Essay: Taxation around the world

Taxation

TAXATION AROUND THE WORLD

Introduction

Taxation is the system by which the government collects the money from the natives and invests it in the well being of the people and the development of the infrastructure of the country. Corporate taxes are very similar but related to companies and organization. These are the taxes on the profit generated by any company or organization. The taxes may vary from country to country. Each government has its different policy to put taxes on the corporate world. These taxes and policies are what shape a country’s market. Liberal laws and fewer taxes encourage in investment. For the past decade, the global movement of taxation has remained downwards. Tax rates also vary from country to country. Many parameters come into shape when calculating the tax rates. Sometimes sub countries or states may also make a policy to take taxes which further complicates the tax rate calculation.

Sometimes as a policy to promote a certain poor company, the government may decide to provide a subsidy to the company. Some incentives are added and this is known as corporate welfare. For the very same purpose various Special Economic Zones are set up in a country which has relaxed policies. These economic zones are a favorable place for any foreign company to invest in a country. These zones provide special incentives and thus in a way encourage investment.

Taxes are of two types: Direct taxes and Indirect taxes. Direct taxes are the ones which the government takes directly from the people as income tax or a part of their profit. Whereas indirect taxes are ones which are imposed on goods and services such as sales tax, VAT etc. These taxes form a part of the revenue generated by the government which in used to run the country. There are also a lot of other taxes such as Custom Duties, Stamp Duties, Expenditure tax, Service tax, Wealth tax and other taxes. Whether these taxes are applicable or not, depends on the government of the country. They may wish to keep these taxes and may also remove them.

We here wish to examine the corporate taxation around the world. The taxation system around the world varies from country to country. The governments like the USA, RUSSIA have levied taxes on its companies whereas countries like UAE have “no tax” policies. The corporate tax rates of some of the countries across the globe are:

• Japan : 39.5%
• USA: 39.3 %
• Germany: 38.9%
• United Kingdom: 30 %
• Poland: 19%
• Ireland: 12.5 %

This shows that each country adopts its own policy to implement taxes according to its needs and resources.

Taxation in UAE

The political system of the UAE is federal. There are seven emirates in UAE which have laid foundation for the making of the country of the UAE. Every emirate in UAE has retained its original judiciary and political power. Each emirate in UAE has its own tax laws. There are some taxes which are not applicable in the emirates. They are basically corporate tax, personal income tax, value added tax, capital gain tax. The revenues generated from the oil reserves are sufficient for the government to run the country, so a lot of taxes are levied. Dubai is even referred as a “no-tax” emirate. Only the banks, oil and petroleum products companies have to pay taxes. Rest there is no tax on individual income. Let us discuss some of the taxations in UAE in detail:

Personal Taxation – there is no individual taxation in UAE. The tax on the income of an individual is not applicable. Only the taxes for the service of municipality have to be paid. The percentage of service charge varies from emirate to emirate. Service tax is charged on the food items both in hotels and restaurants. The rates may vary depending on individual policies.

Corporate taxation – As told earlier, each emirate has its own jurisdiction and thus applies taxes as per their own law.

ABU DHABI – Corporate, Income, sales and value added taxes are currently not imposed in Abu Dhabi. Only certain taxes are imposed on:

a) Oil and Petroleum companies, Gas companies.

b) Branches of foreign banks. The profit is taxed on a certain fixed rate.

c) Hotel and entertainment services, service tax is applicable as per the rate.

DUBAI – The taxation system in Dubai is different. By law, every company is asked to pay taxes. The tax rate may go up to 55% of the total profit earned. But in practice, only a few companies have to make taxes. Those are oil and petroleum companies, Branches of Foreign Banks. Otherwise no other business is required to pay taxes to the government. Custom duties are also very low.

SHARJAH – The tax rules in Sharjah are quite similar to that of Dubai with a few differences. The custom duties are a bit on the higher side.

One new aspect which is coming into light these days is e-commerce. The current business environment is such that the industry has gone about increasing its produce and exports year by year, decade by decade. The industry, though, has been unable to include the technological upswing in the world, like the intensive use of the internet, of the World Wide Web, and other such facilities. The industry has thus lost out on the chance of extensive networking that the internet has been able to champ in today’s era. Though the government has invested enough money on both cultivation as well as modernization, the industry has been a little slow to react to the change in the modern methods. As the transaction done on the internet today involves a lot of transactions and thus it touches various jurisdictions too. A lot of trade now days, have shifted on to internet. And thus cut the indirect taxes of the governments. In theory, this is to increase in the coming years. So policies need to be made and a formula be derived which could help impose taxes on the e-trading in a judicious manner. (Company)

Corporate Taxation in India

India is a developing country. India has a very structured tax system with clear distinction between the powers divided between the state and the central taxation bodies .Taxes are the integral sources of income for every government whether central or local. They are the main sources of income for very kind of government. Central government has the power to levy taxes on the income, the custom duties and the service tax which the companies pay. The mainstay of the taxes for the state government is the agriculture.VAT (Value Added tax); stamp duty, taxes on land revenue and the tax on professions are the main source of income for the state government. Local bodies have sources of income such as taxes on utilities supply like drainage, electricity and water supply and octopi which is charged for the movement of goods between the states. After the reforms of 1991 the tax system in India has gone a tremendous change .The tax system has been made so easy so that the common man can understand and benefit. There has been rationalization in the tax system and the tax laws have been simplified which have resulted in better compliance and the easy payment of taxes and the better enforcement has made the process even more liberal. Only a few steps have been taken and there are a large number of steps to go. The whole responsibility of the taxation in India is borne by the Central Board of Direct taxes (CBDT) and it is a part of the revenue department under the Finance ministry .It provides the inputs that are essential for implementing the policy and guidelines for planning and collecting the direct taxes In India and also administrating the direct taxes with the guidance of the IT department. CBDT was formed by the Act of 1963 called as Central Board of Revenue Act.

There are mainly 2 kinds of taxes:

1. Direct Taxes: These kinds are collected directly like the capital gains tax, personal income tax or the tax on corporate income.
2. Indirect taxes: These kinds of taxes are charged through 3rd party prices .These kinds of taxes are always included in the price of other products and the consumers are made to pay the price without knowing that they are paying for it. Like the service tax and the excise duty.

(Taxation System)

The corporate taxation in India follows a very flexible system. Companies that reside in India have their taxes calculated on their income from their world over assets and income sources that is in order with the rules of the IT act .The companies which have their head offices in other parts of the world are taxed on the income they have generated from the Indian operations or the operations originating from India but meant from other sources such as exports to other markets. A corporation is termed as Indian if the majority of the Ownership of the equity is owned by Indian investors and termed as foreign if the majority ownership is held by persons of foreign origin .The corporate tax structure in India is comparable to any other developing country or some developed countries .The corporate tax structure has basically its roots in the origin of the company .It is the first step .If the company under consideration is Indian then the tax rate comes out to be direct flat 30 percent. But if the domicile of the company is of foreign nature then it becomes a complicated process and one that has many considerations and a number of guidelines to follow. The Indian companies are taxed according to the income they earn from their global operations whereas the foreign companies are taxed according to their domestic income. The revenues that can be taxed from the foreign are capital assets income, equity share sale and the earned dividends.

Domestic income tax rates

For Domestic Companies the total rate comes out to be the 30% and tax rate after adding surcharge is 30% Attention should be given on the consideration that if the taxable revenue exceeds Rs. 1 million then a surcharge of 10% of the total taxable income is added to the tax

Consideration must also be paid on the thing that all of the corporations that have been formed in India are treated as Indian companies, even in the case of mother companies in foreign countries

Foreign companies tax rates

• For dividends the tax rate is 20% in case of foreign companies who have signed no treaties and 15% for companies that are under a treaty signed by the company or the country with the government.
• For interest gains the rate of taxation is 20% in case of foreign companies with no treaty and 15% for companies with a treaty.
• For royalties the taxation rate is 30% in case of non-treaty companies and it is 20% for companies that have a valid treaty.
• For the companies that rely on services based technology and also in the case of non-treaty companies and the rate is 20% for the treaty based companies in the US.
• For other kinds of income and related gains the taxation limit is 55% in case of non-treaty companies and it is 55% for companies with a treaty.
• Attention must be paid on charging inter corporate rates in case there is minimum holding
• Attention should be given on the various kinds of treaties that have been signed by India with different countries and the different kinds of inter region pacts like the SAFTA.

Tax rebates in India

• The profits that are linked to long term capital gains are subjected to low tax rates
• The VC funds and VC companies have very specific and special tax provisions
• Minimum Alternate Tax is levied on the corporate houses. (Corporate tax rate in India)

Similarities in corporate tax among UAE and India

UAE and India both are the emerging countries in the world. Such types of countries have commonly opened hands to the others foreign companies which are willing to settle in their lands. Both of the countries have started to lower the corporate taxes and other types of taxes so that the home companies and foreign companies can feel secure and assured about their future prospect in the foreign land. Some of the common facts about the similarities in corporate tax among UAE and India will be explained in the following paragraphs.

Dubai is considered as a ‘no tax’ emirate. Therefore double taxation treaties are meant at making Dubai an extra striking territory in which to function by reducing taxation imposed in the foreign authority on profits remitted overseas by foreign corporations working in Dubai. Dubai located in The United Arab Emirates has a widespread and increasing list of double tax treaties, in which India is a partner in this treaty. Under this treaty profits consequent from the shares, dividends of the companies, interest, royalties and the fees are taxable only when they are in the contracting position where the income is produced.

Some of the rules both followed by UAE and India,

• For the dividends of 20% in the case of the non-treaty foreign companies while 15% for the companies in the treaty based in UAE and India
• For the gain in interest of 20% in the case of non-treaty foreign companies while 15% for the companies in the treaty based in UAE and India.
• For all the royalties of 30% in case of the non-treaty foreign companies and 20% for the companies in the treaty based in UAE and India
• For the technology based services in case of the non-treaty foreign companies and 20% for the companies in the treaty based in UAE and India.
• For all other kinds of the income and the gains of 55% in case of the non-treaty foreign companies and 55% for the companies in the treaty based UAE and India.
• Concentration must be given on taxing inter corporate rates in case of the holding should be minimum
• Concentration must be given on the information that the approval of the tax establishment on tax maintenance. (Dubai Double-Tax Treaties)

Differences in corporate tax between UAE and India

As we know all the general facts about the economical facts about India and UAE, that UAE’s maximum money is generated by the oil resources in their land but in the case of India there is no such advantages. Thus Dubai’s huge oil revenues imply a simple fact that his government does not have any good reason to raise income through straight taxation. Some of the points are discussed in the below paragraph.

In UAE, with the exemption of the banks and all the oil companies in the UAE, no corporate income tax is allocated by businesses in Dubai. Oil Company’s has to pay up to 55% tax on UAE sourced payable income whereas banks have to pay 20% tax on payable income. The payable income of the banks is according as per the audited financial statements while that of oil firm is as per the compromise agreement. Also oil companies have to pay the royalties on production. This is quite different from the case in India as they have no such advantage of oil. (Taxation System)

Possible challenges or opportunities facing India

India might be on an economic cruise at the moment with an unexpected growth rate per year but there are some major issues that the country is dealing with right now. These issues have been a huge hindrance in India’s growth since it got independent in the year of 1947. Though some of these issues have been dealt with to quite a large extent, the others keep acting as serious obstacles in India’s road to development.

Some of these issues have been raised in the following lines.

1. Poverty: – A considerable part of India’s population is below poverty line with a large number of people who are struggling really hard to feed their families. If one goes to any remote areas of the country, the country’s dark underbelly is clearly visible. With the rapid growth in the country’s population the number of people that are below poverty line is increasing every day. Poverty has been and continues to be a major issue lying at the heart of India’s woes. However the government is running several programs that are there for the benefit of the poor of India. Though these programs and policies have helped the poor a lot, a lot needs to be done in order to eliminate the problem of poverty in the country.
2. Illiteracy: – If poverty is the number one problem that is faced by India, Illiteracy isn’t far behind. Illiteracy has caused a lot of damage to India’s growth rate. Due to India’s ever inflating population levels, it has become tough for the government to provide free education in government schools for all of India’s young children. This has lead to a steady growth in the number of illiterate people over the years. However with the recent economic developments that have take place in India this problem is being slowly handled. Illiteracy has many implications. Some of them are environmental damage, declining sex ratio, unemployment etc.
3. Price Rise: – India really needs to fight against inflation that has been a major issue of concern for the general public in recent years. The prices of all the essential commodities are rising at a steady pace. This includes oil, sugar, other food products etc.
4. Overpopulation: – Die to illiteracy among the people in rural areas it has become a common trend among the people living in those areas to have lots of children. The sole reason behind this is the misconception that a larger family leads to a larger income. However the fact is ignored that a larger family also means more number of mouths to feed with a limited amount of resources. With the country’s bloating population leading to a rapid consumption of natural resources, it is becoming difficult for the county’s government to provide food, shelter and clothing for more than a billion people and the number keeps increasing day by day. The increase in population has lead to a sudden halt to the path of sustainable development. It has lead to a considerable deficiency of shelter and this has lead to the creation of a new type of dwelling also known as slums. These slums are really unhygienic and also lead to spreading of diseases like dengue, typhoid, malaria etc.
5. Though the globalization has lead to direct entry into India’s economy for companies belonging to foreign countries, it is the job of the government to come up with policies in order to protect the domestic producers. This gives the indigenous producers a chance to compete against the foreign giants. The government protects these producers from shutting down.
6. Unemployment: – Due to the soaring population of the country, the jobs are being created at a pace that is slower than the rate at which the country’s population is growing. Though the recent economic development has lead to the creation of a large number of jobs, leading to the employment opportunities for a large number of people, the number of required jobs far outreaches the number of jobs that are available at the moment.
7. Uneven Distribution of Wealth: – It is surprising that there are so many poor in India. The fact remains that there is a lot of money involved in the country but it is very unevenly distributed. There are a large no of people that have no money whatsoever, but there are also people who have a lot of money to spare.
8. Agriculture, which is responsible for providing employment to more than half of the country’s population, needs to be given more investment. The farmers should be provided with more services and finances so that they are able to sustain themselves. As of now the majority of farmers practicing agriculture in India are below the poverty line.
9. Environmental issues have also crept up in the recent past due to the increase in population in the recent past. This is generally due to the cutting down of forests in order to provide for the food, shelter and clothing for such a large number of people. (Indian Economy & Economic Issues )

Other interesting facts about India

India is a large country with such complex demographics that when we dig just a little deep a few interesting facts come out. Some of them have been listed as follows.

1. Initially after it was granted independence from the British, India followed the public sector economy patterns making it really tough for the private producers to flourish and then there was a strict discouragement to investment from foreign companies. However in 1991, the current Prime minister of India, Dr Manmohan Singh who was then the finance minister opened the country to the idea of globalization and liberalization which lead to the following of the mixed economy pattern. This lead to an increase in the number of domestic industrialists and also encouraged investment from foreign companies.
2. India is a true democracy with people from all of the world’s religions. However in order to support so many religions the country has no choice but to try to be a fair democratic power.
3. It is a common misconception that Chinese firms have a better work culture that India. However studies have shown that the firms in India are managed in a more admirable fashion.
4. There are more than three hundred million people that form the crux of India’s economy, the middle class.
5. The analysts are saying that in the next thirty years India will become the world’s third largest economy.
6. India has the concentration of the largest group of mobile users in the entire world. ( Interesting Facts about Indian Economy )

Conclusion

Now that we have analyzed India’s economy and its glitches and successes in detail let us try to summarize. It can now be said that India has been growing at a breakneck pace in the recent years and there is no stopping the Indian Juggernaut. India has acted as a safe haven for foreign investors who were looking for a place to invest with maximum returns and minimum issues.

India now has a large pool of investors, entrepreneurs, doctors and engineers who form India’s skilled labour force. This skilled labour force is responsible for India’s phenomenal economic growth in the recent years.

However it must also be taken into account that there are a large number of issues that India has been facing recently. Some of these issues include poverty, unemployment, price rise etc. Most of these issues have been discussed in detail in previous sections

References

1. Al Tamimi & Company. (n.d). Taxation law in the UAE , Retrieved on April 5, 2010 from http://www.zu.ac.ae/library/html/UAEInfo/documents/UAETaxationLaw.pdf
2. Taxation system in India. (n.d). Retrieved on April 5, 2010 from http://www.indianembassy.org/newsite//doing_business_in_india/fiscal_taxation_system_in_india.asp#2a
3. Corporate Tax rate in India. (n.d). Retrieved on April 5, 2010 from http://business.mapsofindia.com/india-tax/corporate-rate.html
4. LowTax official site. (n.d.). Retrieved on April 5, 2010 from http://www.lowtax.net/lowtax/html/dubai/jdb2tax.html
5. LowAndTax Official site. (n.d.). Retrieved on April 5, 2010 from http://www.lawandtax-news.com/html/dubai/jdblatdctx.html
6. Indian Economy & Economic Issues. (n.d.). Retrieved on April 3,2010 from http://www.whatisindia.com/economy.html
7. Interesting Facts about Indian Economy. (n.d.). Retrieved on April 3,2010 from http://www.citefin.com/609-interesting-facts-about-indian-economy.html

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