EXAMPLES OF OPEN QUESTIONS PRINCIPLES OF TAXATION:

1.     Explain the difference in operation between a cumulative sales tax and VAT/GST?

In the cumulative sales taxes, you add a tax at each stage of production, but do not record
the amount at each stage. So, the tax is adding up, and you get tax on tax, as a first issue.
Also, the amount of tax depends a lot on the amount of transactions and this is another big
issue. Both these problems lead to a bigger one, the fact that the accurate amount of tax
must be estimated, and is often too generous when refunded on exports, which leads to
hidden subsidies.

In VAT, each part of the value chain keeps record of the amount of VAT it payed and the
amount of VAT it charged and can reclaim it. Therefore, we get a clear vision of who payed
who, it is very convenient to compute the exact amount of VAT, there is no such thing as
“VAT on VAT”, …. When there is VAT to be reclaimed it can be refunded in some period to
the payer, and if there is VAT due, it must be paid, and it is easy to comply.

2.      What is the fundamental difference between a tax on income and a tax on
consumption?

Income tax is a tax on a productive activity (your salary, your investments, …). On the other
hand, it is, on the positive side, easy to consider the ability to pay

A tax on consumption is on the gratification of consuming, which is non-productive. But it is

hard to consider the ability to pay, as consumption is not measure in income and it does not
estimate wealth very well. Therefore, the ability to pay is harder to respect in consumption
taxes.

3.      For the application of VAT/GST is there a difference between import/export and intra
community supplies/intra community acquisitions and if there is a difference explain that
difference.

There is 0 VAT on export, and in case of an import the VAT is applied in the country where
the good enters. So, the exporter can deduct all the VAT and charge no one, the importer
gets charged the VAT on custom value.

In intra community, European VAT will be due anyways, as the common market has some
similarities with a simple acquisition within 1 single country. Also, there are differences
between delivery to a taxable person or to a non-taxable person. In the first case the VAT is
due in the member state of arrival, in the other case it is due in the country where the good
were sent from (if the sender as a permanent establishment there).

4.      What is a “bonded warehouse” and explain the rules for import and export for goods in
and out of a bonded warehouse?

When a good arrives in a country, it is placed in a warehouse controlled by the tax

authorities. When it crosses the border no VAT is paid, and VAT is suspended in the
warehouse If the good is re exported, no VAT or import tax will be due at all. If it is sent
inside the country and leaves the warehouse, then VAT is due.
5.      Explain the difference between the consequences of exemption and zero rating in VAT?

Exemption means that the business does not have to collect VAT from its clients, but that
therefore it can not deduct input VAT as it is considered the final consumer.

Zero rate means in theory that the business must charge VAT on your clients at a rate of 0%
(meaning, in practical terms not to charge VAT). Although, as in theory it charges VAT, it is
entitled to deduct input VAT, unlike exempt companies.

6.      What are the reasons why public services provided by the government are not subject
to VAT?

Public services often are subsidized. VAT would undermine subsidize while the exempt
public service aims at the common good (and therefore VAT would hurt the common good).

Also, public services do not aim at making at making a profit and make prices higher and the
public provider less efficient (again, this hurts the common good).

Although, public services who enter in competition with regular businesses may be subject to
VAT as they unfairly would manipulate the market otherwise.

7.      What are the reasons for separate rules of taxation for capital gains and ordinary
business income?

In many cases the rate for taxing capital gains in businesses is lower than the normal rate
applied to regular gains. Therefore, it would be easy to use capital losses to reduce the
regular income, while the regular income is taxed more heavily, and that is not fair. So the
solution is to put capital gains and losses in another category of gains than regular ones.

8.      Describe what type of tax arbitration is possible between the tax burden in PIT and CIT
for an individual professional or businessman in his choice in which legal form he wants to do
business?

SME and independents are usually small enough to fit the PIT, but they can easily
incorporate and be taxed according to CIT.

PIT and CIT have quite different rates as well as different tax bases sometimes. Therefore, it
the revenue will differ depending on the choice made by the independent, and the
independent can choose the option that will maximize his profit (by incorporating or no),
which is arbitration.
9.      Describe which mechanisms are available to avoid double or multiple CIT on the
distribution of company profits, and what are the differences in the functioning of these
mechanisms?

There are 2 ways to avoid such issues.

The first is an exemption, where the company distributing the profit pays the tax and all the
ones after pay not tax. A first problem here is that if there is no tax on the first company,
there is no tax at all. Another issue is the deduction of expenses. If the dividends received
are fully tax exempt, the expenses related to shareholding result in a loss that can be
deducted on other categories of income. This should not happen has the relief in this case
jeopardises the separation between capital gains and other gains taxed at a different rate. To
solve this issue and the previous one, it is possible to use a partial exemption (of less than
100%).

The other way is to use a tax credit. If the tax rate in the country of the distributing is lower
than on the receiving the receiving company will have to adjust and pay taxes. In the
opposite case, the receiving can carry this forward and set it against capital gains.

10.   Explain the difference of linear and degressive depreciation for tax purposes.

The linear method is easy, as it is about decreasing the capital asset by taking its value,
dividing it by the amount of estimated amount of years it will serve, every year. So, [total
asset value/planned years of use], which we take out from the purchase value every year.

In the degressive method, one should take a rate higher than it would be with linear method
and proceed as follows: [“Total value of the asset”- “Value depreciated already”]* (1-
degressive rate).

11.   What is the difference between vertical and horizontal equity?

Vertical equity states that people in unequal situations should be taxed differently. It is based
on the principle of equality and put in application through the law of decreasing marginal
returns.

Horizontal on the other hand means the people in similar situations should be taxed in the
same way, meaning that they should pay the same rate.

12.   The benefit principle is often advanced as a justification for (income) taxation. What are
the problems with the benefit principle if it is used for the equitable distribution of tax
burdens?

The main idea behind the benefit principle is that “people who gets the most benefits should
pay the most”. In this case, people who benefit a lot from the state services should be taxed
a lot, but this can hardly be calculated, unlike the ability to pay, which is easier to put in
place. The benefit principle is good for things such as train tickets, where if you pay you get
your seat, if you do not pay you do not get the it. Also, the benefits principle does not go in
the direction of equality, unlike ability to pay.