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Tax Law LIUC - Academic Year 2006/2007
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• Direct Taxes are generally imposed on:
– profits and capital of businesses;– income and net worth of individuals.
• Indirect taxes are levied on consumptions
Income taxesGeneral issues
Tax Law LIUC - Academic Year 2006/2007
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Income taxesGeneral issues
SOURCE JURISDICTION
• Income may be taxable under the tax laws of a country because of a link between that country and the activities which generated the income.
Tax Law LIUC - Academic Year 2006/2007
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Income taxesGeneral issues
RESIDENCE JURISDICTION
• A country may also impose a tax because of a nexus between the country and the person earning the income. Person subject to the residence jurisdiction of a country generally are taxable on their worldwide income, without reference to the source of the income.
Tax Law LIUC - Academic Year 2006/2007
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Income taxesTaxable income
The determination of the items to be included in the tax base is a central question in all income tax systems:
• Global system
• Schedular system
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Income taxesTaxable income
• Global system typically has a single, comprehensive concept of income and a single rate structure.
• Schedular system focuses on particular classes or categories of receipts and often has different rates and substantive and procedural rules for each class.
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Income taxesTaxable income
• Global system may have schedular elements (eg. limitation on deduction incurred in different categories of activities).
• Schedular system may have a global character (eg. Income and losses are combined in the final income calculation).
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Income taxesTaxable income
The global system of many countries have become partially schedularised by the use of withholding taxes on certain types of income (eg. dividends and interest) and lower tax rates on capital income
Most frequent categories of income– Business income– Income from professional services– Income from employment – Income from immovable properties– Income from capital– Other income
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Income taxesTaxable income
The concept of taxable income effectively defines the income tax base of person for a tax period, usually defined as gross income less total deductions allowed.
• Gross income is the total amount “derived” by a person during the tax period. It does not include amounts which are exempt from tax.
• Total deduction corresponds to the total of expenses incurred by a person during the tax period.
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Income taxesTaxable income
• Deductions for expenses which have been incurred in deriving amounts included in gross income.
• Deductions for capital allowances (eg. Depreciation and amortisation provisions).
• Tax relief on personal expenses.
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Income taxesTaxable income
In determining the correct amount of gross income as well as of deductions, a tax system must specify the basic structural rules which are aimed at:
• identifying; and
• evaluating
the correct amount of gross income and of deductions.
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Income taxesTaxable income
The identification a certain item of income, or an expense incurred by the taxpayer, gives rise to the need for apportionment rules. Where different rules apply to different categories of income, it is necessary to apportion the income/expense between the different categories of income.
Evaluation issues are mainly related to situations where the income is derived as a benefit in kind (eg. an employee fringe benefit)
Tax Law LIUC - Academic Year 2006/2007
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Income taxesTax relief on personal expenses
• Income tax system is usually indifferent to the manner in which a taxpayer chooses to spend money (other than money spent to drive taxable income). As a consequence a taxpayer’s taxable income should be the same regardless of whether the taxpayer saves the income derived, consumes it, or gives it away.
• However, a number of countries do use income tax system to provide relief for certain personal expenses. This is the case, for example, of:
• life insurance premiums;• charitable contributions;• interest expenses;and • medical expenses.
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Income taxesTax relief on personal expenses
• The aim of such relief may be of a different nature:
– encouraging the development of charitable organisation to fulfil various functions that are considered socially important;
– granting a tax relief to those persons who need medical treatment;
– provide for a tax incentive to those who makes relevant personal investment, such as the acquisition of private dwelling.
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Income taxesTax relief on personal expenses
• Tax relief may be granted either through:
– tax deduction (i.e. subtraction from the taxable income); or
– tax offset (i.e. deduction on the taxes due).
In the first case the tax relief increases with the taxpayer’s taxable income and, hence, marginal rates.
In case of tax offset, once established the level of relief, it will the same for taxpayers in all level of taxable income and marginal rates.
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Income taxesTax relief on personal expenses
A. Gross incomeB. Business deduction________________________C. (A-B) Net IncomeD. Personal deductionE. (C-D) Taxable income
F. Tax rate
G. (E*F) Tax dueH. Tax credits (advance payments, wht and other offsets)I. Tax to be paid
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Income taxesTax rate
• Proportional rate: the effective tax rate is flat.• Progressive rate: the effective tax rate increases as the level
of income increases.
• The flater the rate the lower the risk of shifting income.• Important relationship between corporate and individual
income tax rate (divert income into corporate entity).
• The limitation of the number of brackets should lead to administrative advantages.
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Income taxesTiming issues
• The concept of taxable income effectively defines the income tax base of person for a tax period ……
The income tax is imposed on a periodic basis. The tax period is established by the legislation (generally 12 months).
Business taxpayer may be allowed to use different period in particular circumstances.
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Income taxesTiming issues
• The periodic imposition of the income tax requires a separate calculation of the taxable income of a taxpayer for each tax period.
To this end, it is necessary to define specific rules of allocation, which identify the tax period in which a certain item of income, or an expense, must be included.
Income or expenses may be allocated for on a cash or an accrual basis
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Income taxesTiming issues
Under the cash method, income is derived in the tax period in which it is actually received by, made available to, or, in the case of benefit, provided to the taxpayer.
The cash method is usually applied in determining:
– income from employment;– income from capital.
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Income taxesTiming issues
Under the accrual method, income is derived in the tax period in which the right to receive the income arises, and expenses are accounted for in the tax period in which the obligation to pay arises.
The accrual method usually requires a proper accounting system which is able to calculate the correct amount of income and expenses which are attributable to a given tax period. Therefore, it is generally applied to business taxpayers.
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Income taxesThe taxpayer
The taxpayer is the person liable for tax.
The term taxpayer does not necessarily identify a person who is obliged to pay tax in a particular tax period (indeed the taxpayer’s liability may be also satisfied by a person other than the taxpayer itself eg. withholding tax).
A taxpayer may also be required to fulfil certain administrative requirements, such as filing a tax return or provide information to the tax authorities.
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Income taxesThe taxpayer
The primary distinction for taxpayers is made between:
• individuals; and
• legal entities.
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Income taxesThe taxpayer
As with regard to individuals the relevant issue is to define the tax unit.
A wide range of tax units is used in different jurisdictions for imposing tax on individuals; the main possibilities are:– individuals;– married couples;– families.
If couples or families (however defined) are treated as the tax unit, then taxable income is calculated by reference to the income and deductions of all persons included in the tax unit.
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Income taxesThe taxpayer
The relevant consequence for the definition of tax unit is the tax rate structure.
Indeed, progressive tax rates and tax-free zone have an important impact on the difference between aggregation, splitting and separate unit systems.
On the other hand,when the individual tax rates are relatively flat, the difference between income aggregation and income splitting are minimal.
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Income taxesThe taxpayer
Many tax systems provide some relief for the cost of supporting dependents, such relief may be granted through:
– income splitting with dependents;
– deductions for the support of dependents;
– refundable or non-refundable tax offsets.
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Income taxesThe taxpayer
Under the income splitting and deductions system, the higher the individual’s income, the greater the value of the relief.
As a consequence, in such cases relief is provided inversely with the taxpayer’s need.
Many countries moved to a tax offset system.
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Income taxesThe taxpayer
As far as legal entities are concerned, the definition of taxpayer plays a crucial role in determining whether an entity is entitled to Treaty benefit.
To this end, it becomes important to distinguish between transparent and non-transparent entity for tax purposes.
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Income taxesDefining residence
To exercise residence jurisdiction, a country must provide rules that classify individuals and legal entities either as residents or as non-residents.
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Income taxesDefining residence
Individuals• Formal criteria (registration in the Registry of resident
population; residence status for visa or immigration purposes; citizenship)
• Mechanical test (days of presence test):– 183 day test– Cumulative presence test considering a certain numbers of
years.
• Fact and circumstances test– (..)– (…)
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Income taxesDefining residence
Factors which are usually considered relevant in determining the residence of an individual:
– maintenance of a dwelling or an abode that is available for the taxpayer’s use;
– place where the individual engages in income-producing activities;
– location of the individual’s family;– social ties to the country.
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Income taxesDefining residence
The residence of a corporation is generally determined by reference to:
• Formal criteria– place of incorporation;– legal seat;– registration in the commercial register.
• Economic criteria:– place of management;– principal business location;– residence of the shareholders (rarely).
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Income taxesDefining residence
The place of incorporation test provides simplicity and certainty to the government and the taxpayer. Indeed, in general, a corporation cannot freely change its place of incorporation without triggering a tax on the accrued gains in respect of its properties.
The place of incorporation places some limits on the ability of corporations to shift their country of residence for tax avoidance purposes.
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Income taxesDefining residence
The place of management usually coincides with the place where the board of directors meets and exercise control over the affairs of the corporation (vs. day by day management).
The place of management test is less certain in its application. Such test is easily exploited for tax avoidance reasons because a change in the place of management generally can be accomplished without triggering any tax.
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Income taxesDefining residence
Treaty issues relating to residence
It may happen that two countries claim that an individual or a company is resident for tax purposes in both jurisdictions.
In order to overcome such issue, most of the Tax Treaties provide a series of tie breaker rules to give residence jurisdiction to one country.
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Income taxesDefining residence
As with regard to individuals, the following tie breaker rules shall be applicable:
1. the place where the individual has permanent home;
2. the country in which the center of the individual’s vital interest is located;
3. the place where the individual’s habitual dwelling;
4. the country of citizenship.
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Income taxesDefining residence
For legal entities resident in two countries, Tax Treaty provisions makes the entity a resident of the country its effective management is located.
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Income taxesEconomic and juridical double taxation
The term “double taxation” is used in many different contexts (eg. international or domestic).
In general:
• economic double taxation occurs when the same item of income is taxed twice in the hands of different taxable person; whilst
• juridical double taxation occurs when the same item of income is taxed twice in the hands of the same taxable person.
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Income taxesEconomic and juridical double taxation
Juridical double taxation is usually the consequence of the application of a withholding tax on certain payments, such as dividends, interest and royalties considerations.
Economic double taxation is the direct consequence of taxation of business income produced through a legal entity and then distributed to the shareholders.
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Income taxesEconomic and juridical double taxation
There are several methods for granting relief from “double taxation”:
• deduction method;
• exemption method;
• credit method.
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Income taxesEconomic and juridical double taxation
According to the “deduction method”, the tax rules allow the taxpayer to claim a deduction for taxes paid on the same item of income. In this case, taxes are treated as expenses of the business.
Within an international context, foreign-source income earned by residents of a country that uses the “deduction method” is taxable at a higher effective rate than it would be under either the “credit method” or the “exemption method”.
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Income taxesEconomic and juridical double taxation
Under the “exemption method”, the tax rules provides the taxpayer with an exemption for income which has been already subject to tax.
Within an international context, the “exemption method” is generally the most favourable to the taxpayer when the foreign effective tax rate is less than the domestic effective tax rate.
Under a variation of the “exemption method” the income, although exempt, is taken into account in determining the rate applicable to the taxapayer’s taxable income - “exemption with progression”
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Income taxesEconomic and juridical double taxation
Under the “credit method”, the taxes already paid on the same income reduce taxes payable by the taxpayer.
Within an international context, the taxes paid abroad are usually “topped up” by domestic taxes so that the combined domestic and foreign tax rate on the foreign-source income is equal to the tax rate. Credit countries do not pay tax refunds when their taxpayers pay a foreign income tax at an effective rate that is higher than the domestic effective tax rate - “ordinary tax credit”.
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Business Income Introduction
• Both individuals and legal persons engage in business activities.
• When an activity may be characterised as a business?
• If business income is not defined in tax law, reference is made to the commercial law provisions
IN GENERAL, A BUSINESS IS A COMMERCIAL OR INDUSTRIAL ACTIVITY OF AN INDIPENDENT NATURE UNDERTAKEN FOR PROFITS.
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Business Income Introduction
Two basics model are used to determine the taxable income arising from business activities:
• The receipts-an-outgoings system
• The balance-sheet system
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Business Income Introduction
The receipts-an-outgoings system
• the determination of taxable business income is based on the calculation of all recognised income amounts derived by the taxpayer in the tax period and all deductible expenses incurred by the taxpayer in the same tax period.
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Business Income Introduction
Balance-sheet method
• The starting point is the commercial income arising from financial accounting, to which adjustments are added to take into account differences between tax rules and financial accounting rules.
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Business Income Introduction
Business income is generally calculated on an accrual basis:
• Revenues are derived when the right to receive the income arises.
• Expenses are incurred when the obligation to pay arises.
• For corporations, the accrual method is also the basis of financial accounting where specific regulations are provided.
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Business Income Definition of business assets
In determining business income, in general, revenues include both gains from ongoing commercial activities and gains on the disposal of business assets.
The concept of business assets should include not only assets physically used in, or held by the business, but also investment assets related to a business activity.
This is achieved through a broad definition of business assets that includes all assets used, ready for use, or held for the purpose of a business.
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Business Income Definition of business assets
The inclusion in business income of gains arising on the disposal of business assets needs to be coordinated with any special regime applying to specific types of assets, such as:
• Inventories, which give rise to revenues.• Depreciable and amortisable assets, which give
rise to capital gains/losses.• Other assets (eg. Participation in companies),
which may produce capital gains or losses.
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Business Income Determination
Tax rules related to assets should define:
• Timing rules for the realization of gain or losses.• Cost base of an assets.• Determination of gain or loss.
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Business Income Determination
Timing rules for the realization of gain or losses.
• Gain or loss is realised when the taxpayer ceases to own the asset. In this respect, it is crucial to identify the concept of disposal which should includes not only sales, but also exchanges, losses, gifts, etc.
• Another relevant issue is the change of tax regime applicable to a particular asset (eg. From business asset to personal one or vice versa).
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Business Income Determination
Cost base
• Cost base is equal to the consideration given for the acquisition of an asset, plus any ancillary cost incurred in the acquisition of the asset (eg. Legal and registration fee, transfer taxes, etc.). Such base should also include any capital expenditure incurred to improve the assets
Consideration received
• The consideration received is equal to the price received.
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Business Income Determination
Market value / Arm’s length principle
• In kind consideration should be determined at market value.• Related parties may be tempted of manipulating transfer
prices for tax driven reasons• Arm’s length price of a certain transaction is the price that
unrelated parties would have agreed upon, given the same circumstances of such a transaction
Non-recognition rule
• Sometimes particular non-recognition rules are provided. It is the case, for example, of the tax position of an assets that is rolled over into another asset in case of new investment.
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Business Income Deduction of expenses
In general, all costs incurred to derive business income should be recognised for the purpose of determining net income.
• Sometimes tax laws use restrictive language such as “ordinary and necessary” when defining deductible expenses.
• In other cases, reference is made to expenses that are “wholly and exclusively” incurred to derive income subject to tax (this definition may create problems in respect to expenses incurred to derive exempt income).
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Business Income Deduction of expenses
Expenses and other negative items of income shall be deductible if and to the extent that they relate to activities or assets which produce revenue or other receipts which are included in the taxable income.
The literal analysis of the above provision leads to a wide interpretation of the concept of inherence. Accordingly, shall be deductible from the taxable income all those costs that are functional to the business activity, even if they are not strictly related to a specific revenue.
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Business Income Deduction of expenses
Tax laws provides for specific limitations in respect to certain type of expenses, such as:
• personal expenses;• capital expenses;• Policy-motivated restrictions (eg. no tax deduction
for fines, penalties, bribes etc.);• passive interest (see thin capitalisation rules);• expenses that have elements of both business and
personal consumption (eg. entertainment, meal and refreshment).
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Business Income Deduction of expenses
Research and development costs• It is difficult to certainly determine benefits and useful life of
research and development.• As a consequence, generally, presumptive rules are provided:
– amortization in short period of time (2/3 years);– entire depreciation in the year when expenses are incurred.
Advertising / Marketing expenses• In principle ordinary marketing expenses should be
distinguished from extraordinary marketing expenses, the second providing benefits for more than one period.
• In practice, also in such a case it is difficult to determine benefits and useful life, so that presumptive rules are provided.
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Business Income Deduction of expenses / Depreciation
Capital assets• Capital business assets very often have a useful life
which is longer than one tax period.• To accomplish with the accrual principle the cost of
such assets should be split among tax periods in which the assets contribute to the income production (depreciation/amortisation plan).
– a depreciation/amortisation plan must consider:– the cost of the asset;– the period of useful life;– the residual value at the end of the “useful period”.
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Business Income Deduction of expenses / Depreciation
Tangible properties (examples)• buildings;• industrial plants;• equipments.
Intangible properties (examples)• term limited rights;• goodwill.
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Business Income Depreciation rates and methods
Economically depreciation should reflect the benefit that the property contributed to the activity in the period.
From a tax perspective depreciation should reflect the decrease in value of the property:
– straight line depreciation;– declining balance depreciation;– units of production depreciation.
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Business Income Corporate-shareholder taxation
Almost all countries impose a tax on earnings of corporations separate from the tax on individuals’ income.
Such a system implies an economic double taxation of the income produced by corporations when distributed to the owners.
Countries have different approaches to economic double taxation:
• Classic system (double taxation).• Dividend deduction (Avoidance/mitigation of double taxation
at a corporate level).• Exemption, imputation system (avoidance/mitigation of
double taxation at a shareholder level).
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Business Income Corporate-shareholder taxation
Classical system
Both taxes at the level of corporation) and taxes at the level of the shareholder are levied without any reference one to the other.
Example:Taxable profits 100CIT (30%) (30)Net profit 70
Dividend received 70Tax at shareholder’s (50%) (35)Net income 35
Total tax 65Effective tax rate 65%
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Business Income Corporate-shareholder taxation
Dividend deduction system
The corporation benefits of a deduction from the corporate income tax equal to the amount of the distribution made and the shareholders are fully taxable on dividends received.
Example: Retained DistributedTaxable profits 100 100Dividend deduction -- (100)CIT (30%) 30 --
Net profit 70 100
Dividend received -- 100 Tax at shareholder’s level (50%) -- (50)
Total tax 30 50Effective tax rate 30% 50%
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Business Income Corporate-shareholder taxation
Imputation system
The shareholder can offset, from his tax liability, an amount equal to the taxes paid by the corporation.
Example:Taxable profits 100 CIT (30%) (30)Net profit 70
Dividend received 70Credit (gross up) 30Taxable income 100Tax at shareholder’s level (50%) (50)
Credit to offset 30Total tax 20Effective tax rate 50%
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Business Income Corporate-shareholder taxation
Exemption system
The shareholder deduct from his taxable base, an amount equal to the dividends received.
Example:Taxable profits 100 CIT (30%) (30)Net profit 70
Dividend received 70Taxable income --Tax at shareholder’s level (50%) --Total tax 30Effective tax rate 30%
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Investment Income Introduction
• Under schedular system, characterization determines which tax regime applies to the income
• Under a global system, there may be a specific inclusion rule for investment income or special timing or administrative rules.
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Investment Income
• Under schedular system, characterization determines which tax regime applies to the income
• Under a global system, there may be a specific inclusion rule for investment income or special timing or administrative rules.
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Investment Income
The definition of investment income, usually, includes:
• Annuities• Dividends• Interest• Rent• Royalties• Capital gains on the disposal of investment assets
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Investment Income
AnnuitiesA taxpayer purchasing a commercial annuity provides an “annuity provider” with a capital sum that is returned with compensation conceptually similar to interest in fixed payments over specified term or, in case of life annuity, over the taxpayer’s life (eg. insurance scheme).
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Investment Income
InterestInterest is the compensation earned by a creditor for the use of his or her money during the period of the loan (debt obligation).
RoyaltiesPayments received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including patent, trade mark, design or model, plan, secret formula or process.
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Investment Income
RentAny amount received as consideration for the use and occupation of, or right to use or occupy, immovable property.
DividendsIncome from shares, “jouissance” shares or “jouisance” rights and other rights, not being debt-claims, participating in corporate profits.
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Investment Income
Interest, dividends and capital gains on shares……are usually subject to a special tax regime (eg. withholding tax, substitute tax etc.)
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VATIntroduction
• The purpose of a turnover tax is to tax goods destined for personal consumption….
• …also services are to be included.
• Business income taxes are levied on the business activity whilst VAT is levied on each transaction.
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VATIntroduction
• VAT, as levied in Europe, covers all stages of production and distribution.
• The deduction of input VAT prevents from cumulation.
• Within the chain of production and distribution VAT does not influence the price of goods or service, unless exemption are applied…indeed, whatever tax the one business is charging, the other business will deduct it, at same moment.
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VATIntroduction
• The most essential record is the invoice which must list the VAT paid so that business purchasers are able to claim credit for VAT already paid preceding business sellers.
• This facilitates calculation of the tax and also provides a clear audit trail.
• It is possible that, in a given period, the deduction claimed exceeds the tax due. IN particular this will happen in case of large investments, then the difference will be refunded to the tax payer.
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VATIntroduction
• Art. 99 of the (original) EEC Treaty instructed the commission as follows:
“The commission shall consider how the legislation of the various member states concerning turnover taxes, excise duties and other form of indirect taxation (…) can be harmonised in the interest of the common market.”
• 1960, the Commission, through reports issued by different working groups and committee, recommends that Member States adopt the VAT.
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VATIntroduction
• The first Directive of 11 April 1967, together with the second directive of the same date, instructed the Member States to replace the existing turnover tax systems by a common system of “Tax on Value Added”.
• France already had VAT (minor changes were made to the previous system).
• Germany implemented VAT in 1968.
• Netherlands did it as well in 1969.
• Luxembourg complied in 1970.
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VATIntroduction
• A third directive extended the deadline for the implementation of the first and second directive until 1972.
• Belgium introduced VAT in 1971.
• Fourth and Fifth directive extended the time limit for Italy, which implemented it in 1973.
• On 17 May 1977, The Sixth directive was adopted with the aim of further harmonise the various national laws.
• (…)
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VATScope
Subject to VAT are:
• Supply of goods and services
• ..effected for a consideration..
• ..within the territory of a Member State…
• ..by a taxable person acting as such and..
• .. upon importation of goods by anyone.
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VATScope – The subjective element Taxable person means any person who independently carries out in any place any economic activity whatever the purpose or result of that activity.
* It refers to only to individuals but also to legal persons, such as private or public limited companies. Also joint ventures and partnerships even lacking of legal personality.
* It does not include certainillegal transactions (such as importation and supply of drugs).
* It includes all activities of producers, trades and persons supplying services, including mining and agricultural activities, and activities of the professions and the exploitation of tangible or intangible property for the purpose of obtainingincome.
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VATScope – The objective element
Supply of goods means the transfer of the right to dispose of tangible property as owner.
The mere economic conveyance and not the transfer of legal ownership does not prevent transaction to be treated as supplies of goods. If the legal transfer were decisive for the occurrence of a taxable supply, VAT would be imposed at different moments in the various Member States depending on whether property was transferred by contract or by the formal act of delivery.
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VATScope – The objective element
Supply of services means any transaction which does not constitute a supply of goods; it may include assignment of intangible property and even the performance of services in pursuance to the law.
The use of services for non-business purposes is treated as a taxable transaction (eg. private use).
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VATScope – The territoriality element
The general rule with regard to the place of supply of services is that it is deemed to be the place where the supplier has established his business or has fixed establishment from which the services is supplied.
Exceptions:– services connected with immovable properties;– transportation services;– other services such as cultural, artistic, scientific or
entertainment activities;– Intangible services such as technical and consultancy services
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VATScope – The territoriality element
Supply of goods
Goods that are not dispatched or transported, are treated as being supplied at the place where the goods are the supply takes place.
In case the goods are transported, the place of supply is deemed to be where the transportation commences.
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VATRates
• The original provisions of the Sixth directive stipulated that rates to were to be fixed by the Member States themselves, but the standard rate applicable to the supply of goods and services and the importation of goods must be the same in order to fulfil the requirements of neutrality.
• Member States were permitted to apply increased or reduced rates to certain categories of supplies.
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VATRates (1)
Member state Ordinary rate• Austria 20 %• Austria (Communes of Jungholz and Mittelberg) 16 %• Belgium 21%• Cyprus 15%• Czech Republic 19%• Denmark 25%• Estonia 18%• Finland 22 %• France 19,6 %• Germany 16 %
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VATRates (2)
Member state Ordinary rate• Greece 19 %• Hungary 20% • Ireland (Eire) 21 %• Italy 20 %• Latvia 18%• Lithuania 18%• Luxembourg 15 %• Malta 18%
Tax Law LIUC - Academic Year 2006/2007
89
VATRates (3)
Member state Ordinary rate• Netherland 19 %• Poland 22%• Portugal 21 %• Slovak Republic 19%• Slovenia 20%• Spain 16 %• Sweden 25 %• United-Kingdom 17,5%
Tax Law LIUC - Academic Year 2006/2007
90
VATPro-rata
• As regards to good and services to be used by a taxable person for transactions in respect of which value added tax is deductible and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax is deductible as is attributable to the former transaction.
• The provisional proportion for a year must be calculated on the basis of the preceding year’s transactions.
• Deduction made on the basis of such provisional proportion must be adjusted when the final proportion is fixed during the next year.