Summary Comparative Income Taxation

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Summary - Comparative Income Taxation

  • 1 A. Global vs Schedular design of income tax

  • Global design of income tax:
    One tax rate applied to all of a person's income of all types (no matter nature/source)
    Deductions are permitted without regard to the type of income
  • Schedular design of income tax

    - Separate taxes on different types or sources of income  for 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 (amounts not covered in schedules).
    - For certain income categories, such as investment income, the deduction of expenses might be limited or even prohibited.
    - An overall loss in one category can usually not be offset against income in other categories.
    - Some types of tax might be collected by withholding, others by returns.
    - Difficulties:
     As tax rates for certain amounts vary, taxpayers will try to manipulate the character of the amounts to minimize tax
     Classification of different types might be administratively very costly.
     Makes it hard to implement progressive taxation. 
  • United States
    US: Global (Income from “whatever source + non-exclusive list containing most commonly occurring items, excluding specific items).
  • Australia
    Australia: Global but influenced by trust concept -> Income separated in ordinary income (decided by judges) and statutory income (decided by statutory provisions).
  • United Kingdom
    Used to be scheduled but now absence of a general theory of income -> A receipt is subject to income tax if it fits into a part of the scheme and is not excluded by some other rule. Where income falls under a specific “part”, the rules of that category must be applied which affects the method of computation (Berechnung) and the ability to offset losses. Each part lists separate categories or “sources” of income.
  • Canada
    Global ->Only amounts that have a source constitute income subject to tax (principally business, property and employment which are mentioned in the statutory definition of icome).
  • Sweden
    Schedular -> Distinguishes between income from employment, business and capital
  • Netherlands
    Netherlands: Schedular system -> Distinguishes between income from:
    I. Work (self-employed or employee) and rental value of an owner-occupied residence; II. Income and gains from substantial interest participations; and
    III. Income from capital.
  • Germany
    Schedular -> 7 income categories with two basic methods income calculation applicable to the various categories.
  • France
    Several statutory delimited categories and a broader capital gains taxation.
  • Japan
    Intermediate approach  Income is divided into several categories (schedular), capital gains and non-business assets are subject to a broad category of “miscellaneous” income (global).
  • 2.1 a) Employee fringe benefits

  • Fringe benefits are necessary in the tax base in terms of horizontal equity and in order to prevent the erosion of the cash compensation base
  • United States
    Detailled statutory provisions since 1984 ->General rules that fringe benefits are taxable but there are a number of exceptions (de minimis amounts of fringe benefits are excluded; compensation of transportation employees is made on a tax free basis). Where fringe benefits are taxable, this is done on a fair market value.
  • Germany

    n principle, the employment income category includes “all benefits” received by the employee to the extent that they can be determined to have cash value (Rationale lies in the increase “ability to pay”). A de minimis rule secludes from income up to 44€ per month of otherwise taxable benefits. There is a long statutory catalogue of items that are not taxable. Benefits are valued at retail market value -> In case of employer provided cars, the employee may choose between a:
    I. “standard value method”: Based on the list price of a car, requires a percentage of that value to be included in income; or
    II. “Exact method”: Based on actual costs and a driving record, establishing private and business- related driving.
    Special lump sum rules apply at the employer level with respect to certain fringe benefits.
  • Sweden

    In principle all benefits that fall into the category of income from employment are taxable Generally this should be done on basis of the fair market value (free coffee, sport training facilities, etc. are not taxed). Employers often pay health care for their employees because they usually pay a lower rate and can deduct it while the employee is not taxed.
  • Netherlands

    Most fringe benefits are included in income -> Valuation is based on resale value or the amount the employee is assumed to have saved because of the employer benefit.
  • France

    In principle benefits at retail value are excluded but there are several exceptions and special rules. With regard to employer provided cars, computers, etc, a given percentage of the purchase price or the total annual costs are included in the employees taxable income.
  • Canada

    Broad statutory definition, taxing “benefits of any kind” received by an employee, but some benefits are excluded by statute (health benefits, etc.) or by administrative decisions.
  • Japan

    All benefits are in principle taxable but administratively sanctioned exemptions include gifts related to years of service or the anniversary of the company, etc
  • United Kingdom

    As court had established that only fringe benefits that could be converted to cash could be taxed, which was problematic, a special statutory regime had to be introduced: Emplyoees with a monthly salary of at least 8500 pounds have to tax all benefits gained “by reason of employment”, if it is provided by an employer which is a company. For company cars a standard value approach (Based on the list price of a car, requires a percentage of that value to be included in income) is used.
  • Australia

    In 1986 Australia introduced a separate employer-level tax on fringe benefits while excluding such benefits from the employee ́s tax base (This is known as an FBT- fringe benefits tax). This FBT legislation sets up a variety of valuation rules that roughly parallel the types of rules used in the income tax systems in other countries. Problem: Employers are taxed at different income tax rates  FBT needs to be made deductible in relation to the income tax on the employer. 
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Traditional tax treaty policy used tax sparing credits as a wide definition of the PE concept when dealing with developing countries. Today, those tax sparing credits are of less interest because the rate of withholding taxes in the developing countries has often increased. 

Tax sparing for holidays and withholding tax reliefs granted in developing countries.
United Kingdom

Granted tax sparing credits in a limited number of treaties, typically involving former colonies

Gives tax sparing credits for both business income and withholding taxes. 

Does not generally give tax sparing credits for investment income but does accept such credits for business income. Credits are given for spared taxes on business income for a limited period, usually ten years.

Exemption method for foreign business profits but has a credit method for payments of dividends, interest and royalties. Tax sparing provisions in 15 treaties.
United States
Historically rejected tax sparing as a matter of treaty policy
Considered to publish Australian model, giving greater emphasis to source taxation than OECD MC
No formal model and its treaties generally follow the OECD pattern
United Kingdom
No published model treaty and generally follows OECD MC