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Tax Law - Diritto Tributario (Prof. Parada) Appunti scolastici Premium

Appunti in lingua inglese di Tax Law relativi al secondo anno del percorso Business and Management presso l'Università degli Studi di Torino. Sono completi di teoria e casi pratici (con soluzioni). Contengono, inoltre, tutto il necessario per superare l'esame di Tax Law del visiting professor Parada.

Esame di Diritto tributario docente Prof. L. Parada

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ESTRATTO DOCUMENTO

At the same time, we can divide tax rates in other types:

o Progressive tax: tax is moving is moving according to the amount of money you’re receiving

o Proportional tax: there is no movement on the tax rate, it is 50% for everybody (VAT)

o Regressive tax: tax rate is decreasing according to the level of your income.

There are not so much regressive taxes, but several proportional taxes that are considered to have a

regressive effect. 2

CASE STUDY:

Country X decides to introduce a domestic rule that limits the deduction of interest for business activities

up to 30% of the total amount of interest paid either domestically or internationally by a business.

Do you think that the new domestic rule in the country might conflict with any of the principles of the

taxation already studied?

➢ It conflicts with the ability-to-principle and tax neutrality

Do you think that it would make a difference whether those principles are expressly recognized within

domestic law, supranational law (e.g. EU law) or international law?

➢ It will make a difference because, if it is EU regulations or national, in other parts of the world it

may be cheaper, while if it is international it will make no difference

CASE STUDY:

Country X has a corporate income tax with a tax rate of 25% since 1999. In 2018 the tax administration

issues a notice that provides that in tax of tax evasion this rate will be increased up to 80% as a penalty.

Do you see any problem with this new administration notice?

➢ Yes, it is not in accordance with the rule of law principle (because it is issued by a tax administration

and not through a law issued by the parliament).

What principles of taxation may be jeopardized in this case?

➢ it is not in accordance with the principle ability-to-pay, the neutrality and the rule of law principle.

CASE STUDY:

Dr. Tortellini is a re-known tax expert who affirms in his last paper that a VAT rate of 10% has indeed a

regressive effect.

Do you agree with his statement?

➢ It depends, you must justify

Why? Why not?

➢ In some cases, VAT is different in relation to the types of goods (primary or luxury). Moreover, if I

am very rich I will by things like iPhone and Ferrari otherwise I will take buses.

3

CASE STUDY:

Dr. Tortellini is now advising the Country X to implement a tax reform. He proposes to introduce a

“progressive” CIT (progressive income tax rates as per the size of the firms and the income they produce).

The above, according to Dr. Tortellini, will increase fairer taxes, because larger size firm will pay more

taxes than smaller ones.

Does Dr. Tortellini’s advice make sense?

➢ No, it does not make sense to me.

Why? Why not?

➢ The tax increase in a big corporation would be paid by consumers, by workers, by investors and by

all the individual behind the legal entity. Moreover, it will bring the big company getting out of the

country and moving somewhere else, which would increase unemployment etc.

4

Lecture Two:

How can be business activities be performed?

• Individuals: self-employment income. A person who is carry out a business by his own, has an

income and has to pay taxes annually by himself (both with social security and health insurance).

• Legal entities: business profit. An employee who works for instance for Fiat has a tax (payable) who

is paid by the employer (Fiat, 10%). The obligation to pay the taxes is given to the employer (he has

social security and health insurance too).

o Corporate (corporation)

o Non-corporate (partnership)

During the course we will focus on the individual taxes/self-employment. However legal entities can be

divided into corporate entities (here we have limited liability) and non-corporate entities. Some kinds of

business must be performed just by corporation, like insurance companies and a bank.

In terms of taxes, corporation, is a separate legal entity that exists for all taxes purposes, you pay a specific

tax for that entity. If it has profit, it will pay taxes on it and then it will pay taxes on dividends.

A non-corporate entity, on the other hand does not exist for tax purposes, it is not recognized as an entity,

but rather at the level of the owner. Here the income will not be taxed at the level of the partnership, but

only at the level of the company. Every profit in a partnership will not be subjected by taxes but only later,

at the level of the single owners.

Generally, there are a lot of factors influencing the choice between setting up a partnership or a

corporation, not only taxes (flexibility, ability to raise money etc.).

We have different factors that influence which taxes we will have to pay (as individual or corporation):

• (Gross) Income: everything will be income unless the Government will say “this is not income”

o Salary (wages) – Revenues

o Capital gain (results of selling capital assets – stocks, properties, bonds)

o Interests from financial instruments

o Dividends (what we keep after paying the company income taxes)

o Inheritance – not for corporation

o Gifts (over a certain amount)

o Pensions – not for corporation

o Rent

o Share in the partnership

o Tips – not for corporation

o Payments from insurance

o Royalties (when you’ve some cover-right)

• Deductions: are reducing the amount of Gross income you’re declaring.

o Salaries of employee

o Depreciation

o Amortization

o Interests

o R&D

o Marketing & Advertisement cost etc.

• Exempt Income: it is something that is income, but you do not pay taxes on them (compensation

on services etc); however, you have to declare it.

• Taxable Income 5

There are many taxes that trigger taxation:

✓ Residence/Domicile

✓ Citizenship

✓ Place of Consumption

Individuals:

Residence: for tax purposes, a person, stays for a certain period in a place (183 days in a calendar – six

months). Normally a resident in a country will be tax on his worldwide income. Non-resident people pay

only on income generated within the country.

Domicile: it is more a legal concept; it is more about having your main business/family in the country, it is a

proof that your domicile is in the country. Even if you change residence it may be possible that you’re still

taxes on your worldwide income.

Citizenship: there are two countries that are taxing citizens not matter where you are, US and Eritrea.

Corporation:

The place of incorporation – generally used to determine where it is the residence

The place of management and control – some countries say that the residence of the corporation will

depend on where the corporation is managed.

For instance, in Ireland till 2013, you can incorporate the company in Ireland, but managing and control

somewhere else and it won’t be resident in Ireland. At the same time, it is not resident in US because they

use the other criteria, this created many problems.

Each country decides on its own which criteria to use to establish where the residence is.

We can have many sources of income:

• Domestic Source

• Foreign Source 6

CASE STUDY:

After 20 years living and working in country X, Mr. Robinson and his family decide to movie to country Y.

Mr. Robinson registers his children at a school there and his wife gets a job as a school teacher too. For

practical reasons, Mr. Robinson keeps his banks account in country X and decides to lease the family

house in that country. The payments of the rent are deposited directly in the bank account in country X.

in country Y Mr. Robinson works as self-employed, but the majority of his clients are located in country

X.

What problems do you see with regard to Mr. Robinson’s movement to country Y?

➢ We have to establish the difference between residence and domicile. In country X he has a house

and he is renting it (so income), he has some clients there, so he moves frequently there. On the

other hand, he has moved to country Y, we can suppose that he has domicile there. So, it depends

on the rule of policy applied by country X, if it is not strictly linked to the staying there, then he has

residence, on the other hand, if X apply just the principle of residence, he is not residence anymore;

If X applies the concept of domicile, then he pays taxes also there. It is about factors like bank

accounts and clients. The same stuff is linked to country Y.

In a position as tax advisor would you recommend him to do something different?

➢ It would be a good idea to change the bank account and move it to country Y, try to get less

connections possible with the old country.

CASE STUDY:

Mr. Fletcher wants to invest in a touristic business resort in Mojito Country and for that purpose he

needs a legal form. The State offers the possibility to set up both corporate and non-corporate entities,

including also sole proprietorship entities. The statutory CIT rate in Mojito country is of 10% and a

complete exemption of taxes is applied for individuals no matter where income is sourced.

Should Mr. Fletcher set up a Corporate or Non-Corporate legal entity to carry out his business? Does it make

any difference?

➢ I think that it would be convenient to set up a sole-proprietorship in order to avoid the double

taxation and the CIT (we have the complete exemption).

What are the advantages of both options?

➢ In the first case (non-corporate) you avoid double taxation, it is a more flexible form of business. On

the other hand, for a corporation you can easily raise money and you have limited liabilities.

Moreover, if you have a big debt you can deduct from tax and you have a solid structure to show as

a guarantee.

Would you answer vary if I would say that the effective CIT rate in Mojito country is in average 0,001%?

➢ Maybe in this case the difference is so minimal, that he will consider the corporate form. However,

in some country, it acquires more importance the stuff of double taxation and simplicity, so maybe

individual or partnership it is still better. 7

CASE STUDY:

A group of investors decides to invest in the mining sector of country X. for simplicity of its formation in

comparison to a corporation. A partnership in country X is not subjected to taxation at all. Taxes are

rather charged at the level of the partners (i.e. personal income taxes) but only affecting domestic

sourced income received. The partnership receives income from its operational activities of 100.000 EUR.

It also receives interest from investments in country Y, which amount to 50.000EUR and pays 5.000 EUR

on taxes in country Y derived from this investment income.

How much taxes must be supported in country X? who does pay those taxes?

➢ In this case they pay only on the income sources in country X, they only pay income at partners

level not trough the company. So, it would be 50.000 EUR each, if you have two partners.

May the investors deduct the payment of foreign taxes (country Y) in country X? why? Why not?

➢ Can I use dollar from country Y to reduce tax in country X (so to deduce them)? The answer is not

because it says: taxes “only affecting domestic sourced income received”.

Would it make a difference if country X allows the taxpayer to change the tax treatment of a partnership?

Do you know an example from real life?

➢ In the US there is the possibility for the taxpayer with respect to certain entities to choose the tax

treatment; of course, the result will change, it would be taxed first with a world-wide taxation,

moreover, it will not tax just partner anymore but the entity.

CASE STUDY:

Mr. Fletcher is an Italian resident who has the following items of income:

Wages = 100

Dividends from Bahamas = 50

Interest from financial instruments in London = 50

Scholarship in Italy = 35

The laws in country X allows for an exemption of 50% of foreign wages under certain circumstances. Mr-

Fletcher can deduct a lump sum of 100 every year when he prepares his tax return.

What is the gross income of Mr. Fletcher?

➢ The gross profit is 200 because scholarship is not included as income.

What is the taxable income?

➢ The law allows him to deduct 100, so if he has 200 of gross income, the taxable will be 100.

If 50 out of 100 are indeed foreign wages. How much vary his gross income? And taxable income?

➢ Since 50 out of 100 are foreign wages, you can exempt the 50% so 25; so taxable will be 75 and

gross income will be the same.

Would your answer change if he is considered a non-resident in Italy?

➢ It makes a different if you are a resident or not, if you are resident you have a worldwide taxation,

otherwise just on income in that country. 8

Lecture Three:

Corporate Income Tax (CIT)

As we’ve seen there are several ways to establish the residence of a corporation:

• Place of incorporation

• Place of management and control

But how can we calculate the CIT?

(+) TOTAL REVENUE

(-) COSTS OF GOODS SOLD

(-) EXPENSES

Operating expenses (utilities, wages, rent)

Non-operating expenses (R&D, marketing, other investments)

= TAXABLE INCOME

(-) CORPORATE INCOME TAX*

= NET PROFITS

*NB the corporate income tax is calculated multiplying taxable income times tax rates.

EXAMPLE:

Tot. revenues = 100.000

Cost of goods sold = (20.000)

Operating expenses:

Salaries = 20.000

Rent = 10.000

Utilities = 5.000

Depreciation = 5.000

TAXABLE INCOME = 40.000

CIT 30% = (12.000)

NET PROFIT = 28.000

When Net Profit is negative, we have a loss; it is not necessarily something bad for the economy, it can be

something very good. We have various treatment of losses:

• Loss “carry back” = accounting practice that consist in using NOLs (net operating losses) against

previous years NOPs (net operating profits)

• Loss “carry forward = accounting practice that consists in using NOLs against future years’ NOPs

Payment of Dividends and Double Taxation: it is one of the negative facts about a Corporation. But what

companies do in order to avoid double taxation? In some countries, the government guarantee some

credits 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.

9

So, a corporation is paying a tax on the profit (CIT), then if net profit is positive it will distribute dividend to

shareholders. A shareholder has different incomes plus dividends, but dividends arrive with a credit of the

amount to which dividends are taxed, that must be subtracted after computing its personal income tax.

This system, the imputation System, concerns only some companies. If there is not this system, you will pay

all the PIT (personal income taxes) plus the tax on dividends (which are taxed because of the CIT).

10

CASE STUDY:

TIAF is a company incorporated in country X which sells cars. On 31 Dec 2017, the company showed the

following economic results derived from its activities:

Total Revenues = 2.000.000 EUR

Interest income = 100.000 EUR

Cost of goods Sales = 100.000 EUR

Operational expenses = 400.000 EUR

Non-operational expenses = 100.000

CIT rate = 35%

What is the taxable income of TIAF for purposes of the CIT in country X? explain the results.

➢ Taxable income is 1.500.000 (rev. + int. - cost of goods - operate. Exp.-non-op. Exp.)

What is the amount of CIT to be paid in 2017?

➢ It is 1.500.000 times 0,35 = 525.000

What is the effective tax rate paid by TIAF?

➢ I think it is 0,25 because it is the amount of CIT (525.000) paid divided by the overall revenues

(2.100.000); so, it is 25%

Would your result change if TIAF would have a NOL of 1.500.000 in 2018 to carry back to 2017? How?

➢ The result would change because if you take back a loss of 1.500.000 to the year in which you earn

1.500.000 then you wouldn’t have a profit, so you wouldn’t pay taxes.

CASE STUDY:

A company has 1.000.000 EUR losses in 2017. The company has the chance of either using those losses up

to one year back or up to three years in the future. In 2016 the company registered net profits after taxes

of 500.000 EUR. The total revenues of the company in 2016 were 2.000.000 EUR and the totals

expenses/costs were 1.000.000 EUR. The same expenses/costs re expected for 2018, although the

revenues estimated are 3.000.000 EUR.

How much CIT did the company paid in the 2016? (without considering the use of NOL). What is the

effective CIT rate in 2016?

➢ The CIT is 50% because the taxable Income is 1.000.000 and net profit is 500.000.

How much CIT is the company expected to pay in 2018 (without NOL)? Please assume that effective tax rate

equals the statutory tax rate.

➢ Since revenues are 3.000.000 and cost 1.000.000, we have 2.000.000 of taxable income so net

profit is 1.000.000 (because CIT 50%) and so effective CIT paid is always 1.000.000.

Would you recommend to “carry back” or “carry forward” the amount of NOL of 2017? Why?

➢ I think it’s better to carry forward because in this way you delete completely the loss, while if you

carry back to 2016 (when the profit was 500.000) you get 500.000 euros losses in any case.

11

CASE STUDY:

A company has 1.000.000 EUR losses in 2017. The company has the chance of either using those losses up

to one year back or up to three years in the future. In 2016 the company registered a profit after taxes of

500000 EUR. The total revenues of the company in 2016 were 2.000.000 EUR and the totals expenses

were 1.000.000 EUR. The same expenses are expected for 2018 although the estimated revenues are

3.000.000 EUR.

How much CIT did the company paid in 2016? (without considering the use of NOL’S). what is the effective

CIT rate in 2016?

➢ It is 500.000 EUR, so 50% of the profit (2.000.000 – 1.000.000 = EBT – taxes 500.000 so 500.000

which is the half).

How much CIT is the company expecting to pay in 2018 (without considering the use of NOL’s)? Please

assume that the CIT rate from 2016 is still the same in 2018.

➢ It will pay 1.000.000 EUR because it is 3.000.000 – 1.000.000 = 2.000.000 EBT and the half goes to

taxes, so it is 1.000.000 EUR.

Would you recommend carrying back or carry forward the amount of NOL’s of 2017? Why?

➢ I would recommend carrying back so in 2016 I wouldn’t pay taxes; however, it could take long, so

maybe it is better to carry forward to 2018 so you will pay taxes as 2016 and you will have an

advantage to predict the future in a better way.

**losses are used to reduce taxable income, they are considered as expenses when you carry back or

forward them. 12

Lecture Four:

Personal Income Tax (PIT)

it is affected by the residence of the individuals of course:

• Factual test of residence = more than 83 days in a calendar year

• Domicile (deal with the intention to remain in a specific place

But how do we calculate the Personal income tax?

(+) GROSS INCOME

Wages

Pensions

Capital gain

Interests (etc.)

(-) EXPENSES (standard amount or itemized) *

(-) PERSONAL EXEMPTIONS

If you have children

If you have a disable

= TAXABLE INCOME

(-) PERSONAL INCOME TAX (progressive)

NET INCOME

*Countries generally have a long list of itemized deduction based on what you performed or based on the

cost you have. On the other hand, you can have a fixed amount to pay independently by what you have or

spend. Sometimes you can choose between the two methods.

Personal exemptions are not a general rule; it works for instance in the United States.

The difference between CIT and PIT is that personal income tax is progressive:

(this is an example of U.S. tax rates for singles)

Tax rate 2017 taxable income

10% 0 to 9325

15% 9326 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 13

Payment of Dividends and Double Taxation:

Some countries to avoid double taxation as we’ve said use an Imputation system, so they give a credit to

the shareholder of the same amount of the Corporate Income Taxes.

Here we have how an imputation system works

Corporation X Shareholder

Taxable income 100 Dividends 70

CIT (30%) 30 Gross-up 30

Net Profits 70 Taxable income 100

Personal income 40

tax (40%)

Tax credit 30

Personal income 10

taxpaid

As you can see 30 of CIT are then subtracted from the PIT as a credit of the same amount. You add the

gross up in order to simulate 100 gained by the corporation, because otherwise you would have an excess

of credit.

Remember that here this company has just one shareholder that is the one taxed on the right.

14


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DETTAGLI
Corso di laurea: Corso di laurea in economia aziendale
SSD:
Università: Torino - Unito
A.A.: 2018-2019

I contenuti di questa pagina costituiscono rielaborazioni personali del Publisher Friz28 di informazioni apprese con la frequenza delle lezioni di Diritto tributario e studio autonomo di eventuali libri di riferimento in preparazione dell'esame finale o della tesi. Non devono intendersi come materiale ufficiale dell'università Torino - Unito o del prof Parada Leopoldo.

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