1
CORPORATE TAXATION
CLASS PRESENTATIONS
Unit 1. Basic Concepts. The Principles of Taxation.
Unit 2. Personal Income Tax.
Unit 3. Corporate Income Tax
Unit 4. Value Added Tax
Unit 5. Tax Harmonization in the EU
Carlos Garcimartín
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corporate tax, Apuntes de Administración de Empresas
Asignatura: tax, Profesor: , Carrera: Business Administration and Management, Universidad: URJC
Tipo: Apuntes
2014/2015
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CORPORATE TAXATION
CLASS PRESENTATIONS
Unit 1. Basic Concepts. The Principles of Taxation.
Unit 2. Personal Income Tax.
Unit 3. Corporate Income Tax
Unit 4. Value Added Tax
Unit 5. Tax Harmonization in the EU
Carlos Garcimartín
BASIC CONCEPTS: THE PRINCIPLES OF TAXATION
- Efficiency: The concept of deadweight loss
- Lump-sum tax
- Deadweight loss
2 2
DWL = ab bc = ε p pre − tPpre − tXt
- By increasing prices and reducing quantities bought and sold, taxes impose losses on consumers and producers alike. The sum of these costs almost always exceeds the revenue that the taxes raise—and the extent to which they do so is the deadweight loss
- Optimal Taxation Rules emerge:
- Elasticities
- The Ramsey Rule
2.2 The concept of progressivity
- A tax is progressive if the effective tax rate increases as the tax base grows.
- Examples: Flat tax, VAT
- The Kakwani index to measure progressivity: K= GT - GY
2.3. The concept of redistribution
- A tax is redistributive if the pre-tax income distribution is less egalitarian than the post-tax distribution.
- The Reynolds-Smolenski index to measure the redistributive capacity of taxes: RS= GY - GY-T
- The link between progressivity and redistribution
K t
t RS −
= 1
- Simplicity; for both, the taxpayers and the tax administration
- Flexibility
PERSONAL INCOME TAXATION
- Tax Imposed directly on personal income
- Basic PIT scheme: Taxpayer Income Tax Base Tax Base Reductions Tax Rate Tax Deductions Tax Liability
Taxpayers
- Should the PIT discriminate across taxpayers? single vs. married; active population vs. retired people; etc.
- Residence definition: more than 183 days
- Residents vs. Non-residents
Tax Base
- Schedular vs. Global
- Schedular: separate taxes are imposed on different categories of income.
- Global: single tax is imposed on all income, whatever its nature.
- Types of income subject to the tax: earned income (pensions?), savings income (interests, dividends, capital gains, sole proprietors?)
- Tax base reductions vs. tax liability deductions
- Dual taxes
Main characteristics of dual schemes:
- labour income is taxed at progressive rates;
- capital income is taxed at a flat rate; and
- the capital income rate equals the lowest rate on labour income and the CIT rate
Pros:
- Higher revenue and progressivity compared to weak integral schemes
- Possible increase in taxation on capital income
- Lower administration and compliance costs
- Possible decrease in tax avoidance and increase in savings
Cons:
- Potential arbitrage between capital and labour income
- Possible negative social perception of the lower rates on capital income
PIT TRENDS IN THE EU
Big differences across MS. Broadly speaking, new MS show lower tax/GDP ratios
PIT Revenue (% GDP). 2007/
Source: Eurostat
Decrease in rates (until the crisis), enlargement of the tax base, and reduction in the number of tax brackets
Top personal income tax rate. EU average
Source: Eurostat
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Flat taxes in the new MS and dualisation in the old MS
PIT in EU Countries Country PIT Type Austria Comprehensive and progressive with some dualisation Belgium Different categories of income subject to different rates. 25% withholding tax rate for most interest income Bulgaria Flat tax Cyprus Progressive rate structure. Capital income is mostly exempt Czech. Rep Flat tax Denmark Comprehensive and progressive Estonia Flat tax Finland Dual system France Comprehensive and progressive, but some types of capital income is taxed at flat rates Germany Semi-dual system UK Comprehensive and progressive, but some types of capital income is taxed at flat rates Greece Different rate structures are applied to different types of income Hungary Flat tax Ireland Semi-dual system Italy Semi-dual system Latvia Flat tax Lithuania Flat tax Luxembourg Comprehensive and progressive with some dualisation Malta Comprehensive and progressive with some dualisation The Netherlands Semi-dual system Poland Semi-dual system Portugal Comprehensive and progressive Romania Flat Tax Slovakia Flat Tax Slovenia Semi-dual system Spain Semi-dual system Sweden Dual System
COORPORATE INCOME TAXATION
- Tax Imposed directly on corporate net income.
- Why tax companies?
- Borrowing vs. retained profits
- Integration between the CIT and the PIT
- Basic CIT scheme: Taxpayer Profits Tax Base Tax Rate Tax Deductions Tax Liability
From profits to the tax base
- Revenue and expenses included in the tax base
- Costs and expenses:
- Depreciation costs
- Provisions
- Value rules: transfer-pricing, under-capitalisation
- Fines
- Etc.
- Tax base compensation over time?
Tax rate Progressive?
Tax deductions and benefits Cost and rationale
CIT TRENDS IN THE EU
Differences across MS are lower than those in PIT. The exceptions are Luxembourg, Malta, and Cyprus (due to certain “peculiarities”). No particular difference is observed between new and old MS
CIT Revenue (% GDP). 2007/
Source: Eurostat
Rates largely differ across MS: in general, lower rates are found in the new MS. Strong divergence across MS is observed in the first half of the 2000’s, mostly due to intensified tax cuts in the new MS after EU accession
Statutory CIT rate. EU Countries
Source: Eurostat
Statutory CIT rate. EU average
Source: Eurostat
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
VALUE-ADDED TAX
Main characteristics of the VAT
- VAT is a form of indirect tax collected at various stages of production-distribution chains, but it is paid in the end by consumers.
- VAT has an invoice-based credit nature: a taxable business can claim for the refund of the input VAT only if the claim is supported by purchase invoices
- Firms at any stage of the production-distribution chain charge their customers the VAT on their sales, and then claim for the VAT paid on their purchases
- Many countries have introduced the VAT to replace turnover tax or some type of single-stage sales tax
Main pros of the VAT:
- absence of cascading effect;
- information provider;
- international trade neutrality (origin vs. destination principle)
Taxes on final consumption would also show some of these advantages, but drawing the distinction between wholesale and retail sales is difficult in practice
Main cons:
- Regressivity;
- high compliance costs;
- fraud and evasion.
Uniform vs. differentiated VAT rates
- Effects on progressivity
- Costs (revenue costs, compliances and administrative costs, etc.)
- Fraud
- Lobbying
Shares of tax base subject to different rates
Source: TAXUD (2011): “A retrospective evaluation of elements of the EU VAT system”
VAT TRENDS IN THE EU
VAT revenue across MS is more homogenous than that of PIT and CIT. However, the contribution of VAT to total revenue tends to be higher in new MS
VAT Revenue (% GDP). 2007/
Source: Eurostat
Increase in rates, especially strong since the beginning of crisis; modifications of the product lists subject to reduced rates
Standard VAT rate. EU average
Source: own elaboration based on Eurostat
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Although deep differences exist across MS, there is a clear trend towards convergence (conversely to CIT and PIT rates)
Standard VAT rate. EU Countries
Source: Eurostat
Standard VAT rate. Coefficient of variation
Source: own elaboration based on Eurostat
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013