased at a premium. The competent tax collection authorities and taxpayers have different views on whether the bond premiums can be amortized as deductions of the interest income. The paper intends to explore the controversies using the allocation of costs and expenses principle.
Under the current tax laws and regulations, the net income is derived by deducting costs and expenses from the gross income, which is a manifestation of the Ability-to-Pay Principle. The paper first explores the definition of costs and expenses, and argues that the bond premium by its nature should be considered part of the cost to acquire the economic gains of bonds. If the bond premium is deductible from the taxable income and non-taxable income, taxpayers will enjoy the treatment of double tax exemptions, which will violate the fairness principle in taxation. As a result, it is crucial to clarify how to allocate costs and expenses between the taxable income and non-taxable income. In addition, the way taxpayers invest in bonds determines the type of payments they will receive. Held-to-maturity bonds only incur interest income, without gains derived from the securities transactions. Therefore, in the case of held-to-maturity bonds, the total cost of bond premium should be allocated to the interest income. Consequently, the view that the bond premium should be amortized is more reasonable.
With regard to bonds sold before maturity, the bonds will incur interest income and gains derived from the securities transactions. The paper first examines the J.Y. Interpretation NO.493, which promulgates the principle about how to allocate the costs and expenses between the taxable income and non-taxable income derived from stock investments. It moves on to compare the similarities and differences between bond investments and stock investments to see if the allocation principle of stock investments is applicable to bond premiums. The greatest difference between bond investments and stock investments is that bonds as fixed-income securities have different costs from those of stock investments. In other words, the cost of a bond is the sum of the present value of its future cash payments between the transaction date and the maturity date while the cost of a stock is its history cost. Given the difference between bond investments and stock investments, it is necessary to make adjustments to the allocation principle of stock investments before applying to it to bond investments. In conclusion, the interpretation that bond premiums should be amortized complies with the allocation principle promulgated by the J.Y. Interpretation NO.493.
The paper concludes that it is reasonable to amortize the bond premium in the taxation of bond investments.
Subjects
溢價攤銷
成本費用歸屬原則
財務會計與稅務會計差異
零息債券
分割債券
Type
thesis
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