Tax Law Exam (1) PDF - Sem I 2023-2024

Tax Law Sem I 2023 - 2024 Exam-> 24 h Literature-> Hugh Ault, Brian Arnold, Graeme Cooper, Comparative Income Taxation, A Structural Analyhsis, Fourth Edition, Kluwer Law International WK 1 Introduction Lecture Program Introduction to the course Why do taxation and what kind of taxes exist? Why is taxation not the same in every country What types of taxes do exist Introduction to the course Why is it important for entrepreneurs / corporations to have some knowledge about taxation? Goal of this course ○ Not: making a tax specialist out of the students ○ Do: -> creating basic knowledge about the importance of taxes -> creating knowledge about the different tax systems and the choices that governments make in this respect Starting point: The Netherlands Comparison with UK, US and China Why taxation? Governments need funding for general services Distribution of income Encourage people not to buy specific product like alcohol and Tabacco, casinos. Etc…. What kind of taxes do exist? Income tax Tax on dogs Import and excise duties Vehicle tax Value added tax (VAT) Tax on alcohol, Tabacco, sugar Net wealth tax Environmental taxes Gift and inheritance tax Taxes on legal transactions Taxes on games of chance Why is taxation not the same in every country? Not every society has the same needs Countries have other sources of income: ○ Public companies ○ Natural resources Cultural differences What types of Taxes do exist ? Direct taxes vs. Indirect taxes Direct taxes: the person who is liable to the tax is supposed to pay the tax by himself ○ Example: personal income tax Indirect taxes: the tax is being levied from another than the one who is supposed to pay the tax ○ Example: value added tax Entrepreneur is liable to the tax, but is supposed to add the amount due to the selling price => Global system vs. schedular system Materials Article => The Taxation of the “Sharing Economy” Giorgio Beretta article investigates the phenomenon of the “sharing economy” from a tax policy perspective author analyses the tax challenges resulting from this new model of production and consumption and discusses possible tax policies to address development of the sharing economy (1) Intro rise of a new model of production and consumption regarding goods and services, synthetically referred to as the “sharing economy’’ basic idea of using personal resources, such as spare rooms, cars, clothes, time, money, skills and the like, more efficiently by individuals bypassing the traditional middlemen enable individuals to harness the idling capacity of unused or underutilized assets in return of monetary or non-monetary benefits or even a mixture of the two peer-to-peer marketplaces transcend the simple trading conducted on eBay, customers in the sharing economy pay for access instead of ownership referred to as “collaborative consumption”, the “peer-to-peer economy”, the “gig economy”, the “on-demand economy” and the “1099 economy” => sharing economy has dramatically enhanced the opportunities for individuals to interact in a mutually beneficial way in the market. states and public authorities, in turn, have struggled to address the legal and regulatory questions that this new business model entails Labour and tax laws are at the forefront of these legal issues Taxation is probably the other most important matter of concern arising out of sharing transactions (2) Types of Sharing Transactions (opening comments) Sharing may involve different kinds of transactions following four types of transactions can be distinguished: (i) cash transactions; (ii) barter arrangements; (iii) cost-sharing agreements; and (iv) gifts and/or donations ○ => classification of a transaction into one of these four models is key to determining the tax treatment and, therefore, individuals’ decisions regarding the profitability of a sharing activity tax treatment of sharing earnings also depends on whether a tax system defines income in a global or a schedular way Global way => when any item of income is included in taxable income, unless specifically excluded Schedular way => when an item of income is not taxable, unless specifically included in a specific schedule ○ => no country defines income in either a purely global or purely schedular way (3) United States US Internal Revenue Code (IRC) defines taxable income by reference to “gross income” => defined in a circular fashion in section 61 of the IRC as “all income from whatever source derived”. Glenshaw Glass Co. (1955) expression has been interpreted by the US Supreme Court (SC) as applying to all “accessions to wealth, clearly realized, and over which the taxpayers have complete dominion” -> ‘unless Congress provides a specific exemption’ (4) Italy Italy, in contrast, income definition adopts a schedular approach. Tax is only levied on six income categories ○ if such earnings do not fall into any of the six schedules, that income is not subject to tax. the capital gain realized on the private sale of a piece of art is not taxable because it is not listed under any particular “schedule” Interim conclusions Question of whether sharing transactions may give rise to taxable income cannot be answered in a one-size-fits-all manner, but, rather, depends on the following two factors: ○ (i) the model of sharing transactions considered; ○ (ii) the definition of income employed in a given tax system Cash transactions defined as operations in which an individual shares personal goods or provides services on a peer-to-peer basis via online platforms for a fee Under tax systems that define income in a global way any item of income is included in taxable income unless specifically excluded tax systems that define income in a schedular way, for example in Italy, money transactions are generally subject to tax ○ earnings from a short-term rental could be qualified either as business or miscellaneous income, depending on whether the recipient of that income operates in a business or private capacity. Barter arrangements Cash transactions do not exhaust the entire spectrum of possible transactions among peers sharing economy enables individuals to reshape traditional market behaviours by way of renting, lending, swapping, sharing, bartering goods and services through technological platforms such barter transactions are not generally taxable in the hands of the recipients either in a global or schedular tax system long as such credits cannot be exchanged for “real” money or other considerations, or, to put it another way, as long as they “run” in a close circuit, participants are not subject to tax in the United States, a taxpayer is not taxed as long as he cannot exchange such credits for real currency. Cost-sharing arrangements between the two models (1) (2) transactions in which the provider of goods or services only derives a total or partial refund in return ○ case of users in BlaBlaCar ○ depending on whether taxable income is defined in a global or schedular way ○ in the United States, refunds are likely to be considered income and taxed in the hands of recipients ○ schedular system, such earnings may also be considered income for tax purposes. Gifts and donations Couchsurfing, an online platform where people open their home to travellers for free. Sharing transactions such as this fall under the category of gifts and donations Generally, gifts and donations are not relevant for income tax purposes either in global or schedular tax systems United States, under sections 102 and 1015 of the IRC, gifts are not deductible and are excluded from income Italy, for example, gifts are generally not relevant for income tax purposes, unless appreciated assets are gifted within a business or from a business to a stockholder (2) Distinguishing between Business and Personal in Calculating Income and Deductions taxation often relies on how the law classifies persons or businesses those participating in the sharing economy, such classifications are often blurred first question to ask is how to classify sharing earnings appropriately. Notably, the answer depends almost entirely on the frequency and the level of professionality in respect of which sharing activities are conducted depending on the level and frequency of sharing activities, providers should be subject to different tax treatments (3) Tax Administration and Compliance Issues under existing tax laws, the providers of goods and services in the sharing economy are fully responsible for filling in and reporting the related earnings in their tax returns due to the novelty of sharing activities, tax authorities are often unprepared to control every transaction taking place in such new marketplaces most of the time taxpayers fail to report such income in their tax returns Due to the micro-entrepreneurial nature of many sharing economy earners, tax compliance can be equally challenging. ○ workers are reporting business income and expenses for the first time, they may be unfamiliar with keeping track of such income and expenses and may ignore or understate income earned or track expenses inadequately Tax Policy Options for Regulating the Sharing Economy countries basically have the following three options: (i) they can either choose to set up completely new regulations for the sharing economy; (ii) decide to somehow include the sharing economy in existing regulations; or (iii) elect to do a bit of both countries have adopted substantially different approaches for regulating the sharing economy A conservative approach Australia Australian Taxation Office (ATO) has issued guidance clarifying that sharing earnings are to be treated in the same way as other business and occasional income for tax purposes tax laws which apply to activities conducted in a conventional manner apply equally to activities carried out in the context of the sharing economy Individuals must be reported by providers in their tax returns. Individuals must keep records of income from that activity plus any allowable deductions, by separating business from personal expenses UK ’s Her Majesty’s Revenue & Customs (HMRC) plans to issue detailed guidance to help providers of sharing activities to meet their tax obligations US Analogous steps have been very recently taken by the United States. The Internal Revenue Service (IRS) has published on its website guidance specifically designed for taxpayers involved in the sharing economy IRS advises individuals receiving payments, either in the form of money, goods, property or services, and irrespective of whether they qualify as selfemployed, employees or small businesses, that they might be required to report such income in their annual tax returns. Interim conclusions => position shared by Australia, Ontario, the United States and, to a lesser extent, the United Kingdom is that, in the context of the sharing economy, the problem with tax is not as much as with redesigning tax law, rather with enhancing taxpayers’ compliance.What needs to be fixed, instead, is the degree to which providers in the sharing economy understand and comply with their obligations under the law. A radical approach attempting to design tailored tax rules for the sharing economy, evidently on the assumption that current fiscal categories and principles are not sufficient to cover all of the issues brought by sharing businesses Belgium proposal for its Digital Agenda, under which digital platforms are required to “send the necessary information to tax authorities in the same ways employers currently do for their employees’’ rationale behind the tax reporting in respect of online platforms is that, in this way, “the fiscal information stream will be reversed” France ’s Senate has commissioned a report to develop a policy for addressing tax problems arising out from sharing transactions, adopted the view that tailored regulations are required, in estimating that the current French tax system is not prepared for the revolution caused by the sharing economy report propounds to implement an automatic system of reporting with the help of online platforms, which should communicate all sharing earnings of a taxpayer to a third and independent platform that aggregates that taxpayer’s revenues coming from various sharing activities Interim conclusions=> risk is to overtax taxpayers in case their expenses are significant. is why withholding taxes are typically imposed on passive income, such as dividends, interest, royalties and capital gains, as they are less likely to involve significant expenses than business income Conclusions (1) policy makers should pay attention not to create separate laws that apply only to the sharing economy. In doing so would violate the following two central tenets of tax policy: (i) that taxpayers should be treated uniformly; and (ii) that similar services and goods should be taxed in the same way. (2) policy makers should not underestimate the fact that the sharing economy entails a completely different model of doing business in respect to traditional business activities So simply applying existing tax rules to the sharing economy could seriously disadvantage the sharing economy unnecessarily. n designing new tax rules, roles and duties of online platforms should be clearly defined. task of taxing unfamiliar businesses fairly requires an understanding of how each business works Book -> Hugh Ault, Brian Arnold, Graeme Cooper, Comparative Income Taxation, A structural Analysis, Fourth Edition, Kluwer Law International B.V Introduction European Tax Law THE HISTORICAL AND INSTITUTIONAL BACKGROUND 1957 -> six Western European countries (Belgium, France, Germany, Italy, Luxembourg, and The Netherlands) entered into the European Economic Community Treaty to establish a common market for sales of goods and services and other commercial activities. In 1992, through the Maastricht Treaty, the EU was founded to deal with additional matters, including internal security, judicial cooperation, and a common foreign and security policy European Monetary Union and a common currency (same time, exception of England). 2009, pursuant to the Treaty of Lisbon, the European Community was fully absorbed by the EU goal of the EU Treaties is the establishment of an internal or common market for the free flow of resources (goods, services, persons, and capital) across borders between the Member States and to promote undistorted competition (Article 3 of the TEU) Bilateral and multilateral treaties entered into by Member States to further the goals of the common market, including the elimination of double taxation, are not prohibited by the EU treaties. The Member States have sometimes resorted to conventions or intergovernmental agreements in order to avoid European Institutions and exclude the jurisdiction of the CJEU Although the EU does not have the power to introduce new taxes, under Articles 113 and 115 of the TFEU, it has the power to harmonize Member States’ domestic legislation with respect to indirect and direct taxes which affect the functioning of the internal market harmonization measures require unanimity of the Member States of the Council to issue Directives (not Regulations) dealing with discrimination and restrictions on cross-border economic activities, as well as disparities between the different laws of the Member States which may have damaging effects on the internal market Article 107(1) of the TFEU, so-called state aid—“any aid granted by a Member State or through State resources in any form whatsoever”—is prohibited. The CJEU and the Commission have held since the beginning of the European Community that the concept of state aid includes tax incentives which reduce the tax burden on business. Thus, tax incentives providing particular taxpayers with a lower tax level than the “normal” level must comply with Articles 107 and 108 of the TFEU THE FUNDAMENTAL FREEDOMS TFEU provides that the internal market is promoted through four fundamental freedoms: ○ the free movement of goods (Article 34), services (Article 56), persons (freedom of establishment) (Articles 45 and 49), and capital/payments (Article 63) fundamental freedoms represent protections for cross-border economic activity within the EU ○ Two other subsidiary provisions can also be invoked in domestic courts even where no economic activity is involved: (1) the general principle of nondiscrimination (Article 18 of the TFEU); (2) the general right of free movement of EU citizens (Article 21 of the TFEU) fundamental freedoms apply to any cross-border activity taking place in EU territory DIRECTIVES Article 115 of the TFEU, the EU is empowered to issue Directives to align national tax laws in order to improve the framework of the internal market THE CCCTB PROJECT 2001, a project to adopt a common corporate tax base (CCTB) for Europe began when the EC delivered a major report “Towards an Internal Market Without Tax Obstacles” (COM(2001)582 final) accompanied by a study on “Company Taxation in the Internal Market” (SEC(2001)1681) study discussed four options for a better system for business taxation in Europe ○ a European corporate income tax levied by the European Institutions the revenue of which would go to the EU; ○ a “home-state taxation” approach, under which the taxable profit of an international corporate group is measured according to the rules of the home state of the parent company; ○ a compulsory “single harmonized tax base” which would require international groups to follow a prescribed set of European rules for calculating their taxable profits; ○ a “CCCTB” as an optional instrument used by multinational enterprises in order to reduce compliance costs and streamline the tax function ………………… TAXATION OF THE DIGITAL ECONOMY 2018, the Commission released two proposals ○ Proposal for a Council Directive on a common system of a digital services tax on revenues resulting from the provision of certain digital services (COM(2018)148 final); provide a “short-term” solution for the taxation of cross-border activities of highly digitalized businesses. main feature is a tax on a narrowly defined number of digital services provided by social network services, search engines, internet platforms, and the like ○ Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence. provide a “long-term” solution for a reallocation of taxing rights in the area of international business taxation. introduction of the concept of a “significant digital presence” which is meant to parallel the permanent establishment concept in the digital world. The Netherlands => 1. History of the Netherlands Income Tax System (1821-1940) 1821 Act provided the first conceptual framework. Most taxes being excise. But the first true was introduced in 1892-1893 Income from capital, taxed under Wealth Tax Act/1892, and deemed at 4% Business Tax Act of 1893- income tax for business and employment activities. Reason for division=> desire to tax passive (unearned) income more heavily than active (earned) income. the two acts were replaced by the (single) Income Tax Act (ITA) of 1914, same year Wealth Tax was introduced as well. ○ 1914 income tax was levied, not on the income earned by taxpayers during the preceding year, but on the income that was expected to be earned during the current year from income sources available at the beginning of the taxable year (May 1). But tactics to avoid the tax were common. 1914 ITA originally covered the income of companies, 1918 a special tax on corporate distributions was introduced (1940-2001) Under nazi rule, 1941, it introduced in NL an individual income tax and, in 1942, a company income tax => both taxing real income rather than deemed income they were replaced by the ITA of 1964 and the Company Tax Act (CTA) of 1969, government was forced to add to the tax code detailed, complex counteracting measures which often contained elements of overkill in 1980, entered the era of rate reduction and base broadening of income. And simplified it via the adoption of three brackets. late 1990s, an ambitious Under Minister of Finance developed blueprints for a partial return to the 1892 roots of the Netherlands income tax system (2001- …. ) (Individual) ITA 2001 provides for three schedules (“boxes”) of income (income from “work and home,” “substantial interest,” and “capital”). The last box provides for taxation on a deemed-yield basis (determined—as in 1892—as a percentage of the underlying asset; initially fixed at 4% but revised in 2019 to between 0.36% and 5.38% The United Kingdom => 1. History: Income tax UK tax system has been around since the Middle Ages. the tax year starts, not at some arbitrary date in mid-winter (such as January 1), but in the spring (April 6) Income tax was introduced in 1798 and, except for a gap between 1816 and 1842, has remained in force ever since , a temporary tax in that Parliament has to decide each year that there is to be an income tax for that year. This doctrine of the annual tax is a relic from the days when Parliament wanted to make sure that the King would summon a Parliament each year ○ doctrine also applies to corporation tax, but not to capital gains tax (CGT) or inheritance tax income tax was completely overhauled in 1803 by the introduction of the system of the taxation of income as such (as opposed to a person’s total income), the abandonment of the general return of income, and the introduction of the schedular system backed up by an extensive system of withholding at source (1997 to 2010) Tax Rewrite Program, income tax is no longer expressed in a series of Schedules, lettered A to F, but remains a schedular system in substance: if income does not come within any particular part of the relevant Acts, then it is not chargeable to income tax. Each particular part has its own rules for dealing its particular income should be defined and taxed, and which deductions should be allowed, as well as rules about timing ○ loss under one Schedule or Part cannot necessarily be set against income under another ○ new system, one no longer talks of total income but of “net adjusted income.” even today, the income tax consists of various heads of income, each with associated rules greatest legacy of history is a particular view of the scope of income and the distinction between income and capital separate tax on capital gains (CGT) was eventually introduced in 1965. The distinction between capital and income remains central to the UK tax system despite a certain amount of convergence for the corporate sector, especially with regard to rates of tax (now) today’s new legislation finally spells out—in some detail—the different types of income and the different types of taxpayer liable to income tax United States => 1. History of Federal Income Tax (U.S.) first adopted a tax on the income of individuals in 1864 to finance the Civil War taxpayer’s income included their share of undistributed corporate income Congress adopted a new act in 1895, which imposed a tax on the income of both individuals and corporations ○ Supreme Court declared this act unconstitutional because Congress lacked authority to adopt an individual income tax without apportioning the tax among the states based on their relative populations final enactment via the adoption of the 16th Amendment to the Constitution 1913 1913 income tax and subsequent changes through 1938 enacted as self-contained Revenue Acts, with each new Revenue Act superseding the prior Revenue Act and containing all the income tax provisions ○ => the process of referencing and amending the statutes was very complex and cumbersome Congress codified all the revenue provisions in effect in 1939 into the Internal Revenue Code (IRC) of 1939 => allowed allowed subsequent statutory enactments to occur as amendments to the Code. Congress replaced the 1939 Code with the IRC of 1954 1954 Code => revised the income tax treatment of partnerships, trusts and estates, annuities, and corporate distributions ○ introduced several new deductions and provided more accelerated depreciation rates 1981, Congress reduced individual rates, decreasing the maximum statutory rate for individuals to 50%, and adopted significant new tax incentives for savings and investments, including greatly accelerated depreciation rates 1986 -> The Tax Reform Act broadened the tax base, substantially eliminating many taxincentive provisions and reducing individual rates still further, decreasing the maximum statutory individual tax rate to 28%. 1986 through 2000 -> several amendments to the Code which tended to increase the maximum statutory rates for individuals, reaching 39.6% in 1993 2001 -> (Republican President (George W. Bush) and a Republican majority in both houses of Congress) => result was a series of tax cuts 2009 -> C adopted via Obama extend the tax decreases adopted in 2001 and 2003 through 2012. ○ maximum tax rate for high-income individuals, however, was increased to 39.6% for ordinary income and 20% for capital gains ○ Patient Protection and Affordable Care Act (the “Affordable Care Act”) in 2013 added a 3.8% Medicare surtax for individuals on most forms of investment income. President Trump and Republican control set the stage for a significant tax decrease ○ => Tax Cuts and Jobs Act (TCJA), reduced corporate rates from a maximum rate of 35% to 21% and provided significant tax decreases for some individuals Part Two, Basic Income Taxation => Subpart A Global vs. Schedular Design of Income Tax theoretical perspective -> , income tax is often said to be structured on either a global or a schedular basis. pure global income tax involves tax applied to a person’s total income, and income consists of all types of income. All amounts, whatever their nature or source, are included in income, and deductions are permitted without regard to the type of income in connection with which they were incurred pure schedular income tax involves separate taxes on different types or sources of income ○ each category of income, amounts included in income and deductions allowed are determined separately ○ If an amount is not included in any schedule, it is not taxable, although there is usually a schedule that includes residual amounts. ○ overall loss in one category generally cannot be offset against income in other categories ○ Schedular income tax system => presents difficulties which do not arise under a global system i. extent that the tax rates of the various schedules differ, taxpayers will attempt to manipulate the character of amounts in order to minimize tax. ii. difficult to implement progressive taxation of individuals in accordance with the ability-to-pay principle iii. personal exemptions, rebates, and other types of relief are difficult to implement !!!! pure global and schedular systems described briefly above represent the ends of a spectrum ○ between these extremes are income tax systems in which elements of both global and schedular systems are combined, although one type of system may be predominant ○ Applying a global or schedular label to a country’s income tax system does not adequately reflect the combined global and schedular elements in its system Wk 2 Lecture Organization of the Dutch Tax Administration Introduction to the Dutch: ○ Personal Income Tax ○ Corporate Income Tax Organisation of the Dutch Tax Administration Belastingen-> Tax administration ○ We discuss it in this course (blue building) (blue envelopes) Toestagen -> social security building -> Red Building ○ Provides provisional income for people with smaller incomes (not discussed in course) (red envelope) Duane-> Working at the border Belasting telephone-> free information FJORD-> Tax police => Collection of the taxes levied by the State is based on the Collection Act of 1990 Introduction to taxation of income What is income? Def by law ○ Global system: income and deductions are combined to produce an overall taxable income amount to which the tax rate is applied. ○ Schedular system: for each category of income, amounts included in income and deductions allowed are determined separately. Definition by case law ○ Adam Smith: Value of assets at the end of the year minus value of assets at the beginning of the year corrected for consumption Broad definition-> Not every country has the same definition of income. The NL system can be understood as both a schedular and global income.(a combination) (1) Personal Income Tax Personal Income Tax Act 2001 (PITA) Subject to PITA are -> private persons Three categories of taxable income Box 1: income from work and home Box 2: income from a substantial interest Box 3: income from savings and investments Box 1: Income from work and home The employer is withholding the tax There is a difference between social security premiums and tax The rates are just on the income Social security premiums in first bracket => 27.65% for everyone who reside in the NL but only for the first bracket until 37.149 euro ALWAYS. ○ not really a tax but these contributions are being levied in combination with income or salaries tax Kind of income? ○ Business income ○ Salaries ○ Income from other independent performed services ○ Income from a dwelling- house where you live. If you bought with a mortgage the ○ Income from periodical payments->if you pay insurance premiums Several incomes same regime. !!! (Out of 50k ear) => The first 37.149 is taxed at 9,28% and the SSP at 27.65% and until 50K is taxed at 36,93%. BOX 2: Substantial Intrest Tax rate (2023): 26.9% ○ Box 2 covers income from a substantial interest or holding (at least 5%) in a limited company such as a BV. In 2022, income in Box 2 is taxed at 26,90%, like in 2022 and 2021. In 2020, this was 26,25%, and in 2018 and 2019 income in Box 2 was taxed at 25% Substantial interest: ○ Participation in a legal entity (like Dutch BV) of 5% or more Example: ○ Dividends that you receive on the shares ○ Capital gains by selling shares Box 3: Savings and investments 1. Tax rate (2023): 32% 2. Tax base: fictional income based on the value of savings and investments a. (Asset minus debts) Saving-> in the bank Investment other assets -> capital gains Debts -> mortgage ○ All savings and investments are taken and account and then 57K is deducted In cases of partners each has 57k double tax-free amount ○ 2023: provisional assessment: ○ savings 0.36%, ○ investments 6.16%, ○ debts 2.57% ○ Tax-free amount: € 57,000 => Box 3 assets include: Stocks and shares. Bank and savings accounts. A second home or investment property. Endowment insurance policy (if not connected to an owner-occupied residence). => Box 3 exemptions Some assets are exempt from being taxed in Box 3, these include: The property you live in (if you own it). Moveable property such as furniture, art or a car (unless they are an investment). Certain kinds of insurance. Investments in forests, nature or certain green, social, ethical, cultural or startup projects => Assume you have 200.000 as bank saving. (32% it is the same as having wealth tax at 1,1%) Ex of Income Box 3 PITA => https://www.belastingdienst.nl/wps/wcm/connect/en/income-in-box-3/content/income-box-3-on-2023-provisional-assessment 2023 tax-free capital amounts In 2023, you can have assets with a value of up to 57.000 euros as an individual, and 114.000 euros as a couple, without them being taxed. 2022 tax-free capital amounts In 2022, you can have assets with a value of up to 50.650 euros as an individual, and 101.300 euros as a couple, without them being taxed Total amount of tax to pay The outcome of the 3 boxes are taken together. General Tax credits-> (a deductible) It applied after calculating the tax calculated in accordance with the box regulations. is applied on all income. Another argument that this is a global system because of the tax credit It is a schedular system by of the boxes. Every nation is a combination of the two. (when it comes to fictions) it is not a new system. it was the same as 100 years ago (2) Corporate Income Tax Corporate income tax act 1969 (CITA) Subject to CITA are all kinds of -> legal entities (like the Dutch BV/NV) Tax base is -> business profit ○ Art 2, 5 CITA: legal entities such as the Dutch BV/NV are deemed to operate a business using its entire assets ○ What is the difference the BV- anyone can get shares via Stock Exchanges NV- it is a closed system where a small number of shareholders can access But at tax level there is not a difference. Stated in the reader Tax Rate (2023) Biz Profit Rate 0- 19% 200,000 200,000 - 25,8% …. What is income? There is a different kind of income. In personal vs corporate tax. ○ IF a company has bank accounts and receives then it is not taxed. ○ In a personal statement of income accounts => IN the NL there is no difference, only two rates of profits and of personal income are taxed in 3 boxes and more rates. PITA vs. CITA => relation PITA and CITA For less then 5 percent the shareholder does not care about the tax rate When discussing the tax rate for having more than 5 For less than 5 first he profit is taxed at the profit that the bizsniz makes, and then the then you are taxed in box 3 For more than 5 then the profit is taxed in convention with corporate income tax and then the shareholder is taxed the second box. Entrepreneurship Private business Income is taxed according to PITA: Box 1 Tax rate applicable on 86% of the business profit Legal entity (one shareholder) Income is taxed according to CITA Distribution of profits is taxed according to PITA: Box 2 Salary paid to shareholder is tax deductible at the level of the legal entity, but taxed at the level of the shareholder according to PITA: Box 1 ○ There are some differences. In case of Private business. There is no protection, in case you go bankrupt, you go as well ○ In case it’s a legal entity in case of bankruptcy, then only the legal entity goes bankrupt Tax burden Private business (100 -/- 14) * max tax rate = 86 * 49,5% = 42.57% *(14 is not taxed) = (100 is the same) Legal entity Business profit => 100 * 25% = 25 Dividend (personal income tax) =>75,2(available ofr distribution) * 26,9% = 20.175 45.175% -> Salary 49,5 % (it is made by the highest rate) it would be different if it was a lower tax rate. => The idea was that an entrepreour should have a choice either a doing business via private business or legal entity, but not based on tax burdens. => so on his own or via a legal entity. When looking at taxes always look at the tax base, not at the tax rate Taxation of business profits Doing business Private business ○ Income is taxed according to PITA: Box 1 ○ Tax rate applicable on 86% of the business profit Legal entity (one shareholder) Income is taxed according to CITA Distribution of profits is taxed according to PITA: Box 2 Salary paid to shareholder is tax deductable at the level of the legal entity, but taxed at the level of the shareholder according to PITA: Box 1 Tax burden Private business (100 -/- 14) * max tax rate = 86 * 49,5% = 42.57 Legal entity 100 * 25,8% = 25.8 Dividend 75 * 26,9% = 20.175 Salary 49,5% Materials Literature Hugh Ault, Brian Arnold, Graeme Cooper, Comparative Income Taxation, A structural Analysis, Fourth Edition, Kluwer Law International B.V. ➔ Part One, General Description ➔ The Netherlands, 1. History of the Netherlands Income Tax System ◆ SUPRA ^ Reader => Introduction to Dutch Tax Law, chapter 1 Brochure => The Dutch Tax and Customs Adminstration Wk 3 Lecture Overview Remainder lecture 2 ○ Introduction to the Dutch Corporate Income Tax General topics in (Dutch) Tax Law: ○ Difference between resident and non-resident taxpayers ○ Difference between assessment and self-assessment ○ Objections and appeals (2) Corporate Income Tax => already mentioned. Difference between resident and non-resident taxpayers Resident taxpayers are subject to taxation on their worldwide income ○ Country in which the income is earned is not of any importance Non-resident taxpayers are subject to taxation only for their income in the state of source ○ E.g. A non-resident of The Netherlands will be taxed with income tax only for the income being earned in The Netherlands ○ Country in which the income is earned is important Specific issues ○ Place of residence ○ “source” of income ○ Double taxation ○ Tax conventions ○ Unilateral decree Difference between assessment and self- assessment (Self)assessment Assessment: The tax inspector issues a tax return form to a person who, in his opinion, is liable to the relevant tax In The Netherlands the tax inspector invites the taxpayer to return a digital tax form What to do if you didn’t receive a tax return form or invitation? After the tax return form is returned the tax inspector draws up an assessment Self-assessment: The taxpayer has to file a return The taxpayer has to pay the tax Examples Main Dutch taxes levied by assessment: Personal income tax Corporate income tax Gift tax and inheritance tax Main Dutch taxes levied by self-assessment: Salaries tax Value added tax (VAT) Dividend withholding tax Objections and appeals Objections can be made against ○ Provisional assessments ○ Final assessments ○ Additional assessments Decisions by the tax inspector by determination letter Decision upon an objection is given by formal decision in writing ○ Exception for provisional assessments: revision of the assessment Appeals The taxpayer may lodge an appeal with the tax court against: ○ All formal decisions by the tax inspector ○ The failure of the tax inspector to give a formal decision within the period prescribed by the law ○ A refusal by the tax inspector, upon request, to withdraw or reduce an administrative penalty Materials Literature Reader, Introduction to Dutch Tax Law, chapter 1 Hugh Ault, Brian Arnold, Graeme Cooper, Comparative Income Taxation, A structural Analysis, Fourth Edition, Kluwer Law International B.V. ○ Part One, General Description, ○ The Netherlands, 1. History of the Netherlands Income Tax System ○ United Kingdom, 1. History: Income tax ○ United States, 1. History of the Federal Income Tax Wk 4 Taxation on Business Income? => In this lecture the taxation of business income in The Netherlands will be discussed Lecture Overview Taxation of business income ○ Natural persons: PITA ○ Legal entities: CITA Residence Classification of companies Foreign entities Tax base Taxation of business income Natural Persons Resident ○ Business income is the first source of income mentioned in the ○ Personal Income Tax Act 2001 (PITA) ○ Criteria Independent Economic activities Combination of labour and capital Independent profession ........ Also: participation in (limited) partnerships Non-resident ○ Business income in The Netherlands (permanent establishment) Example => A and B are doing business by way of the partnership. ○ At what level is income tax being levied? With two people involved? Have a business together Do we have a legal entity here? no-> it’s a limited partnership ( a bike shop) In the Netherladns, we don’t levie tax at the level of the limited partnership-> is treaterd as if that there is no agreement and levi tax from A and B. ->limited partnerships will not be discussed. A AND B WILL BE TAXED AS IF THEY ARE RUNNING A PRIVATE BUSINESS. But what about a legal entity? It’s a diffent situation now like a dutch BV/ Always have to pay attention at the legal type of the business. Either by agreement (where business profit is divided) or legal entities where they are (shareholders) Legal entities Corporate Income Tax Act 1969 (CITA) Public companies ○ Direct: part of a government body e.g. municipal enterprise that prepares and sells building ground to the public ○ Indirect: a limited partnership of which a Dutch government body holds all the shares or a foundation of which the board of directors is appointed by a government body Private companies Open limited partnerships Cooperative societies Mutual insurance companies “Funds for joint account” Foundations and associations Residence according to PITA Most relevant circumstance is the location of the company’s central management ○ Other circumstances: ○ Location of the headquarters ○ The residence of the managers ○ The location of business activities ○ The places where the accounting takes place ○ Etc. Fiction (article 2,4 CITA): a corporation founded to Dutch law is supposed to be a resident of The Netherlands A DUTCH BV will always be seen as being under dutch law. Always where the place the residence-> will always be Someone which is not resident in the nl -> will only pay tax at the income coming from the nl Someone resident in the nl will be taxed from a world wide income Subject to tax (NL Resident companies) Companies are supposed to do business with all their asssets. Public companies: Only if and to the extent one of a limited specified number of activities is carried out ○ E.g. agriculture, production, mining, trade and transportation Private companies Mostly unlimited tax liability Limited subjects are: ○ Foundations and associations with or without legal personality if and tot the extend they conduct an enterprise (enterprisetest) or because of competition with other companies that are subject to tax (competitiontest) Who is/are liable to income tax? 3 persons, the BV for corporate income tax and the shareholders for personal income tax Non-residents Activities in The Netherlands through A branche A local subsidiary corporation Branches and local subsidiary corporations are taxed at the same rates No withholding taxes are imposed on profit distributions by branches Dutch BV are taxed in a unlimited way, but organisations that are foundations are being tax on a limited margin. NGOs are A, B and both BVs are resident in The Netherlands Who is/are liable to income tax? In this case nothing changed from the perspective of A and B. The question is what happens with the Company BV. And is it double taxation? The notion of double taxation is that a person is taxed twice for one source of income (legal explanation) From a economical perspective it is double taxation. How can the German gmbh do business in the Netherlands? (BV, PE-> permanent establishment) Look at the ‘subject to tax’, ‘non residents’ => thus via a branch or a subsidiary In this case the GMBH would be subject but for the limited part of the BV and the PE, since the rule says that only income that is generated in the nl is taxed, since the gmbh is not resident. Gmbh is doing business ○ For BV – world-wide income is taxed ○ Gmbh is doing business via a branch (pe) and is only taxable for the profit for the PE, the gmbh receives the assessment. Only the income that originates from the nl is beign taxed. ○ At the same time GMBH is resident in Germany, and it makes it rather complicated since gmbh is liable for the worldwide income and in here PE falls within world wide income from the perspective of germany. But we need to avoid the situation of double taxation Readings Literature Hugh Ault, Brian Arnold, Graeme Cooper, Comparative Income Taxation, A structural Analysis, Fourth Edition, Kluwer Law International B.V. Part One, General Description, The Netherlands (179-199) HISTORY OF THE NETHERLANDS INCOME TAX SYSTEM Supra CONSTITUTIONAL ISSUES Article 104 of the Netherlands Constitution, the State central government) is entitled to levy any taxes, provided that they are based on a statute taxes may also be imposed by local public authorities (provinces, municipalities, and water boards) but ○ under Articles 132(6) and 133(2) of the Constitution, these local authorities are restricted to the taxes enumerated in the pertinent statutes (the Act on Provinces, the Act on Municipalities, and the Act on Water Boards ○ Municipalities may also impose an (annual) tax on the value of real property ○ provinces and water boards are generally restricted to levying user fees Impact of Human Rights Conventions and EU Treaty Fundamental-Freedom Provisions individuals and companies cannot invoke the nondiscrimination clause laid down in Article 1 of the Constitution since (the Netherlands statutory law (including tax law) cannot be challenged on the basis of a presumed violation of any Netherlands constitutional provisio) nondiscrimination provisions in the human rights conventions which The Netherlands has signed are of greater importance in The Netherlands than to litigants in other countries. courts in The Netherlands frequently refer to the Charter of the Fundamental Rights fundamental-freedom provisions of the TFEU, notably those on the freedom of workers (Article 45 TFEU) and freedom of establishment (Article 49), have been held by the European Union Court of Justice (ECJ) to prevent differential tax treatment of nonresident taxpayers INCOME TAX RATES current individual ITA 2001, different rate structures apply to the three income schedules (“boxes”) first box, income from “home and work” is taxed at the following progressive rates (2019), applicable to both the income tax and the wages tax individual income tax rates are combined with the contributions for general social security. These contributions are due only on income up to the second bracket (EUR 34,300) “Income” (comprising ordinary income and capital gains) earned by an individual in connection with a “substantial interest” (i.e., a share interest of at least 5% in a company) is subject to a flat 25% rate capital income is taxed at 30% on a weighted notional yield from the net assets. Separate notional yields apply to the deemed “savings” portion of the net assets (yield: 0.13%) and to the (deemed) remaining portion of the assets (yield: 5.60%), with the savings portion declining as the total amount of net assets increases as follows Dividends are subject to withholding tax of 15% company income tax, the rate for 2019 is 19% (2019) on the first EUR 200,000 of company income and 25% on income above EUR 200,000 COMPOSITION OF THE FISCAL SYSTEM BASIC STRUCTURE OF THE INCOME TAX => Individuals ncome of individuals subject to income tax under the ITA of 2001 (ITA, Wet inkomstenbelasting 2001) In addition, income from (current or past) employment and public benefits is subject to wages tax under the Wages Tax Act of 1964 (WTA, Wet op de loonbelasting 1964) Amounts withheld as wages tax are credited against any income tax due Dividends distributed by a Netherlands-resident company are subject to a 15% tax no withholding on interest and royalty payments banks are required to report to the tax administration the amount of interest paid on savings accounts, the amount of these accounts, and the names of the (resident) individuals holding such accounts Principle of “source of income” concept: only income derived from a “source” is taxable. ○ term does not refer to the territorial source of the income (the source concept used by most countries to distinguish between domestic source and foreign source income.) ○ But “source of income” refers to instances where taxpayers engage in an economic activity with the intention of deriving a benefit, and where such a benefit can objectively be expected to materialize ○ activities which are not expected to produce any positive amount of income (hobby farms, “inventing,” etc.) are not considered to constitute a source of income capital of a private wealth fund (afgezonderd particulier vermogen, APV) formed to manage private assets is attributed to the individual who established the fund, or to the heirs => Corporations Companies are taxed on the basis of the Corporate Income Tax Act of 1969 (CITA, Wet op de vennootschapsbelasting 1969). All income earned by companies is deemed to be business income general rules on the determination of business income and the taxation of nonresident companies, the CITA refers to the ITA CITA contains detailed rules on ○ the participation exemption (Article 13-13k CITA). Dividends received from a qualifying (resident or nonresident) subsidiary company are exempt from tax in the hands of the parent company. Similarly, capital gains realized on the disposition of shares of such subsidiary companies are exempt; ○ corporate reorganizations (exchange of assets for stock: Article 14; exchange of stock for stock: Article 13i; legal merger: Article 13k (in connection with Article 3.57 ITA 2001); legal division: Article 13j (in connection with Article 3.56 ITA 2001)). To the extent that (cross-border intra-EU) reorganizations are covered by the 1990 Merger Directive (amended in 2005 and codified in 2009) as implemented in Dutch tax law, the rules applicable to domestic reorganizations have been made applicable to such cross-border mergers; ○ the fiscal unity regime (Article 15-15a CITA). On the request of all the companies concerned, the income of qualifying subsidiaries is taxed to the common parent company TAX LEGISLATION => Tax Legislative Process Parliament has a constitutional right of legislative initiative, virtually all bills are introduced in Parliament by the government, after the advice of the Council of State has been obtained bills are discussed in several rounds in the full Second Chamber of Parliament, which has the right of amendment (through a “motion” introduced by one or more members of this Chamber) After a bill has been approved by the Second Chamber, it is introduced in the First Chamber of Parliament, which may approve or reject the bill but has no right of amendment => Statutory Style With the exception of the ITA 2001, the tax acts with respect to income taxation (CITA, WA, and Dividend Tax Act) were drafted in the 1960s => overall design was intended to provide a clear and lean framework of fundamental rules ○ By 1996, the size of the 1964 Individual Income Tax Act had grown to more than four times its original size. The 2001 Act, while still clearly structured, is about 40% longer than its immediate predecessor and reflects the current tendency to counteract undesirable tax-planning techniques through detailed statutory provisions ○ 1969 Corporate Income Tax Act has been greatly expanded over the last two decades individual and company ITAs, and the wages, dividend, and wealth tax acts and implementing decrees currently comprise well over 750 pages Newly enacted tax legislation, like all law, is generally not retroactively effective (soem exceptions (186) => Statutory Interpretation Constitution provides that taxes may be levied only on the basis of a statute a. courts may not test the constitutionality of statutes, including tax statutes (although they may test rules enacted by local governments and administrative positions taken by the Revenue Service in interpretative decrees tax provisions may not always be clear and may need interpretation, a substantial body of case law has been developed over the years on the interpretation of statutory law in general and tax statutes in particular => four methods are applied (no prevailing order) 1. “grammatical” method -> stresses the literal meaning of statutory terms 2. “historical” method -> emphasizes explanatory memoranda published with respect to the draft legislation and the parliamentary memoranda and debates on the provision concerned 3. “systematic” method -> particular attention is paid to the structure and cohesion of the relevant statute 4. “teleological” method -> under which the purpose and intent of the statute are decisive factors in its interpretation COURTS DEALING WITH TAX MATTERS If a tax dispute is not solved on review within the tax administration, taxpayers may appeal to one of five District Courts (Rechtbanken) e decisions of these courts can be appealed to one of the four regional Courts of Appeal (Gerechtshoven), and further appeal can be made to the Supreme Court (Hoge Raad) (Each of these courts has one or more special chambers to hear tax cases) Since January 1, 2016 -> a lower court is permitted to request the Supreme Court to issue a preliminary ruling on a general question of Dutch tax law court decisions are binding only for the particular case decided. But, they are given much greater weight, particularly when a court’s decision is more general than the case requires Judges in The Netherlands courts do not issue dissenting opinions (opinions are often quite brief, since they are restricted to what the court members are able to agree on) tax proceedings in court are not public, courts themselves select which cases to publish TAX ADMINISTRATION Netherlands Revenue Service => reflects the categorization of taxes, with separate departments for direct and indirect taxes. Both departments consisted of divisions ○ companies typically would have to deal with different officials for each of the taxes to which it was subject. 1980s, the tax administration underwent a complete overhaul to change it from a government-oriented into a taxpayer-oriented organization => has certainly improved the efficiency of taxpayers’ dealings with the Revenue Service & improved the efficiency of the tax administration’s operations introduction in 2005 of “horizontal supervision,” Taxpayer Bill of Rights: Ombudsman 1991, the Ministry of Finance promulgated a “Taxpayers’ Bill of Rights,” (an independent authority with whom complaints against government may be lodged) is entitled to receive complaints from citizens and companies or to undertake investigations on the Ombudsman’s own initiative not permitted to investigate general government policy or individual cases where taxpayers have access to regular administrative or judicial remedies Release of Government Information to Taxpayers 1991 Act on Public Access to Government Information -> important instrument to obtain insight into tax administration policy, both in general and in individual cases Advance Rulings typically issued after a request submitted by Dutch- and foreigncontrolled companies with international operations 2002, rules on “advance pricing agreements” (APAs) were introduced 2002, advance tax rulings (ATRs) were introduced to deal with various aspects of international tax structures APAs and ATRs are administered by a dedicated “APA/ATR team ○ (2014, this APA/ATR team was also given the mandate to decide on requests of nonresident taxpayers for tax treaty benefits within the framework of “safety-net rules” included in the anti-abuse provisions of Dutch tax treaties) rulings issued on or after July 1, 2019 => a tax ruling will be granted only: ○ (i) where the taxpayer has a so-called “economic nexus” with The Netherlands and ○ (ii) where saving Dutch or foreign tax is not the sole or decisive purpose for entering into the transaction for which a ruling is sought. Assessment, Administrative Appeal, and Appeal to Courts For income tax (individuals), and corporate income tax (companies), a tax inspector issues a tax assessment after having reviewed the tax return filed by a taxpayer and the taxpayer’s answers to any questions which the inspector may have asked For corporate taxpayers => the questions may pertain to foreign subsidiaries of the taxpayer or its foreign parent company ○ Failure to provide adequate answers may result in the burden of proof shifting from the tax inspector to the taxpayer tax administration is undertaking efforts to have companies agree to “horizontal supervision” ○ (this is the new approach) a tax inspector may conclude a contract (compromis) with a taxpayer in which the facts of the case are determined ○ original and supplemental assessments may be appealed by the taxpayer to the revenue authorities wages tax and value-added tax (VAT) (companies and individuals) and the dividend tax (companies) are self-assessment taxes Where a tax inspector disagrees with the self-assessed amount, a supplemental assessment is issued. ○ assessment is also subject to administrative appeal by taxpayers +> decision made by a tax inspector on an appeal lodged against an assessment may be appealed to the one of five District Courts (Rechtbanken). Taxpayers do not require legal representation for making such an appeal further appeal can be made to the Supreme Court (Hoge Raad), that has has two Tax Chambers (reflecting the prominent role of tax law in the Netherlands judicial process) taxpayers do not require legal representation GENERAL PRINCIPLES => Relationship Between Tax and Financial Accounting NL -> rules on tax accounting and commercial (financial) accounting diverge substantially ○ aim of commercial accounting (including the International Financial Reporting Standards (IFRS) provide the information necessary to judge the financial policy and operations of a business undertaking ○ Aim tax accounting is to determine the income of a business operation as the basis for paying tax to the government two goals partially overlap there are important differences with respect to the impact of inflation and the degree of discretion in making accounting choices ○ Tax accounting rules are generally “nominalist” => amounts to be taken into account at their nominal value without loss of value as a result of inflation being taken into account ○ commercial accounting rules are “substantialist” => take into account the effects of inflation. Respect under Tax Law for the Civil (Private) Law Form of Contracts tax law employs many terms and concepts which are based on civil (private) law. ○ => question may arise whether these terms and concepts necessarily have the same meaning for tax law purposes as they have under civil law Under current doctrine, civil law terms and concepts used in tax law are generally understood to have their civil law meaning. Anti-avoidance Doctrines and Rules => application of tax law rules generally involves three steps 1. must be ascertained whether what is presented as a fact is indeed a fact 2. determined whether the (truly existing) facts are to be recognized for tax purposes 3. law must be applied to these ascertained and recognized facts (1) facts need not be accepted by the tax authorities as they are presented by the taxpayer. Something presented as a fact may not be a fact illegal income is subject to tax, despite the fact that it does not constitute true income because the recipient may be under the legal obligation to return to the owner the funds obtained (when the funds are returned, a deduction (“negative income”) will be allowed at the time of the payment) (2) courts may apply the (nonstatutory) fraus legis doctrine to attach to facts tax consequences different from the consequences which these facts normally entail (a) applying the fraus legis doctrine (1) the nontax effects of the extraordinary (nontaxable) situation created by the taxpayer are identical or similar to the more ordinary (taxable) situation; (2) tax avoidance is the controlling (“primary”) motive of the taxpayer; (3) the tax effects of the situation created by the taxpayer conflict with the purpose and intent of the tax law. TAX TREATIES Netherlands has ninety-seven bilateral income tax treaties has a tax treaty in place with all OECD member countries and, except for Cyprus,333 with all Member States of the EU => 2011 Dutch Tax Treaty Policy Memorandum -> Dutch tax treaty network is a core ingredient of the investment climate of The Netherlands (tax treaties facilitate international trade and provide the necessary legal security for Dutch-resident companies engaged in international business). -> Some of the core policy choices laid down in the 2011 Memorandum are (p. 195) SOURCES OF TAX LAW official source of statutory tax law is the Official Gazette (Staatsblad) where all statutes (and amendments) are published. Tax decisions provided by court (all) are -> officially made public only on the Internet Beslissingen in Belastingzaken => Annotations by scholars to selected tax decisions of the Supreme Court Reader: Introduction to Dutch Law, chapter 2 Wk 5 => lecture “Sound business practice’ will be discussed. Taxation of business income in The Netherlands will be compared to the way in which it is taxed in the UK and the US Overview Remainder lecture 4 Summary of tax rules Dutch Income Tax “Sound business practice” Lecture Taxation of business income => things are supra. Sound Business Practice Article 9 PITA Principle of sound business practice not defined by law Theory of business economics is the starting point Exception if this theory violates any provision of tax law Case law: Sense of reality Prudence Simplicity Sense of reality Profits and costs have to be taken into account in the year in which they belong (matching principle) Prudence Different treatment of profits and losses Losses can be taken into account in the year in which they are expected to occur. Profits do not have to be brought into account until they are realized Simplicity There is a balance between the complexity of the profit calculation system and the nature and size of the enterprise Valuation of assets Only facts and circumstances at the balance-sheet date are taken into account As a general rule, receivables are valued at face value According to the valuation of stock several systems are allowed United kingdom Traditional stance: tax accounting and business accounting are not the same By the early 1990s the courts had come to recognize a significant role for business accounting United States Gross income is calculated Individual taxpayers may deduct expenditures Trade or business expenses are limited to expenses that do not have a significant benefit extending beyond the current taxable year Some expenditures that involve mixed aspects of income production and personal consumption are always non-deductible Some expenses, such as business-related meals and entertainment are partially deductible Corporations: income is calculated in a manner similar to that of individuals Expenses and losses are generally assumed to be connected to a trade or business Materials Literature => Hugh Ault, Brian Arnold, Graeme Cooper, Comparative Income Taxation, A structural Analysis, Fourth Edition, Kluwer Law International B.V. Part One, General Description, The Netherlands, Supra Part One, General Description, The United Kingdom, par. 9.1 (231-232) => Relationship Between Tax and Financial Accounting traditional stance of UK tax law was to regard tax accounting and business accounting as distinct ○ was clear that in many areas the tax law rules were very different from the accounting rules (e.g., in relation to depreciation) recent UK story has been one of continuous movement UK tax legislation charges tax on the full amount of annual profits or gains arising or accruing from a trade, profession, or vocation,early 1990s, the courts had come to recognize a significant role for business accounting Court of Appeal decision doubted whether any judge-made rule could override a generally accepted rule of commercial accountancy which: (i) applied to the situation in question; (ii) was not one of two or more rules applicable to that situation; (iii) was not shown to be inconsistent with the true facts or otherwise inapt to determine the true profits or losses of the business subsequent legislation,368 which required that profits be computed in accordance with generally accepted accounting principles “subject to any adjustments required or authorized by law” => generally accepted accounting principles are those recognized in the UK or the International Accounting Standards mid-1990s corporation tax rules on loan relationships, financial instruments, and foreign exchange all use accounting rules for measuring and timing gains and losses; usually override the distinction between capital and revenue Some business people still want tax law to follow accounting treatment—usually because they believe that they can get more reliefs than are available at present and hope to save on accountants’ bills for making tax returns ○ accounting specialists want to be free to develop their accounting ideas, which are based on how to report profits to shareholders and other interested parties, without fear that their proposals will be rejected because of adverse tax implications ○ tax specialists want nothing to do with these ideas, believing that some of the answers produced by the accounting theorists are not only bad tax but also bad accounting Part One, General Description, The United States, par. 9.1 => Relationship Between Tax and Financial Accounting US -> tax accounting is totally distinct from financial accounting principle of conservatism in financial accounting creates a bias in favor of a rapid recognition of expenses and a delayed recognition of income tax accounting seeks broadly the opposite to recognize income as soon as it is reasonable to expect the taxpayer to pay tax but to recognize expenses only to the extent that they can be matched to the recognized income tax accounting generally requires taxpayers who receive a cash payment before they have earned it by performing services or delivering property to include the payment in income regardless of whether they use the cash or accrual method of accounting Like financial accounting, tax accounting employs an annual accounting period which has been interpreted fairly strictly by the courts ○ Events which occur after the close of the year will not, in general, affect the tax treatment in the year (some exeptions, p 262). Expenses incurred in a trade or business which exceed business income may be carried forward to future years without limit but cannot eliminate more than 80% of the taxable income in the year to which they are carried forward Despite the differences, corporations that report assets on their balance sheets over USD 10 million are required to file Schedule M-3 Part Two, Basic Income Taxation, Subpart A Global vs. Schedular Design of Income Tax Supra Reader: Introduction to Dutch Law, chapter 2 ? Wk 6 => In this lecture some special rules within corporation tax, like participation exemption and transfer pricing will be discussed Lecture Programme Remainder Sound business practice Calculation of taxable income Box 3 PITA Corporate income tax ○ Transfer pricing ○ Participation exemption ○ Fiscal unity Programme Calculation of income Box 3 PITA (exercise) Suppose you have €150,000 savings, investments worth € 250,000 and a debt of €50,000. 1. Calculate the return per asset type Savings 150,000 eur x 0.36% = 540 eur Investments 250,000 eur x 6.17% = 15,425 eur The return on assets in total is 540 + 15,425 eur = 15,965 eur The 3400 eur debt threshold will be deducted from the debt. Deductible debt 50,000 eur - 3400 eur = 46,600 eur The return on deductible debt: 46,600 x 2.57% = 1197.62 eur The taxable return is 15,965 - 1197.62 = 14,767.38 eur 2. Calculate your assets Assets: 150,000 + 250,000 = 400,000 eur Deductible debts: 46,600 eur Total assets: 400,000 - 46,600 = 353,400 eur Your capital yield tax base ( = total assets) is 353,400 eur 3. Calculate the basis for savings and investments The tax-free allowance in 2023 is €57,000 per person. 353,400 - 57,000 = 296,400 eur You declare the entire basis for savings and investments = 296,400 eur 4. Calculate your share in the capital yield tax base €296,400 : €353,400 x 100 = 83,87% 5. Calculate your income from savings and investments 14,767.38 x 83,87% = 12,385 eur 12,385 x 32% = 3963 eur tax on your assets Capita Corporate Income Tax Case Transfer pricing Participation exemption Criteria 5% or more of the shares In some situations 5% or more of te statutory voting rights Participation in company resident in other EU member state Tax convention with that member state Reduction of taxation based on statutory voting rights. => profit from shares exempt from tax Fiscal Unity Criteria 95% of the shares 95% of the statutory voting rights entitled to 95% of the profit Resident of The Netherlands Materials Literature => Hugh Ault, Brian Arnold, Graeme Cooper, Comparative Income Taxation, A structural Analysis, Fourth Edition, Kluwer Law International B.V. Part Three, Taxation of business Organisations Introduction taxation of business organizations generally falls into two basic patterns ○ Corporate ‘taxation’ -> imposition of tax on the income of certain types of commercial organizations (formed under special enabling legislation). Also, tax on profits distributed to the holders of ownership interests ○ “partnership” or “flow-through” taxation -> taxes the income derived by an organization directly to its owners (whether or not the income is distributed), and makes appropriate adjustments to reflect this fact when the income is in fact distributed. Subpart A deals with corporate taxation. Subpart B deals with partnership taxation. Subpart A Presently, a wide variety of taxing patterns exists, with imputation systems falling out of favor being replaced with direct shareholder-level relief. e function of a particular rule is affected by the system in which it is operating, which in turn may partially explain the contours of the rule OVERVIEW OF CORPORATE TAX SYSTEMS two predominant corporate tax systems have been the ○ classical system, which taxes a company on its income and then taxes shareholders separately on distributions received from the company, ○ imputation system, which gives shareholders a credit for corporate tax paid. recently, many countries have changed the basic structure of their corporate tax systems away from the classical and imputation systems to systems which give approximate or “rough-and-ready” relief from double taxation three classical systems (China, India, and Sweden) survive among the countries covered Sweden China-> pure classical system, with the corporate tax (EIT) and the tax on dividends received by individuals (IIT) being completely separate 25% was chosen in 2007 to be globally competitive; Netherlands was a pure classical system until changes were made in 1997 and 2001 ( system has been difficult to classify in traditional terms, although it may be regarded as a variant of the classical system). ○ corporate rate of 25% (with a rate of 19% for corporate income below EUR 200,000, in order to encourage small business) Before 2001, rates applicable to dividends received by individuals ranged from 37.7% to 60%. capital gains on stock were not taxed to individuals unless the level of shareholding amounted to a “substantial interest,” defined as at least a 33.3% interest held by the taxpayer. 2001 -> income from shares held by individuals which are not part of a substantial shareholding is taxed in the same way as all capital income. deemed yield increases with the individual’s overall net wealth (from 1.94% to 5.60%), deemed yield is subject to a fixed 30% tax rate, resulting in an effective (income) tax rate on the capital income (including dividends) ranging from 0.58% to 1.68% of the taxpayer’s net wealth. Since 1997, dividends and capital gains from substantial shareholdings of individuals are subject to a flat tax of 25%, threshold for substantial shareholdings was lowered to 5% so as to be consistent with the participation exemption for corporations holding shares. ○ => individuals with substantial shareholdings are generally taxed at similar rates as individuals who operate businesses in noncorporate form, while portfolio investments in shares are covered by the “deemed yield” regime United States has abandoned its classical system in recent times United States has abandoned its classical system in recent times distributed profits are taxed to individual shareholders at preferential rates which currently do not exceed 20%. -> individuals maximum tax rate on capital gains is also generally limited to 20% compared to the previous system, the preferential rates disproportionately benefit higher-income taxpayers whose dividend income and capital gains would otherwise be included in higher marginal brackets, but reduce the element of double taxation of dividends and capital gains on shares Japanese system has gradually reduced the degree of integration corporate tax rate is 23.2% national tax and approximately 30% when municipal and local taxes are included (down from about 50% in 1997) individual taxpayers with income below JPY 10 million, there is a credit for 10% of the amount of the dividend distribution which can reduce individual tax on the dividend and tax on income in other schedules Dividends received by corporations are excluded from tax for holdings of more than 33.3% of the shares of the payer corporation one-half of the dividends received are taxed where the shareholding is not more than 33.3% but more than 5%, and 80% of dividends are taxed where the shareholding is 5% or less. Capital gains on shares realized by individuals are taxed at 20%, German system for many years combined a split rate on distributed profits with an imputation credit in order to eliminate fully the impact of the corporate tax on profits distributed to resident individuals, but radically changed in 2000, with a “shareholder-relief” system changes was a substantial reduction in the flat corporate income tax (CIT) rate from 40% (retained profits) and 30% (distributed profits) to a 25% rate irrespective of whether profits are retained. 2008, the corporate tax rate was reduced to 15% ○ only 50% of cash dividends were taxed in the hands of individual shareholder 2009, dividends from shares which are held as private assets are subject to a final withholding tax of 25%. Where stock is held as a business asset, only 60% of the dividends are taxable in the hands of shareholders at the individual tax rate. to avoid discrimination against foreign investment, this “part-income method” has been extended to dividends from foreign companies. participation exemption which applies to shareholdings in German and foreign corporations -> To avoid cascading tax effects for intercompany dividends. intercompany dividends are, in principle, tax-free except for 5% representing expenses allocable to the dividends. Capital gains from stock held as a private asset are subject to a 25% withholding tax. an individual owns at least 1% of the capital stock or the shares are held as business assets, 60% of the capital gain is taxed at the individual tax rate. under the participation exemption, 95% of the gain on the sale of shares held by a corporate shareholder is free of tax in order to parallel the treatment of intercompany dividends. United Kingdom (UK) -> has a system where dividends from resident corporations to resident individuals are taxed at reduced rates. rate of corporation tax is 19%, to be reduced to 17% by 2020. individuals are now taxed at reduced progressive rates on receipt of dividends and the first GBP 2,000 of dividends are tax-free 20% personal tax rate has been reduced to 7.5%, the 40% tax rate to 32.5%, and the 45% rate to 38.1%. For individuals, since 2008, capital gains are taxed at a general rate of 10% or 20% depending on their income tax bracket. Intercorporate dividends received from resident corporations are largely exempt from tax. capital gains on the disposal of shares by corporations are fully taxable with indexation relief France was one of the first European countries to adopt an imputation system after the Second World War. a credit (avoir fiscal) of one-half of the dividend distributed was available to resident shareholders 1993, when the corporate tax rate (initially 50%) was reduced to 33.33%, the imputation credit provided full relief for distributed profits. Corporate shareholders holding a 5% or greater interest were entitled to elect either to exclude dividends received from income or to include them with the imputation credit. 1999 rate of the credit for corporate shareholders that are not entitled to intercorporate dividend relief has been progressively reduced 2004 Finance Act repealed the avoir fiscal in 2005 and replaced it with a deduction at the individual shareholder level for dividends received. deduction applies to dividends from French companies & to dividends from corporations having their seat in the EU or in countries that have concluded a tax treaty with France. taxpayer has the choice between progressive taxation and a flat tax. Gains from the disposal of shares are taxed as private capital gains, i.e., subject to a 12.8% flat rate or, optionally, to progressive income tax, when realized by individual shareholders not holding the shares in a business. No relief from economic double taxation is available for corporate shareholders that are not entitled to the intercorporate dividend exemption. Canadian imputation system allows full imputation of the corporate tax in the case of Canadian-controlled private corporations (CCPCs) 2007 -> legislative response was a tax on distributions by income trusts and a reduction in the tax on dividends paid by corporations so that there would no longer be any benefit for corporations to convert into income trusts. striking features of the Canadian system is that it provides the dividend credit regardless of whether the corporation distributing the dividend has actually paid any corporate-level tax => incentive for Canadian-resident individuals to invest in Canadian corporations. Australia full imputation system gives full relief from corporate-level tax on distributions, but the technique used is somewhat different from the typical imputation systems formerly used by European countries. basic corporate rate is currently 30% (27.5% for businesses with turnover under AUD 50 million and is scheduled to decline to 25% in 2021-2022), reduced from 49% in 1988. When fully taxed corporate profits are distributed, domestic individual shareholders receive a refundable credit for the full amount of the corporate tax If over the course of the year a company attaches more corporate tax than it has paid to dividends, a compensatory tax is levied, which can be offset against future company tax liabilities but with penalties where over-franking exceeds 10% India followed a classical system of corporate/shareholder taxation of dividends corporate tax rate on domestic companies differed depending on the structure of the company Now all domestic companies were taxed at the same rate companies with income up to INR 4 billion pay tax at a rate of 25%, while those with taxable income above that amount pay at a rate of 30% From 1997 to 2014 dividends received by individuals were subject to an additional income tax, called the dividend distribution tax (DDT) 2014, both a company and its individual shareholders are subject to tax with respect to income earned by the company and dividends distributed to shareholders Intercorporate dividends qualify for a special credit to the extent that a resident company has received dividends from a specified Indian subsidiary company on which DDT has been paid by the subsidiary or from a specified foreign subsidiary company in which the recipient company has paid tax on gross dividends under section 115BBD. ○ Indian-resident company must hold 26% or more of the nominal share capital of the foreign company to be taxed on the foreign dividends at the concessional rate. 2 DEFINING ENTITIES SUBJECT TO TAX basic structural decision in the design of a corporate tax is the determination of which entities or organizations should be subject to the tax. some systems, the determination is made on the basis of a statutory list or enumeration of organizations, which is exclusive => there is a nonexclusive list and a more general description of the characteristics that will cause an organization to fall under the corporate taxing scheme United States -> all entities which are formed under the general domestic corporate laws of the states are treated as corporations for federal tax purposes -> tax applies to both one-person corporations and publicly traded corporations with thousands of shareholders ○ partnerships and limited liability companies with more than one member, which are not publicly traded, are taxable as flow-through entities unless they “check the box ○ Publicly traded entities are usually taxable as corporations regardless of their form of organization ○ Limited liability companies with only one member are disregarded (“tax nothings”) Canada, entities formed under federal or provincial corporation law are subject to corporate tax, while those formed under partnership provisions are treated under pass-through rules. Swedish rules follow the same pattern -> all entities (except partnerships) which must be registered are treated as corporations for tax purposes German Corporate ITA lists specific organizational forms which are subject to corporate income tax. forms correspond to entities which are treated for civil law purposes as “legal entities. ○ A special catchall provision includes associations, institutions, foundations, and other “conglomerations of assets” to the extent that the participants are not subject to tax directly ○ Commercial general and limited partnerships, as well as civil law partnerships, are not subject to corporate income tax -> taxed, under the income tax, on a pass-through basis ○ “Societas Europaea” has been introduced as a new supranational company form. As a result, the CITA now explicitly includes foreign and supranational corporate forms Dutch rules are similar. entities which are subject to corporate tax are defined in the CITA both in a “specific” manner, i.e., through enumeration (where Dutch entities are concerned, such as the NV and the BV), and in a “generic” manner, i.e., through listing of generic criteria (e.g., entities created under Dutch or foreign law whose capital is divided into shares). ○ all entities whose interests are freely transferable and whose income does not accrue directly to the participants, but requires a decision as to distribution,50 are subject to corporate tax France form of civil organization is determinative for tax classification purposes. ○ tax code enumerates different types of business organizations, specifically those with equity interests evidenced by shares, which are subject to corporate tax regardless of their activity ○ code also contains a catchall provision under which all entities (other than partnerships) which have a juridical personality under civil law are subject to the corporation tax if they carry on profit-seeking activities. ○ share of profits attributable to limited partners is subject to corporate tax Japan is somewhat different -> organizations which constitute “juridical entities” under Japanese civil law concepts are subject to tax. => Both general and limited partnerships formed under the Company Law are juridical entities ○ unincorporated associations which are not juridical entities are not subject to the tax “undisclosed associations” which are structurally similar to “silent” or undisclosed partnerships ○ Supreme Court decision held that similarity to the Japanese law concept of a “juridical entity,” especially the capability of an entity to hold rights and obligations separately from its contributors or members, should be a key factor in determining whether a foreign organization is characterized as a “juridical entity.” standards established in the case are very abstract Australia, statutory definition of a “company” for tax purposes is quite broad, including “a body corporate or any other unincorporated association or body of persons” with a specific exclusion for partnerships and unincorporated joint ventures. United Kingdom similarly taxes all incorporated bodies and unincorporated associations other than partnerships China, owing to a legacy of the command economy from 1949 until the 1980s, many state-owned, collective, and privately owned enterprises do not take the form of corporations since corporations were associated with capitalism; ○ after the launch of economic reforms in the late 1970s name of the tax remained “enterprise income tax. An “enterprise” is an entity established under Chinese law and is a “legal person.” A partnership is not a legal person and thus not a taxpayer under the EIT. India, all companies incorporated under the Companies Act are regarded as companies for tax purposes, a body corporate incorporated under the laws of a country outside India is also regarded as a company. ○ Partnerships are taxable entities and are not treated as transparent 3 ISSUES IN CORPORATE FORMATION In some the corporate law treatment of the capital contribution and its possible subsequent repayment will affect the tax rules applicable to the shareholder and to the corporation In other jurisdictions, the corporate law treatment is irrelevant for tax purposes. appreciated or depreciated property is transferred in exchange for shares on formation transfer would be an exchange causing gain or loss realization by the shareholder. Several systems take this approach and require current taxation as the general rule in these circumstances Some allow a tax-deferred incorporation in certain situations United States system neither gain nor loss is taken into account, regardless of the nature of property transferred, as long as persons transferring property in the formation transaction collectively have an 80% or greater stock interest in the corporation following the transaction Part A Corporate Shareholder Taxation -> (Page 445 - 532) Part B Partnership Taxation -> (page541- 555) Part One, General Description, The United Kingdom, par. 9.1 Supra Part One, General Description, The United States, par. 9.1 Supra Transfer pricing guidelines Reader: Introduction to Dutch Law, chapter 2 Parent-Subsidiary Directive COUNCIL DIRECTIVE 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States Transfer pricing guidelines => OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 https://read.oecd-ilibrary.org/taxation/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administra tions-2017_tpg-2017-en#page2 Wk 7 Content => In this lecture the taxation of profits from a permanent establishment will be discussed. Taxation of these profits will be compared to taxation of profits from a subsidiary Literature => Hugh Ault, Brian Arnold, Graeme Cooper, Comparative Income Taxation, A structural Analysis, Fourth Edition, Kluwer Law International B.V. Part Three, Taxation of business Organisations Part One, General Description, The United Kingdom, par. 9. Part One, General Description, The United States, par. 9.1 Reader: Introduction to Dutch Law, chapter 2 Lecture Video (1) Discussion started regarding the definition of income. ○ NL has personal income tax (natural persons) Corporate income tax. (several legal entities, foundations). ○ Question of who is liable? How to define income ○ => important question of What is income? One psobility-> interpretation of Adam Smith-> discount of assets at the beginning with the assets at the end of the year, and excluding consumption. ○ In the NL-> Difference between corporate/personal income tax. In corporate -> the company is supposed to do business with all the assets. ○ Even savings are taxed as benign business profits. Interests incurred. Personal income-> everything is different-> ○ The 3 boxes (1) income from labor (2) tax the income from an substantial interests (if he owns more than 5% shares in a legal entity, alone or with his partnert. (3) income of a way of function Saving and investments. Rather difficult. For example-> shares -> you cna receive income from shares (dividends) but what if u have not sold the s

Tax Law Exam (1) PDF - Sem I 2023-2024

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