Chapter 4: taxation

• Personal taxation is levied on

  Income, profit (sole trader or partner), inherited wealth, investment gains, value of assets heldd
• Additional taxes governments may introduce

  Levy social security contributions on earnings. Taxes on capital gains, wealth taxes, inheritance taxes
• Capital gains 


  Gain made from selling an asset for more than it was origninally purchased for
• Wealth taxes 


  Tax on amount of wealth, such as property owned. eg. In the UK-council tax based on value of property to raise money for local government
• Inheritance taxes 


  Tax on the amount transferred on death. Generous allowances to not catch most people. Wealthy people use trusts to avoid this
• Taxing cashflows


  In some countries, taxes are limited to cashflows-available to finance the tax payable. If tax is determined on assets-assets have to be realised to generate the funds (easier to tax income than wealth)
• Taxing in arrears 


  To ensure the citizens have sufficient retained income and wealth to meet their essential needs-assess tax liabilities in arrears and exempt some basic levels of income or wwealth
• taxing in arrears when tax is levied at source to accelerate tax flows to the government

  eg. PAYE-weekly or monthly taxes directly from salary. At the end, tax rebate if you paid too much or pay more if you paid too little. Self employed pay twice a year (Jan and Jul): based on estimates then amendments made
• Taxing once


  Revenue flows are only taxed once. However, if the taxes are levied on wealth or the value of specific assets, the revenue may be taxed twice (since the assets may have been purchased using after-tax funds)
• Tax free income 


  Profits from gambling, social security benefits, certain investments. Means-tested benefits are tax free, non-means tested benefits are taxable
• Tax-Free expenditure 


  Tax relief on certain forms of expenditure-pension schemes and charitable gifts- reduces taxable income
• Income in kind


  The value of additional fringe benefits are included in taxable income. Eg. company cars, medical insurance, housing and subsidised mortgages
• Investment income deducted at source

  Investment income can have income tax deducted at source. For tax purposes, the grossed up equivalent is included as taxable income and the tax deducted at source can be offset against the person;s tax liability
• Allowances 


  Considerations given to: "tax-free" level of income or capital which may need to reflect personal or family circumstances-personal allowance deducted from income. Age related allowances
• The marginal tax rate


  the percentage of an additional unit of income that is taken in tax
• How is taxable income determined

  Income earned+income in kind+ gross investment income - tax-free income - tax-free expenditure - allowance
• The following assets are free from capital gains tax 


  Private motor cars, a main private residence, foreign currency obtained for personal use, government securities, small tangible moveable assets (or chattels) worth less than $6000
• A chargeable gain 


  Sale price-purchase cost
• Indexation allowance


  Allowances to remove the inflationary element of any gain or to encourage individuals to retain assets
• Capital losses


  Negative chargeable gains, offset against capital gains, not any other form of tax/ Any unused is carried forward
• Table profits for companies

  Accounting profit + business expenses not allowable for tax + depreciation -capital allowances - special reliefs (research and development costs)
• Uses of the corporation tax system

  Since dividends are paid from profit after tax, some countries give relief to shareholders. Most govs: shareholders are imputed or ascribed at least part of the tax (deemed to have paid at least part of the tax due).
• What would happen if there wasn't a corporation tax system

  The company would pay corporation tax on profits and the shareholder would pay income tax on dividends, discouraging firms from distributing profits as dividends
• How would the gov use taxes to incentivise companies to retain and reinvest earnings

  To pursue a faster rate of economic growth-encourage greater investments by firms from their retained profit. By levying higher taxes on dividends than on retained profits or provide tax relief for new investments
• Accelerated depreciation 


  Depreciate a large part of the machine in the early years thus increasing the company's costs, decreasing profit and therefore decreasing its tax liability in the easy years
• Other categories of taxes

  Stamp duty on contract documents, inheritance taxes, property taxes
• The difference between sales tax in the US and VAT in the UK

  Sales: collected only at the point of final sale to the consumer. VAT: collected at each stage of the production process according to the value added at each stage of the production process
• Customs duties


  On imported goods: flat rates, weight taxes, physical size, emissions
• Excise duties 


  Goods produced and sold within the country. To encourage certain patterns of consumer expenditure or to raise revenues (eg tax on ciggs to use for health services)
• Double taxation reliefs


  The local tax authority will allow companies and individuals with overseas income or capital gains to offset tax paid overseas against their liability to domestic tax on that income tax or capital gains. The max offset is the rate of tax that would have been paid locally
• Offshore investment funds
• Differences between tax systems

  Make international investment complex, investors pay more tax than is intended within the jurisdiction in which they live. For example, pension funds and charities don't pay tax on investment returns in many countries, however corporations will often pay tax on profits that is not reclaimable by non-taxpayers
• Imagine a pension fund who doesn't pay tax on investment income, invests in shares. When the pension fund receives dividends, it is paid from after tax profits

  The tax system may enable the pension fund to reclaim the tax that has been paid, however in many countries, such reclaiming is not allowed
• What is the difference in a charity investing directly vs investing via an investment fund/mutual fund/collective investment vehicle


  If a charity invests directly, it might not have to pay tax on income. However the investment fund pays tax on income before it pay to investors
• How do investment funds use operating offshore to prevent the same income being taxed twice?


  Investing in a jurisdiction in which little or no corporate tax is due. The investment will be established in a jurisdiction where no tax is payable on the returns (Bahamas, Cayman Islands, Jersey). The investors will pay tax on the income and capital gains at the appropriate rates in their own countries with the fund itself not paying tax
• Benefits of offshore investment funds

  Ensure tax transparency, ensures tax is paid according to the rules of the country in which the particular institution or individual live. However, the investor may not disclose to the domestic tax authority