Class 10 (ch 15 & 16) Flashcards
What does the term “tax morality” mean
It is the decision to comply or not comply with tax laws
What do regulators or governments need to consider in regards to tax
Potential revenue from the tax, how it can be collected and its impact on the economic behaviour
What should the ideal tax do?
Raise revenue efficiently and have few negative effects on economic behaviours
Some theorists argue that the idea tax should…
be completely neutral in its effect on private decisions and equitable among taxpayers, which is called tax neutrality
Some theorist that argue against tax neutrality say…
Payments or investments in developing countries should be encouraged through an active tax incentives policy
What do tax treaties between countries intel
Different tax structures, rates and practices that results in unfair playing field for the firms that complete on world markets
What are the 2 ways nations structure their tax systems
1) worldwide approach
2) territorials approach
What is the worldwide approach for taxation and give an example of a country that does so? Give an example
Regardless of where the money is made (domestic or abroad), the firm is subject to taxation from that country. The USA does this
Ex: American company does work in Africa, the earnings they get in Africa will be subject to USA taxation even though they were earned in Africa
What is the territorial approach for taxation and give an example of a country that does so? Give an example
It states that you are only taxed on earnings that come from where they were earned. Germany does this where they imply tax on earnings made within the country whether it is a foreign or domestic company
What is said about tax regimes for countries with worldwide taxation
They are considered to have less competitive tax regimes to attract companies
Tax-haven subsidiaries are typically established in a country that can meet what 4 requirements
1) low tax on foreign investment or sales income by resident corporations and low dividend withholding tax on dividends to parent firm
2) Stable currency with easy conversion
3) Facilities to support financial services (ex: good communications, good office workers, reputable banking services)
4) Stable government that encourages foreign-owned financials and services facilities
What happens with tax haven subsidaries and parent companies?
Typical tax-haven subsidiary owns 100% of the parent company, which means all transfers go through the subsidiaries, including dividends and equity financing.
What are tax treaties? What do they allow for?
It is an agreement made by one country with another regarding earnings that are earned in one of the countries. For example: the USA has a tax treaty with Canada for building a new building in the US. The US may offer lower taxation to Canada to come help them make their building
These treaties allow for a better business relationship between countries
Which sort of countries are these tax treaties most important to?
Countries that typically export goods
Why is this tax treaty so important to these exporting countries
Because they dont want any of its worldwide income to be taxed by the importing company
What is transfer pricing? Give an example
It is the practice of setting the price of the good a company is transferring from one country to another
Example: USA sends cars to Europe and they set the price of each car at $50k USD
What is the principal used by countries when exporting a good in terms of transfer pricing? Describe that principal
It is called Arm’s length principal which states that authorities generally require that transfer price to be set at a price that is comparable to what unrelated parties would agree to pay for it under similar circumstances
What does Arm’s length tax prevent
Prevents profit shifting solely to tax benefits
What sort of risk mitigation tools would a company use when doing international trade? (name 1)
Letter of credit
What is a letter of credit
A financial instrument issued by the bank that guarantees the payment of the good to the exporter (seller) by the importer (buyer), granted that specific conditions are met. This tool helps mitigate risk for the buyer and seller
When are letters of credit mostly used?
In international trades
What else can Letter of credit be used for besides goods?
They can also be used to guarantee services
What is an alternative to letters of credit
Performance bonds
What are performance bonds
It is a type of surety bond that is issued by insurance companies or banks to guarantee satisfactory completion of a project by a contractor
What does a performance bond protect?
It gives security to a project owner (the obligee) that if he contractor (the principal) fails to fulfill the obligations agreed upon in the contract, the bond issuer (the surety) will compensate the obligee, usually up to the bonds full value
How will the issuer (bank and insurance company) typically go about if the contractor fails in a performance bond
They will try to find a new contractor who could complete the project instead of paying out the bond
Do pension funds pay tax?
Pension funds are tax exempt if they invest in their own country
If a canadian pension fund invests in foreign markets, do they have to pay tax?
Yes they must pay tax unless some sort of agreement is made between the pension fund and the country they wish to invest in
Name the two liabilities for a pension fund?
1) the pensioners money they will get at retirement
2) the inflation rate
Why do pension funds invest in riskier assets when all it has to do is invest in the risk free rate?
Because the excess returns from this risk can go to stakeholders which will increase share price
What determines the quality of a letter of credit
- the bank where it was issued at
-If it is revocable or unrecoverable - if it is confirmed or unconfirmed
How do different countries help finance growth
Every country has a “company” that facilitates the exporting process for a country. These banks/company’s help finance international growth with letters of credit that go beyond what banks can offer
If a country doesn’t have these companies that facilitate growth, who do they use?
They use the IMF
