Principles of Taxation

Question 1

What is competent jurisdiction?

Answer 1

Competent jurisdiction is the country whose tax laws apply to the entity.

Question 2

What is INCIDENCE when it relates to tax?

Answer 2

The incidence of a tax is the distribution of the tax burden - who is paying the tax. Which can be split into 2 elements.

Question 3

What is FORMAL INCIDENCE?

Answer 3

This is the person who has direct contact with the tax authorities - who is legally obliged to pay the tax.

Question 4

What is ACTUAL / EFFECTIVE INCIDENCE?

Answer 4

This is on the person who actually ends up bearing the cost of the tax.

Question 5

What is a TAXABLE PERSON?

Answer 5

The individual or entity accountable for the tax payment - who normally pays tax in the country of residence.

Question 6

What is HYPOTHECATION?

Answer 6

Means certain taxes are devoted entirely to certain types of expenditure - Road tax is used entirely on maintaining roads.

Question 7

What is the TAX GAP?

Answer 7

This is the GAP between the tax theoretically collectable and the amount actually collected.

Question 8

What is the Tax Rate Structure?

Answer 8

There are 3 types of tax rate structure:- Progressive Taxes, Proportional Taxes & Regressive Taxes.

Question 9

Explain Progressive Taxes regarding the tax rate structure?

Answer 9

A progressive tax takes a higher % of tax from people with higher incomes.

Question 10

Explain Proportional Taxes regarding the tax rate structure?

Answer 10

This takes the same proportion of income as income rises.

Question 11

Explain Regressive Taxes regarding the tax rate structure?

Answer 11

A regressive tax is a tax which takes a higher % of tax revenue from those on low incomes.

Question 12

Explain SOURCE OF TAX RULES?

Answer 12

• Legislation produced by a national gov of the country;
• Precedents based on previous legislation / CASE LAW;
• Tax authorities also issue interpretations;
• Directives from International Bodies such as European Union guidelines;
• Agreements between different countries - UK/US Double Tax treaties.

Question 13

Can income be taxed twice? Explain?

Answer 13

Foreign income is often taxed twice - once in the country of origin and again in the country of residence. Hence the UK/US Double Tax treaties.

Question 14

Give examples of DIRECT TAXES?

Answer 14

• Tax on trading income
• Capital taxes
• Property taxes
• Wealth taxes

Question 15

What are the 2 types of INDIRECT TAXES?

Answer 15

• Unit Taxes - These are taxes based on the No. or weight of items :- excise duty.
• Ad valorem taxes - Based on the value of items :- Sales Tax.

Question 16

Can you give 4 examples of INDIRECT TAXES?

Answer 16

1. Excise Duty
2. Consumption Tax
3. Cascade Tax
4. VAT

Question 17

Explain Excise Duty?

Answer 17

This is a type of UNIT TAX applied on certain products like alcoholic drinks, tobacco, mineral oils or motor vehicles. They are based on the weight or size of the tax base. This is imposed to :-
* discourage over consumption of harmful products
* pay for extra costs, such as increased healthcare
* Tax luxuries

Question 18

Give some reasons why Gov. set deadlines for filing returns and / or paying taxes.

Answer 18

1. Entities will know when payment is required;
2. Its enables tax authorities to forecast their cash flows more accurately;
3. Provides a reference for late payment - useful for applying penalties for not paying;
4. To prevent entities spending tax money deducted from employees. If tax is deducted from employees at source and not paid to the tax auth fairly quickly, there is more chance of an entity spending the amount deducted, instead of paying it to the tax authorities.

Question 19

What is TAX ON TRADING INCOME?

Answer 19

Trading income relates to income from the main business activity and the tax base should be TAXABLE TRADING PROFITS.

Question 20

What is a Tax Base?

Answer 20

A tax base is something that is subject to tax.

Question 21

Give 3 examples of Tax base?

Answer 21

1. Income - taxes on an entities profits.
2. Capital or wealth - taxes on capital gains or inherited wealth.
3. Consumption - taxes on excise duties, sales tax / VAT

Question 22

Why do trading profits need to be adjusted?

Answer 22

In many countries there are differences between what the ACCOUNTING STANDARDS allow you to show as an income/expense and what the TAX SYSTEM deems to be allowable as income / expenses.

Question 22

Explain CAPITAL TAX GAINS?

Answer 22

These gains are made on the disposal of investments and other non current assets. At a simple level, the gain is calculated as proceeds from sale LESS cost of asset.