Analysis of Tax Problems of Financial Derivatives [Abstract] This paper discusses the tax problems such as the determination of income nature, tax base and tax collection time brought by the use of financial derivatives, analyzes the inadaptability of existing treatment methods, and puts forward the idea of constructing the tax system of financial derivatives in China. (Zhongjing comments on Beijing) Financial innovation is the most important development trend in contemporary international financial circles, and it is the main driving force for the upgrading of financial structure and financial development. The core content of financial innovation is the innovation of financial instruments, and the continuous emergence of financial derivatives has changed the face of the whole financial field. A derivative instrument is a financial instrument (or contract), and its value depends on the value of another asset or the reference interest rate or index. The financial derivatives mainly used in practice include forward, futures, options and swaps. These derivatives play a role in managing risks, finding prices and improving transaction efficiency in the financial market, bringing good social benefits. Generally speaking, financial derivatives are fictitious, leveraged and risky by predicting the future trends of interest rates, exchange rates, stock prices and commodity prices, signing contracts by paying a small amount of margin or equity, or exchanging different financial commodities with each other. First, the tax problems brought by the innovation of financial instruments. There are essential differences between derivative financial instrument transactions and traditional financial instrument transactions, which pose great challenges to the traditional tax system and form many inconsistent and asymmetric treatment methods in theory and practice. (I) Determination of income nature Determining the income nature of financial derivatives is the core issue to be solved under the income tax system. At present, there is no uniform method adopted by all countries, and there is no universal standard covering all kinds of instruments. Traditional tax law treats two kinds of financial instruments (debt and equity) differently: debt instruments pay interest, which can be taxed and written down as income on accrual basis, withholding tax is levied on cash basis, and principal is not taxed; Equity instruments pay dividends, and dividends are subject to withholding tax in cash, so they can enjoy ownership credit. However, the complexity and variability of derivatives make it difficult to confirm whether income is debt or equity, and how to tax income is also controversial. In terms of specific tax items, people are controversial about whether the gains/losses from derivative transactions are "capital gains/losses", "ordinary gains/losses" or other special gains. In practice, the legislation of various countries mainly classifies transaction income as "ordinary income" or "capital gains", and levies income tax on "ordinary income" and capital gains tax on "capital gains". If financial derivative transactions constitute the general process of business, they will be taxed as "operating profit" or "other income"; Some countries adopt new income categories to levy taxes. For example, the income from financial derivatives is listed as "income items" in Britain, and the transaction income from resident taxpayer swap contracts is regarded as "transaction profit" in the Netherlands. Different countries have different recognition of the nature of income and classification of tax items, so the tax methods and tax rates applicable to similar transactions are also different. According to whether the trading motivation of financial derivatives holders is hedging or speculation, there are two ways of differential taxation and non-differential taxation in practice. The United States and Britain have different tax systems: the gains and losses arising from hedging transactions are defined as general gains and losses, and the gains and losses arising from speculative transactions are defined as capital gains and losses, which are subject to different tax rules; Similarly, Britain levies income tax on the income from hedging transactions and capital gains tax on the income from speculative transactions. Different trading purposes have different economic impacts. This kind of differential treatment in tax law is reasonable, in line with the principle of tax fairness and improving market efficiency. However, due to subjective and objective factors, the actual distinction is often based on complex rules, and there are problems such as vague conceptual boundaries and low tax efficiency. Japan implements a non-discriminatory tax system, does not distinguish between trading motives, does not tax unrealized gains and losses, and recognizes trading gains and losses at the time of transaction settlement. This method is simple and easy to implement, and saves tax cost. These two methods have their own advantages and disadvantages. Whether to continue the status quo, unify with a certain method or develop a superior new method in the future needs exploration and practice. (II) Determination of Tax Base There are different ways to determine the income tax base of financial derivatives internationally. The principle of separate taxation regards derivative instruments as portfolio transactions, and taxes derivative transactions and basic transactions differently, which embodies the principle of fair taxation according to economic substance. But different derivatives can be separated to different degrees, so it is difficult to form a unified rule. The principle of non-separation taxation treats derivatives as a whole transaction, which is conducive to promoting the innovation and application of derivatives, but the taxation method should be different from traditional financial instruments. In practice, the above two principles are adopted by different countries, such as Britain adopting the principle of separate taxation and France adopting the principle of non-separate taxation. Financial derivatives usually have multiple value indicators in transactions, such as options have intrinsic value and market value, and market value often deviates from intrinsic value. Choosing intrinsic value as the tax base of transaction tax, the tax burden changes with the change of intrinsic value, which accords with the principle of moderate tax burden, but it is difficult to restrain the speculation that the market value deviates from intrinsic value; Choosing market value as the tax base of transaction tax has a strong regulatory function, but when market value deviates from intrinsic value, there is the possibility of unbalanced tax burden. In addition, financial derivatives have huge transaction amount, frequent and large value changes, so traditional accounting principles (such as historical cost principle and matching principle) cannot be applied and it is difficult to list them in the traditional reporting system (such as not listed in the balance sheet). Therefore, when taxing derivatives, it is a big problem to determine the value and income. (III) Determination of tax payment time The timing of different derivative transactions varies greatly, and the timing of the same derivative transaction is also optional. For example, financial futures can be hedged and delivered at maturity: financial option contracts can be executed or not, so it is difficult to unify the taxation timing of trading links. From the beginning of the contract to the final settlement and delivery, there is no actual capital flow, and the change of spot market price will bring profits and losses to the contract holder. In the corresponding accounting period, there are different ways to confirm the profit and loss before the contract is closed or delivered. Profit and loss realization principle is applicable to Britain and Japan, and unrealized gains and losses during the contract period are not taxed. The profit and loss at the end of the contract shall be recognized only after it is realized through market transactions. This method is simple and easy, but it will stimulate taxpayers to delay the realization of income and achieve the purpose of tax avoidance. The principle of market pricing requires taxpayers to calculate the unrealized gains and losses of each tax year and tax them at the end of each tax year. The United States adopts this method. However, there are some problems in this method: first, the value changes during the contract duration should be taxed as tax basis, and there is a contradiction that unrealized gains are ultimately unrealized after taxation; Secondly, adjusting taxes according to market value is contrary to the traditional income tax system, and some special regulations need to be formulated; Finally, it is difficult for some financial instruments with poor liquidity to obtain reliable market prices. In addition to the above two principles, some researchers have suggested that the accounting period of derivative tax can be confirmed by confirming the matching principle of profit and loss of derivative transactions and the revised realization principle for measuring the expected income of derivative instruments when hedging transactions gain income. Second, some thoughts on constructing the tax system of financial derivatives in China. At present, the main taxes applicable to the financial and insurance industry in China's tax system are business tax, income tax, stamp duty, urban maintenance and construction tax and education surcharge. Value-added tax is levied on commodity futures, and capital gains tax is not levied for the time being. The financial institutions involved mainly include banks, stock exchanges, securities companies, securities investment funds, financial asset management companies and insurance companies. The businesses involved are basically traditional banking, securities and insurance businesses. The newly emerging innovative financial business mainly follows the existing related taxes, tax items and tax rates, and makes detailed provisions in the form of "Reply of People's Republic of China (PRC) and State Taxation Administration of The People's Republic of China on Specific Issues". For example, in the form of approval from People's Republic of China (PRC) and State Taxation Administration of The People's Republic of China, it is stipulated that the swap business in foreign exchange lending of financial enterprises can be subject to business tax in accordance with the "lending business"; Taking Ling 'ao Nuclear Power Company as an example, it is agreed that the company will conduct hedging transactions to reduce foreign exchange risks, confirm the trading income of ultra-forward foreign exchange contracts, and calculate and pay enterprise income tax according to the gains and losses realized by some foreign exchange contracts that have been delivered. With the development and application of financial derivatives in China, the relevant tax system construction should focus on the function of promoting market development, and according to the nature and characteristics of derivatives, stamp duty, business tax, value-added tax, income tax, capital gains tax and other taxes should be appropriately levied. According to the current tax law, all units and individuals who issue and receive stamp duty vouchers within the territory of People's Republic of China (PRC) are taxpayers of stamp duty and should pay stamp duty according to the regulations. Therefore, following the usual practice, issuing derivative contracts can be used as the tax object of stamp duty. According to the tax law, the parties concerned shall pay the stamp duty on securities (stocks) transactions when trading, inheriting and donating the documents of A shares and B shares signed by the office. Derivative contract transactions can also be subject to transaction stamp duty, which can curb speculative transactions by increasing transaction costs, but the tax rate must be set appropriately, which will fundamentally hurt transactions, and at the same time, the transaction tax on basic assets should be carefully levied to prevent the impact on derivative transactions. The trading of derivatives by financial institutions belongs to the transfer of financial commodities, and business tax should be levied according to foreign exchange, securities and non-commodity futures trading business, and similar business tax should be levied on brokerage business and settlement business related to derivative transactions. The difficulty of business tax collection lies in determining the turnover of different tools and businesses. We should adhere to the principle of referring to basic transactions, splitting and merging flexibly, and substance is more important than form. The tax rate setting of business tax should reflect the support and control of the policy on derivative transactions. It is logical to levy income tax on financial institutions and investors (natural persons and legal persons) engaged in derivatives trading. Income from the transfer of derivative contracts, interest, dividends and bonuses should be included in the scope of corporate income tax and personal income tax collection. At present, China has not levied a capital gains tax. According to the particularity of participants and transaction risks in derivatives trading, capital gains tax can be considered. The process of taxation reflects the different treatment of speculative transactions and hedging transactions, and guides the emerging derivatives market to develop in the direction of avoiding risks and improving market efficiency. The construction of derivative tax system also needs to consider the tax treatment of foreign financial institutions. At present, the income tax and business tax of domestic and foreign-funded enterprises have been unified. The formulation of tax policies related to derivative transactions in the future should continue to follow the principles of balancing tax burden and promoting fair competition. It is necessary to make full use of the experience advantages of foreign-funded financial institutions, encourage their enthusiasm for participation, and prevent their strategic position and economic resources from being controlled by others. It is most important to coordinate the identification of tax elements such as taxpayer, tax basis, tax payable, tax obligation occurrence time and tax payment period in derivative transaction tax system at home and abroad. If the tax treatment of the same derivative transaction is different in the host country and the home country, it will inevitably lead to tax confusion and restrict business development. In short, the improvement of the tax system of financial derivatives is bound to be accompanied by the continuous introduction and application of derivatives, the continuous understanding and mastery of attribute characteristics, and the continuous progress and innovation of accounting recognition and measurement, which will eventually be reflected in the reasonable recognition of transaction nature, transaction quantity (value) and accounting period, thus achieving the purpose of fair tax burden and improving market efficiency.

Further reading: How to buy insurance, which is good, and teach you how to avoid these "pits" of insurance.