Concept of Double Taxation

There are two types of double taxation: economical and juridical (international). Double economical taxation is related to the taxation of two and more taxes from one tax basis. As an example can be presented the situation when the profit of the corporation first is taxed and after being distributed among the stockholders and it is taxed again as dividend tax. Also the double taxation can occur when indirect taxes are levied, for instance, when the goods are levied excise tax, and after this VAT is imposed on the price of the goods, including excise.

International double taxation is levying on one taxpayer in one or more countries for one object in the same period of time, which results in identical tax payment, and brings to coincidence of tax object, of tax subject and the period of tax payment. Countries can levy income taxes using the principal of residence, or territorial principal. Double taxation is possible when one country is using residence principal in levying taxes, and the other country is using territorial principal. The double taxation can also occur in the situation when both countries affirm that the taxpayer is their resident, or when each of the countries affirms that the profit was made on its territory. Double taxation restrains the economical activity of the entrepreneur, it influences the growth of prices for goods and services, it increases tax burden on juridical and physical subjects, and also it violates the principal of tax fairness.

Elimination of the Double Taxation

The measures that are used for prevention of double taxation can be unilateral measures that are related to the norms of internal taxation legislation and multilateral measures that are implemented using the international conventions and agreements.… Read the rest

Tax Collection Methods

There are three important types of tax collection methods: cadastral, at the source (before the receipt of the income) and through self-assessment (at the declaration of the income).

The cadastre method implies the use of the cadastre. The cadastre is a register of all the typical objects (land, real estate) classified according to physical features and where the average profitability of the object is determined. Physical features include: for the land tax—the size of the land area, the distance from transportation ways and markets; for the house tax—the number of windows, pipes, doors, the type of the building; for industry tax—the number of employees and machines. The average profitability of the object, which is based on physical features, may differ significantly from actual profitability; this constitutes the main disadvantage of this method.

Taxation at the source is calculated and deducted at the accounting unit of the company, which pays the income of the taxation subject. In this way is deducted the tax from wages and salaries. The tax is subtracted by an intermediary—the collector (tax agent) before the receipt of the tax by the subject, which excludes the possibility of tax evasion. Collection at the source is done for taxing income of employed personnel and for other relatively fixed incomes. The same method is used in other countries for the income of joint ventures. Tax collection at the source implies collection before the receipt of the income by its owner.

Tax collection upon self-assessment represents the deduction of a part of the income after its receipt and implies that the taxpayer submits to the taxation authorities a self-assessment, i.e.… Read the rest

Modern Principles of Taxation

The analysis of classical theories allows the formulation of principles that represent the qualities and tendencies of the modern taxation system.

The modern principles of taxation are:

  1. The rational combination of direct and indirect taxes, which implies the utilization of various types of taxes, taking into consideration both the wealth and the income of the taxpayer. In periods of economic crisis it is better to have many sources of budget revenue with a relatively low rate and a large taxation basis then to have 1-2 types of income with high deduction rates.
  2. The universalization of taxation which implies equivalent efficiency requirements to all payers and an equivalent approach to the deduction of the tax amount irrespective of the income source, type of activity, or economic sector. It is not acceptable to introduce additional taxes, increased and differentiated rates, or tax allowances for different types of ownership, organizational or juridical structure of the entity, citizenship of natural persons or other factors. In addition, taxes should not be established or applied on basis of political, economic, and ethnic factors, or other criteria of this type.
  3. One-time taxation implies that one object can only be taxed once through one tax type for a specific period of time indicated in the law.
  4. The scientific approach for the determination of the exact tax rate, which implies setting the deduction rate at a level that would allow the subject to have an income necessary for normal development. The magnitude of the tax burden should allow the normal functioning of the taxpayer after paying the tax amount.
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Classical Principles of Taxation

A number of principles that characterize taxation in general and the taxation system more specifically were set forth by Adam Smith. These are:

  1. The principle of justice, which promotes the universality of taxation and the evenness of tax distribution among citizens in correspondence with their revenues (“the subjects of the state must participate in the maintenance of the government in correspondence with the income that they make use of under the protection and with the help of the state”). This principle means that taxes must be deducted in conformity with the capacity of the payer, who is obligated to take part in financing a corresponding share of the state’s expenditures. In the international practice, there are two methods of implementing the justice and equality principle. The first method entails insuring the benefit of the taxpayer. According to this approach, taxes paid must correspond to the benefits received by the taxpayer from the services of the state, i.e. the taxpayer receives back a part of the tax paid through various transfers from the state budget covering compensations, the financing of education, health protection, etc. Hence, in this case the approach is connected to the structure of budget expenditures. The second approach depends on the capacity of the taxpayer to pay taxes. Each entity must pay its share in accordance with the capacity to pay. Usually these two approaches complement each other when a taxation system is elaborated; this leads to the creation of the best possible conditions for the implementation of this principle.
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Theories of Taxation

Attempts to provide a theoretical grounding to the practice of taxation are reflected in various theories of taxation, the evolution of which took place together with the development of various directions in economic thought.

Classical Taxation Theory

For a long time, the classical taxation theory was of most importance. As a result, taxation was only granted the fiscal role of providing state revenues. A. Smith is considered to be the father of the scientific taxation theory. In his monograph “An Inquiry into the Nature and Causes of the Wealth of Nations” Adam Smith gave a definition of the taxation system, indicating the main conditions for its formation and putting forward four main taxation principles: equity, determination, convenience and thrift of taxation administration. Smith’s work was developed later on by D. Ricardo, J. Mills, and W. Petty. All the theoretical deliberation and scientific debates of those years were focused on one singular aspect: that the execution of the taxation’s function—the provision of state revenues—is achieved on basis of the principles of equity and justice. Naturally, this theoretical approach to the nature and role of taxation changed in the course of many decades and centuries, when economic relations became more complex and the need for the intensification of the state’s regulatory role became more stringent. As a result, new theories of taxation emerged; among them there were two directions of economic thought, which had the most significant influence on the taxation policy of the countries with a developed market economy: the Keynesian and the neo-classical ones.… Read the rest

Functions of Taxation

Taxes are a defined as mandatory payments of the contributors to the budget and to the extra-budgetary funds in the amount determined by law and within the stipulated deadlines.

The functions of taxes are a manifestation of their essence; they are a means to represent the characteristics of taxes. The functions of taxation illustrate its social purpose of the value-based distribution and redistribution of income. Each of the functions fulfilled by the taxation instrument is a manifestation of an internal feature, an indicator or trait or this economic category.

There are five main functions of taxation: fiscal, redistributory, regulating, controlling, and promoting.

1) The main function of taxation is the fiscal one. It is through fiscality that taxes play their role in the formation of the state budget necessary for the realization of national and holistic state programmes. The fiscal function provides for the achievement of the main social goal of taxation — the formation of the state’s financial resources necessary for executing the role of the latter (defense, social, environmental protection, etc.)

2) The allocation function of taxation expresses their essence as a special centralized instrument of allocation relations and consists of the social income redistribution among various groups of citizens: from wealthy to deprived ones, which ultimately provides for the assurance of the social stability of the population.

3) The regulatory function of taxation was initiated as soon as the state started to take active part in the economic set-up of the society. This function is aimed at achieving specific goals of the taxation policy through the taxation mechanism.… Read the rest