Financial Accounting

Taxation XIII

Accounting I
12 chapters from Wiley

1.  Accounting in Action

2.  The Recording Process
3.  Adjusting the Accounts The Basics
4.  Completing the Accounting Cycle
5.  Accounting for Merchandising Operations
6.  Inventories
7.  Accounting Information Systems
8.  Internal Control and Cash
9.  Accounting for Receivables
10.  Plan Assets, Natural Ressources and Intangible Assets
11.  Current Liabilities and Payroll Accounting
12.  Accounting for Partnerships
13.  Taxation
14.  International Accounting

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 Financial Accounting
Taxation XIII

Taxation
Study Objectives

1.  History of taxation

2.  Function and taxation as macroeconomic parameter
3.  Types of Taxes
4.  Accounting for VAT
5.  Basics of corporate taxation

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 Financial Accounting
Taxation XIII

History of taxation
Study objective 1

n  There is no such thing as a good tax.

Sir Winston Churchill
n  Before 1900, income taxes were used primarily to finance
wars
n  1861 in the US: First Federal Income Tax imposed to finance civil
war
n  Taxation on corporations started around 1900
n  Prussia: 1904 (4% tax rate)
n  US: First corporate tax levied in 1909 / Personal income in 1913
(tax rates 1% to 7%)

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 Financial Accounting
Taxation XIII

Functions of the Income Tax System

Study Objective 2

n  Produce Revenue (for the government)

n  Management of Economy
n  Effectuate fiscal policy
n  encourage desired behavior (i.e. re-introduction of DDB
depreciation as part of economic stimulus package starting Jan 09)
n  Regulatory Function
n  discourage undesirable activities
n  Alcopops-Steuer, € 0,83 per 275ml bottle
n  Social Function
n  redistribution of wealth

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 Financial Accounting
Taxation XIII

Principles of Taxation
Study Objective 2

n  Benefits-Received
n  „If you use it, pay for it“
n  Taxes on gasoline for road maintenance
n  Toll Roads
n  In German academia, not considered a tax (Steuer), but fee
(Gebühr)
n  Ability-to-Pay
n  „If you make the big bucks, pay the big taxes“

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 Financial Accounting
Taxation XIII

Criteria for Evaluating Tax Systems

Study Objective 2

n  Adam Smith

n  Equality
n  Convenience
n  Certainty
n  Economy
n  Effectiveness: Collection and administration expenses
should not exceed revenues (except: regulatory functions)

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 Financial Accounting
Taxation XIII

Estate Tax: Effectiveness?

Study Objective 2

n  No estate tax: Austria (since Summer 2008), Israel, etc.

n  Germany
n  Revenue: € 5,45 bn in 2014
n  Cost of administration: € 4,1 bn
n  State of Mecklenburg-Vorpommern in 2014:
n  Revenue from Beer Tax (Biersteuer): € 22,1 mln
n  Revenue from Estate Tax: € 11,0 mln

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 Financial Accounting
Taxation XIII

Tax Structure
Study objective 2

n  Tax Base

Amount to which tax rate is applied
n  Tax Rate
Applied to tax base to determine tax liability
n  Proportional (linear)
n  Progressive
n  Regressive
n  Incidence of Tax
Degree to which total tax burden is shared by taxpayers

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 Financial Accounting
Taxation XIII

Tax Incidence - Economics

Study objective 2

The theory of tax incidence has a large number of practical results, although many practical results of
the theory are disputed by economists:
n  Because businesses are more sensitive to wages than employees, payroll taxes, employer
mandates, and other taxes collected from the employer end up being borne by the employee. The
tax is passed onto the employee in the form of lower wages.
n  If the government requires employers to provide employees with health care, the burden of this is
likely fall on the employee to a great degree because the employer may pass on the burden in the
form of lower wages.
n  Taxes on easily substitutable goods, such as oranges and tangerines, may be borne mostly by the
producer because the demand curve for easily substitutable goods is quite elastic.
n  Similarly, taxes on a business that can easily be relocated are likely be borne almost entirely by the
residents of the taxing jurisdiction and not the owners of the business.
n  The burden of tariffs (import taxes) on imported cars might fall largely on the producers of the cars
because the demand curve for foreign cars might be elastic if car consumers may substitute a
domestic car purchase for a foreign car purchase.
n  If consumers drive the same number of miles regardless of gas prices (which appears to be the
case in the short run), then a tax on gasoline will be paid for by consumers and not oil companies
(this is assuming that the price elasticity of oil is high, which is incorrect. In this case both the price
elasticity of demand and supply are very low). Who actually bears the economic burden of the tax is
not affected by whether government collects the tax at the pump or directly from oil companies.

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 Financial Accounting
Taxation XIII

Types of Taxes
Study Objective 3

n  Transaction
n  VAT

n  Real Estate Transfer Tax

n  Estate / Gift / Generation Skipping Transfer

n  Property (ad valorem)
n  Grundsteuer
n  Income
n  Körperschaftsteuer/Corporate Income Tax
n  Einkommensteuer/Personal Income Tax
n  Gewerbesteuer/Trade Tax
n  Employment
n  Lohnsteuer (as form of Einkommensteuer), in the US: FICA
n  Other
n  Alcopops, Hundesteuer

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 Financial Accounting
Taxation XIII

Types of Taxes
Study Objective 3

n  Direct / Indirect

n  Direct: Personal Income Tax, Corporate Tax
n  Indirect: VAT
n  Beneficiary
n  Federal (Tobacco Tax, Energy Tax/Mineralölsteuer)
n  State (Estate Tax)
n  Local (Trade Tax, Gewerbesteuer, Hundesteuer)
n  Mixed (Income Tax, VAT)
n  Revenues in Germany 2014: € 1.246 bn
n  Thereof € 641 bn in taxes
n  Rest: Social Security (€ 375 bn) and other
n  (Expenses: 56% for social security, <11% for education, culture, research)
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 Financial Accounting
Taxation XIII

Taxes in Germany 2014

Study Objective 3

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 Financial Accounting
Taxation XIII

Accounting VAT – Systems

Study Objective 4

n  Current System in Germany

n  „Allphasen-Netto-Umsatzsteuersystem mit Vorsteuerabzug“
VAT is charged on the net amount on each transactions and
corporations can receive credit for VAT paid
n  Since 1968
n  VAT paid by seller to government
n  Tendency: Reverse charge method
n  VAT paid by buyer to government, except when sale is to final
(retail) customer
n  Australia did not have VAT (aka GST) until July 1, 2000

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 Financial Accounting
Taxation XIII

Recording Sales of Merchandise

Study Objective 3 ex Chapter 5

May 4: PW Audio Supply records a sale of $ 3.800 to Sauk Stereo. The merchandise cost PW Audio
Transaction
Supply $ 2.400.

Equations Assets = Liabilities + Owner's Equity

Accounts
Sales
receivable
$3.800 $3.800
Merchandise Cost of
Inventory Goods Sold
-$2.400 -$2.400

Debit Credit Dr Increase Assets Accounts Receivable

Cr Increase Owner's Equity Sales (Revenue)
Dr Decrease Owner's Equity Cost of Goods sold
Cr Decrease Assets Merchandise Inventory

Dr Cr
J/E May 4 Accounts Receivable $3.800
Sales (Revenue) $3.800
(To record credit sale to Sauk Stereo)

May 4 Cost of Goods Sold $2.400

Merchandise Inventory $2.400
(To records cost of merchandise sold to Sauk
Stereo)

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 Financial Accounting
Taxation XIII

Recording Sales of Merchandise

Study Objective 3 ex Chapter 5

Posting Sales (Revenue) Accounts Receivable

May 4 $3.800 May 4 $2.400

Merchandise Inventory Cost of Goods Sold

May 4 $2.400 May 4 $2.400

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 Financial Accounting
Taxation XIII

Accounting for VAT

Study Objective 4

PW Audio Sauk Stereo Mrs ABC

Wholesaler Wholesaler Consumer
Receives product and pays Receives product and pays Receives product and pays
Price: 2.400 Price: 3.800 Price: 7.600
VAT: 456 (19%) VAT: 722 (19%) VAT: 1.444 (19%)
Total: 2.856 Total: 4.522 Total: 9.044

VAT at Tax authorities VAT at Tax authorities VAT at Tax authorities

To PW Audio: - 456 To PW Audio: - 456 To PW Audio: - 456
From PW Audio: + 722 From PW Audio: + 722
To Sauk Stereo: - 722 To Sauk Stereo: - 722
From Sauk: +1.444
Total: - 456 Total: - 456 Total: + 988
Note:
(7.600 – 2.400)* 19%=988

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 Financial Accounting
Taxation XIII

Accounts used to record VAT

Study Objective 4

n  VAT Credit (Vorsteuer) A/R

n  VAT Received (USt) A/P

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 Financial Accounting
Taxation XIII

Recording a purchase incl VAT – Part I

Study Objective 4

Transaction On May 1, PW Audio Supply purchases inventory for $ 2.400 plus applicable VAT for cash.

Owner's
Equation Assets = Liabilities +
Equity
Merchandise
Inventory
$2.400
Cash
-$2.856
VAT Credit
$456

Debit Credit Dr Increase Assets Merchandise Inventory

Dr Increase Assets VAT Credit
Cr Decrease Assets Cash

Dr Cr
J/E May 1 Merchandise Inventory $2.400
VAT Credit $456
AccountsCASH
Payable $2.856
(To record goods purchased on account from
PW Audio Supply)

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 Financial Accounting
Taxation XIII

Recording a purchase incl VAT – Part II

Study Objective 4

Posting Merchandise Inventory Accounts Payable

May 1 $2.400

VAT Credit Cash

May 1 $456 May 1 $2.856

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 Financial Accounting
Taxation XIII

Recording a sale incl VAT – Part I

Study Objective 4

May 4: PW Audio Supply records a sale of $ 3.800 to Sauk Stereo. The merchandise cost PW Audio
Transaction
Supply $ 2.400. All transactions transpire incl applicable VAT.

Equations Assets = Liabilities + Owner's Equity

Accounts VAT
Sales
receivable Received
$4.522 $722 $3.800

Merchandise Cost of
Inventory Goods Sold
-$2.400 -$2.400

Debit Credit Dr Increase Assets Accounts Receivable

Cr Increase Owner's Equity Sales (Revenue)
Increase Liabilities VAT Received
Dr Decrease Owner's Equity Cost of Goods sold
Cr Decrease Assets Merchandise Inventory

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 Financial Accounting
Taxation XIII

Recording a sale incl VAT – Part II

Study Objective 4

Dr Cr
J/E May 4 Accounts Receivable $4.522
Sales (Revenue) $3.800
VAT Received $722
(To record credit sale to Sauk Stereo)

May 4 Cost of Goods Sold $2.400

Merchandise Inventory $2.400
(To records cost of merchandise sold to Sauk
Stereo)

Posting Sales (Revenue) Accounts Receivable

May 4 $3.800 May 4 $4.522

Merchandise Inventory Cost of Goods Sold

May 4 $2.400 May 4 $2.400

VAT Received
May 4 $722

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 Financial Accounting
Taxation XIII

VAT declaration at PW Audio

Study Objective 4

n  Due at the 10th of the following month in Germany

(Umsatzsteuervoranmeldung)
n  Part of the closing process
n  Debit VAT Received
n  Credit VAT Credit

VAT Received
Adj J/E $722 May 4 $722

VAT Credit VAT Payable

May 1 $456 Adj JE $ 456 Adj J/E $456 Adj J/E $722

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 Financial Accounting
Taxation XIII

Income Tax
Study Objective 5

n  Levied on the financial income of persons, corporations, or other legal

entities.
n  On persons: “Income Tax”
Individual income taxes often tax the total income of the individual (with
some deductions permitted)
n  On legal entities: “corporate tax, corporate income tax, or profit tax”
Tax base: Net Income BEFORE taxes
(the difference between gross receipts, expenses, and additional write-
offs).
n  Tax Rates: see KPMG‘s article
n  British Virgin Islands: 0%
n  Bulgaria: 10% (corporate)
n  US: Up to 51% (federal and state corporate tax)
n  Germany: Just over 30% (corporate, trade tax and SolZ)
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 Financial Accounting
Taxation XIII

Income Tax - Germany

Study Objective 5

n  Personal Income Tax

n  Einkommensteuer up to 45%
n  Solidaritätszuschlag 5,5% on Einkommensteuer
n  Kirchensteuer (church tax) on Einkommensteuer
n  Corporate Income Tax – Körperschaftsteuer
n  15% on Taxable Income
n  Trade Tax – Gewerbesteuer
n  3,5% x local levy (Berlin: 410%) = 14,35%
n  Norderfriedrichskoog: 200%
n  München / Bottrop: 490%
n  Reunification levy – Solidaritätszuschlag
n  5,5% on corporate / personal income tax
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 Financial Accounting
Taxation XIII

Determination of Tax Liability

Study Objective 5

n  Tax Base for corporate income tax

n  Taxable Income

n  NOT: Net Income or Gross Profit

n  Generally complex reconciliation

n  Approximation of tax base: Earnings before tax (EBT)

n  Determination of Tax Liability
EBT
+/- reconciliatory items
= Tax Base
x Tax Rate
= Taxes due
+/- Prepayments / Penalties
= Tax Payable
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 Financial Accounting
Taxation XIII

Taxation
Study Objective 5

n  Double Taxation Agreements

n  Effective Tax Rate (ETR)
n  ETR = Actual Taxes / EBT
n  Measurement of effectiness of tax department in an international
group
n  Leasing
n  Tax „savings“
n  There are no permanent tax savings
n  Tax „savings“ occur in temporary timing differences between gain
realized as per EBT and gain realized as per Tax Base
n  Total amount of taxes of a period in time remain the same
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 Financial Accounting
Taxation XIII

Reconciliation from EBT to Trade Tax Base

Study Objective 5

Gewinn aus Gewerbebetrieb (Gewinn) gem. EStG bzw. KStG

+ Gewerbesteuer-Vorauszahlungen Berechnungsjahr
+ Hinzurechnungen (see separate chart)
- Kürzungen (see separate chart)
----------------------------------------------------------------
= Gewerbeertrag vor Verlustabzug
- Gewerbeverlust aus Vorjahren
----------------------------------------------------------------
= Gewerbeertrag (abzurunden auf volle 100 €)
- Freibetrag von 24.500 € (nur für Einzelunternehmen und Personengesellschaften)
-----------------------------------------------------------------
= Gewerbeertrag * Steuermesszahl (siehe Berechnungsschema)
-----------------------------------------------------------------
= Steuermessbetrag * Hebesatz der Gemeinde
-----------------------------------------------------------------
= Zwischensumme - Gewerbesteuer-Vorauszahlungen
= zu zahlende Gewerbesteuer

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 Financial Accounting
Taxation XIII

Reconciliation from EBT to Trade Tax Base

Study Objective 5

Hinzurechnungen
Zinsen und andere Entgelte für Schulden (§ 8 Nr. 1a) GewStG)
+ Rentenzahlungen und dauernde Lasten (§ 8 Nr. 1b) GewStG)
+ Gewinnanteile stiller Gesellschafter (§ 8 Nr. 1c) GewStG)
+ 20  % der Mieten, Pachten und Leasingraten für bewegliche Anlagegüter (§ 8 Nr. 1d) GewStG)
+ 65  % der Mieten, Pachten und Leasingraten für unbewegliche Anlagegüter (§ 8 Nr. 1e) GewStG)
+ 25  % der Entgelte für Rechteüberlassungen (Konzessionen und Lizenzen - § 8 Nr. 1f) GewStG)
----------------------------------------------------------------
= Gesamtbetrag der Finanzierungsentgelte
− Freibetrag von 100.000 €
= Zwischensaldo
x 25  %
-----------------------------------------------------------------
= Gesamtbetrag der Hinzurechnungen aus Finanzierungsentgelten

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 Financial Accounting
Taxation XIII

Reconciliation from EBT to Trade Tax Base

Study Objective 5

Kürzungen:
1,2  % des Einheitswerts des zum Betriebsvermögen gehörenden Grundbesitzes (§ 9 Nr. 1 GewStG)
+ Gewinnanteile aus einer ausländischen oder inländischen Mitunternehmerschaft (§ 9 Nr. 2 GewStG)
+ Dividenden einer inländischen Kapitalgesellschaft, soweit zu mindestens 15 % beteiligt (§ 9 Nr. 2a
GewStG)
+ Gewerbeertrag einer ausländischen Betriebsstätte im Sinne des § 12 AO (§ 9 Nr. 3 GewStG)
+ Zuwendungen zur Förderung steuerbegünstigter Zwecke innerhalb der Höchstbeträge (§ 9 Nr. 5
GewStG)
+ Dividenden einer ausländischen Kapitalgesellschaft, soweit zu mindestens 15 % beteiligt (§ 9 Nr. 7
GewStG)
+ bestimmte Dividenden einer ausländischen Kapitalgesellschaft, in Abhängigkeit von
Doppelbesteuerungsabkommen (§ 9 Nr. 8 GewStG)

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