Tax Law - notes

BUSINESS LAW AND TAXATION

What is tax? Why do we have tax? What do we tax?

Are necessary in order to provide money to sustain services. (If you are a company,

you need to satisfy your clients with dividends.)

Taxes are a distortion of the market.

 Taxes normally imposed in a general way, according to our wealth.



Example of taxation can be on tobacco and alcohol.

Taxes are a compulsory general levy imposed by governments on individuals and

businesses in order:

To finance their expenditure: to provide public goods.

 To estimate some specific sectors of the economy

 To avoid certain behaviors: we’ve talked about cigarettes and alcohol

 To control macroeconomic indicators:



Taxes can be a levy on:

Income/profits a percentage of individual or corporate earnings field to the

 

federal government.



Assets If we talk about a house that in many years can increase its value, is

 it taxed? The house is an asset. This is applied in many countries and is

“capital gained”,

called taxes on which are a specific tax on assets.

Consumption

 is a tax on the purchase of a good or service. It takes the form



sales taxes.

of Let’s assume that the entire cell phone have the same quality

is that price real?

(Apple, or others), even with this assumption, No.

A consumption tax is applied doesn’t matter your income.

A government cannot say that they’re going to impose income taxes, so on specific

purpose.

Why is not possibile?

(Income/profits) In a company, why don’t we tax the capital of a company?

When we talk about income, we are talking about something that is generating profits,

capital is just needed to start running a company. If a company is not generating

income, profit should not be taxed.

Value added tax is already charged on the asset.

VAT sales taxes

and is not the same thing but they are applied on the same issue that

is consumption. Sale tax is applied in the US, doesn’t have the mechanic of

discounting the amount of taxes that you already paid when you bought something.

Generally speaking, when you pay VAT, you will discount the amount of taxes.

Is important to know many economic concepts, which deal with progressivity of taxes.

regressive.

VAT and consumption taxes are generally criticized because they are

Are there limitations for taxation?

Constitution limitation. I cannot tax corporations 99% of corporate income tax,

because they won’t survive, or I cannot tax people 80% because otherwise people

would just leave the country to go somewhere else.

Italy is a democratic country. In each of that there are some rules of democracy. There

are many laws that regulate taxation.

Principles of Taxation 1

Rule of law (principle of legality): the law must provide taxes and everything

 related to tax rate etc.. This is because we live in a democratic country.

Tax neutrality it means that taxes should not affect the economic decision,

 

doen’t matter if you are an individual or a corporation. So when you take

decision on business activities, you are not affected by taxes. (Taxes are not

neutral at all)

Why don’t we want that taxes affected our economic decision?

Because taxes are a distortion of the market.

Ability-to-pay requires that the total tax burden will be distributed among

 it

individuals according to their capacity to bear it. Is recognized at Constitution

level (example of Italy).

In a tax system, a corporation is calculated on taxes income, (revenues of the

company- deductions). Italy introduced provisions:

Example: a company that is paying interest abroad, they can only use 10% interest,

with 100 of Income (100 is what you pay, and 10% is the deduction).

Ability to pay means that taxes should be charge according to the economic

capacity.

Taxes may also be affected by European tax rules, but we have also the principle of

taxes sovereignty.

Tax sovereignty countries can decide what to tax, what to consider not income, how



much to tax, etc.

Source of taxation rules

Domestic law

 International Law (tax treaties) Tax treaties have a simple purpose, which is to

 avoid the double payment for taxes. An example of Tax treaties is between Italy

and Germany, so are designed by a lateral agreement to avoid a double

payment of taxes. (others can be USA and Japan).

EU Tax Law is all the member states of EU. There are some rules that are at

 

the level of the European Commission. The member of states must implement

this rule,, and these are issued by directives. These directives are recognized as

Domestic law.

Types of Taxes

Direct taxes (taxes on income/profits) Corporate Income Tax, Personal Income

 

Tax (wages)

Indirect taxes (taxes on goods and services) VAT, Sales taxes

 

Tax rate

Taxes is general are imposed on tax base. It depends on the type of tax we are

applying. Example: when we are talking about the personal income tax, we refer to

gross income drive from different sources.

Nominal vs effective tax rates statutory tax rate is the tax rate you see on

 

the law, example: Apple is paying 10% of corporate income taxes and in US is

35%. This is not what you pay effectively because there are deductions, not on

the gross amount you receive. When you talk about tax reforms you always

effective tax rates.

refer to

Progressive tax depends on how the tax rate moves. The most common is

 

personal income tax. It is calculated from 0 to (let’s say) 40%, it doen’t mean

that you have to pay 40%. But if you are earning a lot, you have to pay the

maximum. Is a payment applied according to the level of your income. 2

Proportional tax There is no movement of the tax rate: example is the VAT,

 

we all pay the same amount.

Regressive tax Tax rate decreases according to earning more income (VAT

 

has a regressive effect: non-relation between increase of income and increase

on consumption).

NB!!! TAX BASE IS WHAT WE TAX

Business activities

How can business activities be performed?

Individuals: SELF-EMPLOYMENT INCOME



Employee vs self-employed .

1 2

100 income A person that is carry out a business.

(-)taxes (payed tax) 100 income

 (-) taxes annualy

monthly (-) social security

(-)social security (-) health insurance

(-) health insurance = Net profit

= Net Salary

Legal entities: BUSINESS PROFITS.

 Corporate

a) limited liability, it means that if you are an investor of the



company, you are only liable as a legal person (so for the money that you

put), not with your personal assets.

Corporations: carry out a business in a safe way. In terms of taxes,

corporation pays corporate income tax.

Non-corporate

b) Doesn’t exist for taxes purpose, is not liable for taxes as



an entity itself, but at the level of the owners. Partnership is an example

of non-corporate entity: income is not taxes at the level of the partnership

(is completely invisible). So the income is reflected only on partners, the

same happen for expenses (directly to partners).

If you have to decide to carry out a corporation, which factor would you consider?

The corporate income taxes in Italy are 45%, and partnership 30%. Which one would

you choose?

Partnership, because i’d have to pay only 30% instead of 45%.

Would you prefer to have a rigid leag entity or flexible one? Flexible.

Generally is difficult to say that the main purposes for the choice of the entity, is

based on tax purpose.

We look at different types of items, but we have many basic rules: INCOME and

DEDUCTION.

Income: is the money that we have paid for services or business activities.



1 working for someone else.

2 is an individual that works for himself instead of working for an empoyer that pays

salary. 3

Deduction:



Which type of individual income do you know?

Salary

 Wages

 3

Capital gains is an increase in the value of capital assets that gives it a

 

higher worth than the purchase price.

Interest

 Dividends distribution of a portion of a company’s earnings.

 

Gifts

 Pensions

 Rent

 Tips should be considered income

 

Payments for insurance (generally will be income)



Gifts won’t be taxed until a certain amount and won’t be considered income. If a



corporation makes a gift, it is not considered income up to €10.000

+ GROSS INCOME

NON-INCOME

(-) DEDUCTIONS

(-) EXEMPT INCOME

=TABALE INCOME

TAX

Exempt income refers to certain types or amount of income not subject to

 federal income tax.

Deduction is any time or expenditure subtracted from gross income to reduce

 the amount of income subjected to income tax. It is also referred to as an

“allowable deduction”.

a. Standard are reducing the amount of gross income you are declaring

b. Personal deduction, you can have deductions to cover the cost to

maintain (i.e. a child)

Corporation income:

Salary

 Gifts

 Pensions

 Rent

 Dividends



Corporation deductions:

Salaries (it is an expense)

 R&D

 Interest

 Depreciation & Amortization

 Market and Advertisement



3 The gain you pay for the capital asset. 4

Operation expenses (interest of the loan, which is not necessarily a daily

 operation but has to be deducted)

FACTOR TO TRIGGER TAXATION

Residence/ Domicile for tax purposes (an individual is considered a resident

 

after 183 day in a calendar year).

Resident is taxed worldwide income. (Foreign income)

 Non-resident people are taxes on the income source within the country

 (where you are. Domestic sources).

Citizenship

  if you are a citizen, anywhere you are, you must pay taxes (this is

only valid for US and Eritrea)

Place of consumption VAT is applied on the territory.

 

Others.



In c