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Unformatted text preview: Before we start Before Sign the attendance sheet Switch off your cell phone Get ready for a quiz Principles of Taxation Principles Instructor: Instructor: Oksana Alexandrovna Korneo, MBA Oksana [email protected] Office #342, Dostyk Building Based on Principles of Taxation for Business and Investment Planning by Sally M. Jones Based Principles The history of the Word The The word ‘tax’ first appeared in the English language only in the 14th century. It derives from the Latin taxare which means ‘to assess’. Before that, English used the related word ‘task’, derived from Old French. For a while, ‘task’ and ‘tax’ were both in common use, the first requiring labor, the second money. Some Historic Facts Some Egyptian Taxes The first known taxation system was in ancient Egypt. The Pharaoh would collect taxes twice a year from the Egyptians. One of the most commonly taxed items in the ancient world was cooking oil. • Greek Taxes Athenians taxed their citizens for war costs with a tax they called "eisphora." The most historic factor of this tax was that it exempted no one, which many consider the first democratic taxation system, as after the wars the money was often refunded to the people. There is also some documentation of a tax put on foreigners called "metoikion." Some Historic Facts Some • Roman Empire taxes The earliest taxes in Rome were customs duties on imports and exports called portoria. Caesar Augustus was consider by many to be the most brilliant tax strategist of the Roman Empire. During his reign cities were given the responsibility for collecting taxes. Caesar Augustus instituted an inheritance tax to provide retirement funds for the military. The tax was 5 percent on all inheritances except gifts to children and spouses. During the time of Julius Caesar a 1 percent sales tax was imposed. During the time of Caesar Augustus the sales tax was 4 percent for slaves and 1 percent for everything else. There were more than 200 types of taxes. Some Historic Facts Some The price of faith "One tenth of the produce of the land, whether grain from the fields or fruit from the trees, belongs to the LORD and must be set apart to him as holy”. Leviticus 27 For Christians it was a ‘tithe’, or a tenth of what the faithful produced, usually paid to the Church in kind. The expansion of Islam was accompanied by the ‘Islamic Tax’, the khums, or ‘one twentieth’ – more modest by half than the tithe. There are direct references to it in the Koran, which requires its use for specified purposes, such as the relief of the poor. Some Historic Facts Some • Some Kazakh taxes X-XIX Kopchur – in kind tax: one animal per every 100 animals (usually sheep) Tagar – a tax for war force provision Kharji-kharajat – a tax for farmers Kolnalga – a duty to billet soldiers Jamalga - a duty to billet messengers and administrative persons Tamga – a customs duty for goods Later, when Kazakhstan became a part of Russian Empire, the following taxes were levied: kibitka tax – 3 rubles from a household Passport tax – a tax paid by Kazakhs leaving aul in search of job (1,5 rubles) Kara Shygyn – a tax for building and maintenance of mosques, schools, roads, bridges, for a smallpox vaccination/ In South Kazakhstan: Haradj – one tenth of a crop; zeket – one forties of the cost of the goods; tanap – monetary land tax Brief History Brief Three stages: • Ancient world – Middle Ages The State does not have a financial institution to define and collect taxes. The State just announces the total amount it wants to receive and delegates the tax collection to the city or community. Usually taxes are collected by publicans (tax collectors). • XVI – beginning of XIX century beginning century The period of establishing of some governmental institutions (including the financial institutions). The State performs some functions: defines the tax rates, oversees the tax collection process. Publicans still play an important role. • XIX century - present century The State is responsible for all functions related to taxation. Local governments and communities helps the State in some of these functions having a different degree of independence. Basic Terminology Basic Tax – payment to support the cost of government payment A tax is not an assessment of benefits. It is a means of distributing the burden of tax the cost of government. The only benefit to which the taxpayer is constitutionally entitled is that derived from his enjoyment of the privileges of living in an organized society, established and safeguarded by the devotion of taxes to public purposes. US Supreme Court US Court Taxpayer – any person or organization required by law to pay tax to the governmental authority to *Person could be both a natural person (individual) and a corporation. Jurisdiction – the right of a government to levy tax on a specific person or organization Base, Rate, Revenue Base, Tax Base – an item, occurrence, transaction, or activity with respect to which a tax is levied. respect TAX = Rate x Base Flat Rate – a single percentage that applies to the entire tax base Graduated Rate – multiple percentages that apply to specified portions or brackets of the tax base. Revenue – total tax collected by the government and available for public use. Flat Rate vs. Graduated Rate Flat Jurisdiction A imposes a tax on real property located within jurisdiction. The tax is based on the market value of the real properly. ABC Company owns a real property worth $500,000. Flat Rate – 2% TAX = $500,000 x 2%= $10,000 TAX Graduated Rate 1% 2% 3% Value from 0 to $100,000 Value Value from $100,000 to $225,000 Value in excess of $225,000 TAX = $100,000 x 1% = $1,000 TAX $125,000 x 2% = $2,500 $125,000 $275,000 x 3% = $8,250 $275,000 $500,000 $11, 750 $500,000 Transaction vs. Activity-Based Taxes Taxes Event or Transaction Based tax - the tax is triggered only when an event occurs or a transaction takes place. Examples: sales tax; estate tax levied on transfer of property from decedent to the heirs; excise taxes. Activity-Based Tax – the tax imposed on the cumulative result Activity-Based of an ongoing activity. Taxpayers must maintain records of the activity, summarize the result at periodic intervals, and pay tax accordingly Examples: annual income tax. Income Tax – a tax imposed on a periodic inflow of wealth resulting from a person’s economic activities. Earmarked Taxes Earmarked The revenues from some taxes are earmarked to finance designated earmarked projects. For instance, Local real property taxes are earmarked to support public school systems; earmarked Federal payroll and self- employment taxes are earmarked to fund the Social earmarked Security system (Old-Age, Survivors, and Disability Insurance Trust Fund) and Medicare (Health Insurance Trust Fund); Environment excise taxes are earmarked to support the Environmental Protection Agency’s Hazardous Substance Superfund, which subsidize the cleanup and disposal of toxic waste. Taxes are pervasive and dynamic Incidence of a tax – ultimate economic burden represented by the tax Property Tax Incidence. Mr. Blaire owns an eight-unit apartment building. Currently, the tenants living in each unit pay a $6,000 annual rent. The local government notifies Mr. Blaire that his property tax on the apartment building will increase by $2,400 for the next year. Mr. Blaire reacts by informing his tenants that their rent for the next year will increase by $300. Consequently, Mr. Blaire's total revenue will increase by $2,400. Although Mr. Blaire is the taxpayer who must remit the property tax to the government, the incidence of the tax increase is on the tenants who will indirectly pay the tax through higher rent. Taxes Levied by Different Jurisdictions Jurisdictions Local Taxes State Taxes Federal Taxes Taxes Imposed Taxes by Foreign Jurisdictions Jurisdictions Local Taxes Local Real Property Taxes – are levied annually and are based on the market value of the property as determined by the local government. Personal Property Taxes – tax the ownership of personalty, defined Personal as any asset that is not realty. Three classes of taxable personalty: • household tangibles (automobiles, pleasure boats, private airplanes); • business tangibles (inventories, furniture and fixtures, machinery, equipment); • intangibles (marketable securities – stocks and bonds). ______________________________________________________________________________________________________________________ Real Property Tax Real Springfield's city council decides that the city must raise $1.2 million of real property tax revenues during its next fiscal year. Springfield's tax assessor determines that the total value of real property located within the city limits is currently $23 million. What should be the nominal tax rate for the upcoming year? $1,200,000 : $23,000,000 x 100% = 5,2% These are NOT local taxes!!! This is just an explanation of two terms! These Ad valorem taxes – налоги, взимаемые соответственно стоимости Ad товара товара Abatement – is a tax exemption granted by a government for only a limited period of time. limited Local Tax Abatement Local Late in 2004, computer maker Dell Inc. announced plans to build a new manufacturing plant in North Carolina. The announcement prompted a bidding war among North Carolina cities and counties to entice Dell to locate within their jurisdiction. Winston-Salem, along with Forsyth County, won by offering Dell a package of tax abatements worth $37 million. State Taxes State Sales Taxes – is based on the retail sale of tangible personalty. The seller is responsible for collecting the tax at point of sale and remitting it to the state government. Use Tax – a complimentary to a sales tax. The tax applies only if the owner of the goods did not pay the state’s sales tax when the goods where purchased. The purpose is to discourage residents from purchasing products in neighboring jurisdictions. Excise Tax – is impose on a retail sales of specific goods, such as Excise gasoline, cigarettes, or alcoholic beverages, or on specific services, such as hotel or motel accommodations. Personal Income Taxes and Corporate Income Taxes Sales and Use Tax Sales Ms. Goode is a resident of Idaho, which has a 7 % sales and use tax. Before going on vacation, she bought a ring for $5,000. While on vacation in Hawaii, Ms. Goode purchased a diamond bracelet for $7,600 and paid 4% Hawaiian sales tax. Than she spent two days in LA, California, and bought a ear-rings for $6,000 (8,25%). Please calculate sales and use taxes. Sales Tax Use Tax Ring $5,000 x 7% = $350 NO Bracelet $7,600 x 4% = $304 YES: $7,600 x 7% - $304 = $228 Ear-rings $6,000 x 8,25% = $495 NO because 8,25% > 7% Federal Taxes Federal Income Tax Employment Tax – a tax based on annual wages and salaries Employment paid by employers to their employees and on the net income earned by self-employed individuals/ Earmarked to Social Security and Medicare Unemployment Tax – is a tax based on annual compensation paid to employees. Excise Taxes imposed on retail purchase of specific good and services (tobacco products, luxury automobiles, firearms) Transfer Taxes – are based on a value of individual’s wealth transferred by gift or at death. Sources of Federal Tax Law Sources • Statutory Internal Revenue Code of 1986 - voluminous combination of Internal statutory rules enacted by Congress • Administrative Administrative The Department of the Treasury is responsible for writing The regulations that interpret and illustrate the rules contained in the Internal Revenue Code Internal Internal Revenue Service (IRS) – the subdivision of the Internal Treasury responsible for the enforcement of the law and collection of taxes. collection • Juridical System Juridical Federal court Federal Basic Terminology - RK Basic Taxes – obligatory monetary payments to the Budget, established by the State unilaterally in accordance with the legislative procedure to be made in certain amounts, which have irrevocable and interest-free nature. in Taxpayer – a person who is payer of taxes and other obligatory payments to the Budget payments Tax Agent - an individual entrepreneur, private notary, advocate, Tax officer of the court, legal entity, including non-residents, who in accordance with this Code are entrusted with the duty of assessment, withholding and transfer of taxes withheld at the source of payment Basic Terminology - RK Basic Monthly Calculation Index (MCI) – is an index which is used to calculate the benefits and other social welfares, as well as to apply penalty sanctions, taxes and other payments in compliance with laws of the Republic of Kazakhstan with 2011 – 1,512 KZT Minimal Monthly Salary (MMS) – the lowest wage legally Minimal permitted by the government. The goal in establishing minimum wages has been to assure wage earners a standard of living above the lowest permitted by health and decency. 2011 – 14,952 KZT RK Taxes RK Local Taxes • tax on transport vehicles tax • land tax land • property tax property • uniform land tax uniform State Taxes • corporate income tax corporate • personal income tax personal • value-added tax value-added • excise duty excise • export rent tax export • special payments and taxes of subsurface users taxes • social tax social • tax on gambling business tax • fixed tax fixed Sources of the Tax Law of RK • Statutory Constitution of RK Tax Code - voluminous combination of statutory rules enacted Tax by the Parliament The Code “Concerning Taxes and Other Compulsory Payments to the Budget” • Administrative Administrative Ministry of Finance is responsible for writing regulations that interpret Ministry and illustrate the rules contained in the Tax Code and Tax Committee – the subdivision of the Ministry of Finance responsible for the enforcement of the law and collection of taxes. responsible • Juridical System Juridical Court Decisions Problem Solving Problem Problem 1 Custer County is considering raising revenues by imposing a $25 fee on couples who obtain a marriage license within the county. Does this fee meet the definition of a transaction-based tax? Problem 2 A city government recently increased its local sales tax from 1 percent to 2 percent of the dollar value of consumer goods purchased in the city. However, the city's sales tax revenues increased by only 30 percent subsequent to the doubling of the tax rate. What factors might account for this result? Problem Solving Problem Problem 3 Mr. JK, a U.S. citizen and resident of Vermont, owns 100 percent of the stock of JK Services Inc., which is incorporated under Vermont law and conducts a business operation extending over four counties in the state. JK Services Inc. owns 100 percent of the stock of JK Realty Inc., which is incorporated under Massachusetts law and conducts business in Boston. a. How many taxpayers are identified in the above statement of facts? b. Identify the governments that have jurisdiction to tax each of these taxpayers Problem Solving Problem Problem 4 This year, Jurisdiction A decided to raise revenues by increasing its general sales tax rate from 5 percent to 6 percent. Because of the increase, the volume of taxable sales declined from $800 million to $710 million. In contrast, Jurisdiction Z decided to raise revenues from its 5 percent sales tax by expanding the tax base to include certain retail services. The volume of services subject to tax was $50 million. Compute the additional revenue raised by Jurisdiction A and by Jurisdiction Z. Problem Solving Problem Problem 4 Jurisdiction A: Revenue BEFORE tax increase Revenue AFTER tax increase Additional revenue $800,000,000 x 5% = $40,000,000 $710,000,000 x 6% = $42,600,000 $ 2,600,000 Jurisdiction Z: Revenue AFTER tax base expansion $ 50,000,000 x 5% = $ 2,500,000 Problem Solving Problem Problem 5 Mr. and Mrs. Cook operate a hardware store in a jurisdiction that levies both a sales tax on retail sales of tangible personalty and an annual personal property tax on business tangibles. The personal property tax is based on book value as of December 31. This year, Mr. and Mrs. Cook purchased $840,000 inventory for their store. a. Are Mr. and Mrs. Cook required to pay sales tax on the purchase of the inventory? b. How can Mr. and Mrs. Cook minimize the personal property tax burden on their business by controlling the timing of their inventory purchases? Problem Solving Problem Problem 6 The management of WP Company must decide between locating a new branch office in foreign Jurisdiction F or Foreign Jurisdiction G. Regardless of location, the branch operation will use tangible property (plant and equipment) worth $10 million and should generate annual gross receipts of $2 million. Jurisdiction F imposes an annual property tax of 4 percent of the value of business property and a 15 percent gross receipts tax Jurisdiction G imposes no property tax but imposes a 30 percent gross receipts tax. Based solely on these facts, should WP locate its new branch in Jurisdiction F or Jurisdiction G? Problem Solving Problem Problem 6 Jurisdiction F: Property tax Gross receipts tax Tax cost of operating in Jurisdiction F $10,000,000 x 4% = $400,000 $ 2,000,000 x 15% = $300,000 $ 700,000 Jurisdiction G: Property tax Gross receipts tax Tax cost of operating in Jurisdiction G $10,000,000 x 0% = 0 $ 2,000,000 x 30% = $600,000 $ 600,000 ...
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