18 February 2010 by

Review of financial instruments

It has been announced that Government will conduct an extensive review of the taxation of financial instruments such as derivatives and measures that deal with debt/equity arbitrage. One of the issues is whether derivative instruments should be taxed according to accounting principles as opposed to an accrual or entitlement basis. It may create a hardship to the extent that these types of instruments are taxed on an accounting basis as a taxpayer may in those instances have to account for tax even though the underlying instrument has not yet been realised. In other words, it may result in a cashflow mismatch for the taxpayer.

On the other hand, it may be beneficial to the issuer of such an instrument in circumstances where it would be able to deduct the costs associated with a financial instrument without actually being obliged to pay for it. This is generally referred to as a mark-to-market basis of taxation, which has proved to be problematic in the past.

Emil Brincker, Director, Tax

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