Tax Law - notes

SOURCE OF INCOME (INDIVIDUAL)

Domestic source all the income that you receive [1h15…]

 

Foreign source (from abroad)



It is not restricted to the country.

Income source can be in Italy or all around the world.

CORPORATE INCOME TAXES

Residence of corporation:

Place of incorporation

 Place of Management and Control



Calculation of CIT:

(+) Total Revenue 4

(-) Costs of goods sold (COGS)

4 Direct cost related to the production 5

(-) Expenses There are some direct cost that are

5

Operating expenses considered as expenses.

Non-operating expenses

(gross income-expenses)

=TAXABLE INCOME

(-) CIT (taxable income * tax rate)

=NET PROFITS (Taxable income – CIT)

O.E. could be rent, salaries, equipment and fund, but also utility such as

 

water, electricity.

N.O.E. marketing costs. Non-operating costs has not to be cover for the life of

 

the business.

Net profits are what you effective earn and show if the business is successful or

 not. You than can decide to reinvest your profits, or do investments etc.

Cost of goods sold amortization

 

NB!! 

GROSS REVENUES When we talk about it, is exactly what we have received.

(-) COGS

(-) Operating expenses For taxes purpose, i’m talking about



Net operating

= profits (NOP) taxable income.

the

 losses (NOL)

(-) Non-operating expenses

(-) CIT

= Net profits

Example

Total revenue 100

Expenses 80

COGS 20

Operating expense 30

Non-operat. Exp. 30

=Taxable income

Example 1.

Company X sells cars and has the following profits up to 31 December 2017:

Total revenues from sales = 100.000

Cost of goods sold= (20.000) Cost of goods sold are expenses too ( they have to

pay raw materials)

Operating expenses (tax purposes)

Salaries= 20.000

Rent= 10.000

Utilities= 5.000

Depreciation= 5.000 (even if it should be included in cost of goods sold)

5 Is an expense a business incurs through its normal business operations. 6

-----

Taxable income= 40.000 (if it’s negative, you won’t pay CIT)

----- 6

CIT 30% = (12000)

Net income= 28.000 (with this amount we can reinvest, we can give dividends, we

can invest in financial instrument to gain interest on them)

If the net profit is negative? It means that the company spends more money than what

received. Having a loss is not necessarily a bad thing. Some companies decide to have

losses, and it could be very good. The loss of one year is translated in an expense the

next year; in this way there are no taxes to pay. If this situation holds for many years

(and some countries allow this), you will be exempted from taxes at all. Moreover

there also are some cases in which two countries have a relation, called consolidation.

In this case they share the same net profit. In this way, a company that have positive

profit and another one who has negative profit will have a total profit=0, not paying

taxes. This rule is valid in countries such as Italy and Germany.

How could you create losses? Is something that is really good for a company.

TREATMENT OF LOSSES

Loss “Carry back” you calculate taxable income, recalculate the taxes, so you

 

wil receive the money back from the tax administration. Is an accounting

practice that consists in using NOLs against previous years’ “net operating

profits” (NOPs). Carry back losses are not so common.

Loss “carry forward” accounting practice that consists in using NOLs against

 

future years’ NOPs.

Example of “loss carry back”

NOLs 2018= 40.000

Net operating profits 2017

Total revenues= 100.000

COGS= 20.000

Operating expenses= 40.000

NOPs= 40.000

CIT= 30%

The tax liability for the company in 2017 would changes from 12.000 to -0- due to the

“loss carry back”.

Example of “loss carry forward”

NOLs 2018= 40.000

Net operating profits 2019

Total revenues= 100.000

COGS= 20.000

Operating expenses= 40.000

6 30% of 40.000 7

NOPs= 40.000

CIT= 30%

The tax liability for the Company in 2019 changes from 12.000 to -0- due to the “loss

carry forward”.

PAYMENT OF DIVIDEND AND DOUBLE TAXATION

Personal income tax 15%

dividends

Shareholder Co.

CIT 25%

Profits

Some countries gives a tax credit at the shareholder level according to the

 amount of taxes paid at the level of the Corporation Imputation system.



Tax credit and/or exemption are usual in cross-border situations.

 Corporation

- is paying 30% on the profit for taxes. They are given to

shareholders as dividends.  

Gross income-expenses= taxable income

- 30% of income in taxes after

that you deduct a credit that is given to shareholders.

Dividends will come with a tax credit

- , Gross income (-) expenses = taxable

income – CIT.

- Tax credit is applicable after the corporate income tax.

CIT

- is applied on the profit of the corporation. in the U.S, shareholders will

receive hundred of dividends and then they have to pay taxes on them.

Non-imputation system (US):

- taxes are paid twice (at level of corporation and at

level of shareholders). Anyway, some countries to avoid this, there will be a tax

credit applied in the amount of taxes. If shareholder has to pay on dividends

35% but already paid 25% (CIP), i twill have a credit on that amount, and will

pay only 10%.

Personal Income Tax

You have to declare annually all your incomes. Taxation for individual effect residents

and we have two ways to determine who are these taxable residents:

1. Factual tests (residence test) people who stay more than 183 days in a



calendar year

2. Domicile it’s a really subjective thing. A civil law concept that try to look more



than the physical presence, more about the intention of the person (If I buy an

8

house here, move with my family, open a bank account etc.). Germany, since

the moment you arrive in Germany, you are domicile (strict content of domicile)

Is it possible to have a domicile and not be a taxable resident?

It depends from the Country.

The income that will be subject to taxation is all the income that I receive.

- If I’m resident, I have worldwide taxed.

- If it’s my domicile, only the place where I am.

Calculation of Personal Income Tax

(+) Gross Income

(-) Expenses (standard amount or

itemized)

(-) Personal exemptions

= Taxable Income

*Income Tax (Progressive tax rates)

(-) Tax Credits

= Tax burden

Gross income : We consider all the kind of income we receive in a year

 (scholarship is not taxable), and then we deduct expenses. Gross income could

be wages, rent and interests.

Expenses: There’s a long list of costs that can be deduct (ex. health care,

 business car and all the cost associated, university fees, charitable contribution

with a limitation, child care expenses, alimony, casualty and theft).

Standard amount of deduction: People have also the option to be allowed to have an

amount of costs that can be deduct and don’t have to be justify.

Personal Exemptions : In certain cases (Countries) you also have some

 personal exemptions that can be benefits for yourself or for someone else that

is leaving with you under you (like a kid). Personal exemptions are not a general

rule, but you can still find it.

We have two systems that are standard deduce and itemized deduction.

Allowed Deductions (in general)

Mortgage Interest paid

 Medical expenses

 Insurance premiums

 Certain charitable contributions

 Child care expenses

 Alimony

 Casualty and theft

 Etc.



Not allowed deductions (in general)

Personal interest paid (from personal loans

 Fitness club membership

 Cosmetic surgeries

 Fines and penalties

 Etc.

 9

PERSONAL INCOME TAX

Taxable Income

Progressive Tax Rates

(Example – US tax for singles

Tax Rate 2017 Taxable Income

10% $0 to $9,325

15% $9,326 to $37,950

25% $37,951 to $91,900

28% $91,901 to $191,650

33% $191,651 to $416,700

35% $ 416,701 to $418,400

39,6% $418,401 or more

If you are married or have children and you have only one person working, your

personal tax rate will be lower.

Payment of dividends and double taxation (will be in the exam)

Dividends are paid out of profit of the company, so we have a situation of double

taxation, one at the level of the company and one at the level of personal income.

To avoid these double taxations some countries, give a credit for the amount of taxes

already paid of the CIT Imputation System

 Imputation System Example

Corporation x Shareholder

Taxable Income 100 Dividends 70

CIT (30%) 30 Gross-up 30 (rimborso tasse, same

amount of CIT paid)

= Net Profits 70 Taxable income 100

Personal income tax 40

Tax credit 30

Personal income tax paid 10

Here for example I pay 30 of CIT, I also pay 40 in personal income tax, at this point I

get a tax credit of 30 so that I only pay 10 in personal income tax.

The Gross-up is the CIT in the Corporation that makes the taxable income of

 100 again. 10

CROSS-BORDER BUSINESS ACTIVITIES

Most of the businesses are carrying out with web pages. When we talk about branch

and subsidiary we talk about legal entity:

branch

- A is a legal extension of the main company, is a “branch” the



company wants to carry out some businesses in Japan, so I will set up an office

with the same name, the same legal structure, but I will operate in another

country.

subsidiary

- A is a new legal entity, you have a corporation who decides to set a

subsidiary. It is 100% owned/controlled by partners.

BRANCH ITALY GERMANY

Branch

Corp. sales income 11

NON-RESIDENT

- Non-separte legal entity

Withholding taxes gross amount of the income,

- is a tax that you apply on the



no other deductions. Is a way that countries use for tax non-residents. For

example: a singer is going to perform in Germany, and you receive

compensation. You are not a resident in Germany, you don’t have Germany tax,

and so the easiest way for the German tax administration is that they will

charge the tax at the moment when you are living.

No deductions allowed:

- when you talk about deductions, you refer to corporate

income tax. So there won’t be deductions, but there could be the income.

Is the branch having deductions?

 Deductions are referred to corporate income taxes.

Branches are considered a permanent establishment, which is a concept given by

treaties.

SUBSIDIARY ITALY GERMANY

dividends DE

IT WHT 25%

sales income

RESIDENT

- Separate legal e