Capital 9: Local profit tax

Question 1

What are the different local profit taxes?

Answer 1

• Trade tax on income: Germany, Japan, Luxemburg, USA
• Business tax: Hungary, Japan
• IRAP: Italy

Question 2

What is the trade tax like in germany?

Answer 2

• Subject to trade tax: All business in germany, maintaining a permanent establishment, Sole propr, Partnerships, Corporations
• Trade tax is levied by communities where business are located, if more than one community the base value is allocated on apportionment of labour costs in the different

Question 3

What is the justification for trade tax?

Answer 3

• Benefit principle
• Businesses induce extra costs for communitites

Question 4

What is the determination procedure for the trade tax in germany?

Answer 4

Start: BUsiness income

• Add backs: e.g. 25% of interest payments
• Deductions: forein source income

Allowances: 24,500 for partnerships and sole proprietor

= trade income

Question 5

How is the trade tax in germany calculated

Answer 5

Base value = trade income x federal rate (3.5%)

tax= Base value x Municipal multipli

Municipality, at least 200%)

Question 6

Germany Trade tax:

What are the objectives for the modificiations?

Answer 6

• Entity principle: tax burden should not be affected by source of finance and the use of rented property
• Source principle: only domestic profits should be subject to tax

Question 7

Trade tax Germany:
What are the most important add backs?

Answer 7

• 25% of interest costs for loans and of deemed interest in rental payment, leasing fee and royalties
• Losses from foreign business (permanent establishment, partnerships)

Question 8

Trade tax Germany:
What are the most important deductions and allowances?

Answer 8

deductions

• Dividends from corporations (major shareholdings 15%)
• Profits from foreign businesses (permanent establishments, partnerships)

Allowances:
- Sole proprietor and partnerships: 24,500

Question 9

Trad tax Germany /Luxemburg:

What is the tax rate?

Answer 9

• Federal rate: 3.5%
• Municipal multiplier: varies between 200% and 900%
• Minimum 7% = 3.5% x 200%
• Maximum 31.5% = 3.5% x 900%– - Average 14% = 3.5% x 400%

Question 10

How does trade tax affect business profits?

Answer 10

• Trade tax is a non-deductible business expense
• It increases the nominal tax burden on profits of corporations and sole proprietors/partnerships.
• Sole proprietors/partnerships can deduct 400% of base value from income tax on business profits.

Question 11

What is the special treatment of sole proprietor and partnerships regarding trade tax?

q

Answer 11

Reasons: They face a higher income tax burden than corporations

• to reduce their disadvantage, sole proprietors/partnerships
• can deduct 400% of the base value (=product of trade income and federal tax rate of 3.5%) from the income tax on their business profits

Question 12

What is the local business tax like in Hungary?

Answer 12

Subject to local business tax: all businesses, e.g.
- sole proprietorships
- Partnerships
- Corporations

Local business tax levied by municipalities for business activities which are
- Permanent (legal sear or permanent estalbilishment within territory of municipality) or
- Temporary (longer than 30 but less than 181 days per tax year)

Question 13

What is the justification of the business tax in Hungary?

Answer 13

• Benefit principle
• Extra costs for communities

Question 14

What is the determination of the business tax in Hungary?

Answer 14

Revenue from sales of goods and services, excluding profits attributable to foreign permanent establishments provided it was subject to tax in the respective foreign country

Deduction:
- Acquisition costs of goods sold (deductibility restricted)
- Cost of mediated services, including subcontractors (deductibility restricted)
- Cost of material
- Direct costs of R&D (basic research, applied research and experimental
development)

= Local business income tax base

tax base:
- Interest receipts not included and interest expenses are not deductible
- Labour costs and depreciation are not deductible

Question 15

What is the tax rate in Hungary?

Answer 15

Tax rate
- Max. 2% for permanent business activities

• Local business tax is deductible for corporate income tax purposes

Local business tax: tax base x 2%

Question 16

Which businesses are subject to the regional tax on productive activities (IRAP)?

Answer 16

• Corporations
• Partnerships
• Sole proprietors

Question 17

How is IRAP (regional tax on productive activities) represented?

Answer 17

• IRAP is based on the added value produced in a certain region
• Taxpayer must have a fixed base (e.g., factory, building, office) in the region for at least 3 months during the financial year
• If more than one region: added net value of production allocated on
  apportionment of costs of employees in region

Question 18

What is the justification of Italy in IRAP?

Answer 18

• Benefit principle

Question 19

What is the tax rate of the IRAP (Italy)?

Answer 19

• The standard rate of IRAP is 3.9%
• Regional authorities may decrease or increase the standard rate by up to 0.92%

Question 20

How is IRAP calculated when business activities occur in multiple regions?

Answer 20

The added net value of production is allocated based on the apportionment of employee costs in each region

Question 21

Is IRAP deductible when calculating the taxable base for CIT?

Answer 21

No, IRAP is not deductible for determining the taxable base for corporation income tax (CIT rate = 24%)

Question 22

What measures exist to reduce the IRAP burden

Answer 22

Seince 2015: A 10% tax credit on IRAP for entities without employees.