Proposed (Anti) Thin-capitalization Tax Rule

On November 19, the government proposed a thin capitalization rule to be enacted in 2010 that an interest expense due to a loan granted by a related party will no longer be recognizable as such if a certain debt versus shareholder equity ratio is exceeded. The ratio currently under discussion is 3 to 1. It is also proposed that an enterprise will need to disclose the loans drawn from related parties and the ratio of debt over shareholder equity as well as other pertinent information of the transactions. This is a move of the government to align its system with other nations that have already enacted this type of regulation to prevent capital being diluted for the purpose of tax avoidance such as the U.S., the U.K., Germany, France, Japan and Korea. It is also discussed that banks should not be included in this new tax rule because the banks are already subject to specific capital ratio adequacy requirements