International taxation

Read the text and practice exercises

Taxation is used to finance government expenditure. It represents a transfer of income from individuals, groups and organizations to the government.

Taxes may be classified under various headings, the commonest distinction being "direct" and "indirect" taxation. Anyone paying direct tax (e.g. income tax) cannot shift this liability onto others. Taxes on goods, on the other hand are traditionally regarded as "indirect". Corporation and individual income taxes are direct; value-added taxes, sales taxes, and import or excise duties are indirect taxes.

Income tax is usually collected at source. Employers compute, deduct and remit the tax to be paid on their employees' earnings.

Corporation tax, a tax on the income of companies which are distinct legal entities, is a major source of fiscal revenue. The net income of a corporation constitutes the tax base, irrespective of whether such net trading profits are paid as dividends or kept as reserves. Corporation income taxes vary among the countries. Less developed countries usually have lower corporation tax rates in order to attract foreign investment.

Sales taxes and excise duties are the best known examples of indirect taxes. The distinction between excise duties and sales taxes is based on the scope of coverage. Excise duties are levied on particular commodities, e.g. tobacco, alcohol, petrol, while sales taxes apply to a broad range of goods and services. Sales taxes are charged on top of excise duties, wherever the latter apply, so that anyone buying cigarettes or petrol will, in effect, not only pay excise duties but also a sales tax on top.

The best known kind of sales tax, value added tax (VAT) has won recognition in the European Common Market. This is a national sales tax levied at each stage of production or at the sale of consumer goods. The tax is assessed in proportion to the value added during that stage. Generally, manufacturing goods, such as plant and equipment, have been exempted from this tax. In most cases, food items also have been exempted. Here is an example of how VAT works. A tree owner who sells part of a tree to a lumber mill for $1 must set aside ten cents.

VAT to pay to the government. The lumber mill processes the tree into building material and sells the wood for $3 to a lumber wholesaler. The mill adds $2 in value and thus sets aside 10 percent of the added value, or twenty cents, to pay to the government. And so the VAT continues until the final sale.

The VAT system offers advantages, such as rebates on exports. Profitable and unprofitable firms are taxed alike, as there is no possibility of tax deductions to determine taxable income. A badly run company is, therefore forced to improve or go out of business. Further, VAT is easy to calculate and collect. But VAT is often accused of having contributed to serious inflation in countries where it was introduced.

Notes:

net trading profits - чистий торговельний прибуток

a badly run company - компанія, керівництво якою здійснюється погано

Exercises

Exercise 1. Study the following definitions. Make sure you understand them and can reproduce them from memory:

taxation - the compulsory contribution of money to the government;

direct tax - a tax that is levied on individuals and corporations;

indirect tax - a tax levied on goods and services;

value-added tax - an indirect tax levied at each stage of the production cycle or at the sale of consumer goods;

corporation tax - a direct tax levied on the profits accruing to businesses;

income tax - a direct tax levied on the income (wages, rent, dividends) received by households;

sales tax - a form of indirect tax which is incorporated into the selling price of a product and which is borne by the consumer;

excise duty - an indirect tax levied by the government on certain goods, most notably tobacco, oil and alcoholic drink.

Exercise 2. Find the following words and phrases in the text and translate the sentences containing them:

Government expenditure; a transfer of income; under various headings; liability; taxes on goods; at source; employees' earnings; legal entities; the tax base; tax rates; the distinction; particular commodities; are charged; consumer goods; rebates on exports; a national sales tax; profitable; go out of business; inflation.

Exercise 3. Find words in the text opposite in meaning to the following:

illegal; expenditure; to exempt from taxes; similarity; retailer; profitable; employer; direct;

Exercise 4. Match the words in column A with their synonyms in column B

A B

corporation difference

to levy to count

fiscal ultimate

tax revenue

final financial

to calculate to assess

income duty

distinction company

Exercise.5. Make a proper selection:

liability	the value of what is received for goods sold, services rendered, and other sources;
direct taxes	a legal obligation, such as to pay debts and damages;
revenue	corporate and individual income, taxes;
indirect taxes	spending of money;
expenditure	value-added taxes, sales taxes, import duties;
e arnings	money remaining after business expenses are deducted;
profit	wages, salary, or income from work or investments

Exercise.6. The words in the box frequently occur after the word"tax":

burden	haven	bearer	cut
avoidance	tax	therapist	base
collector		free	evasion

Text 6.