Principles of International

Taxation
By
Lynne Oats
Emer Mulligan
Publisher
Bloomberg Professional
Seventh Edition
 Chapter 1

Introduction to basic principles of

international taxation and laws
 Introduction to Taxation
Learning objectives
• Introduction to basic taxation
• Elements of taxes
• Type of taxes
• Tax Administration
• Principles of Taxations
 Introduction
• International taxation is the study or determination of tax on a person or
business subject to the tax laws of different countries.

• Taxation is the part of public finance that deals with the means by which
the government raises revenue from the public by imposing taxes which
revenue is used by the government to provide good services to the public
or its citizens (to carry out government functions).

• Taxation, therefore required to obtain the funds for various development

initiation by the government.
• International taxation in a simple language means the study of Taxation
beyond the National Level.
• It is a system of compulsory levies or exactions imposed for the
purpose of a variety of taxpaying subjects, but it may also be imposed
for other social and economic objectives.

• There is enormous diversity in the types of tax systems.

• The range of taxes used and the complexity of the rules to impose
them vary from country to country.

• The term international tax law means laws that stem from domestic
sources and international sources, that refer to taxation in cross
border situations.
 Common features
in any tax system
• i. Taxing authority:
• This is the authority with the power to impose tax e.g. the
government or local authority. The taxes are received as public
revenue. The taxing authority has the power to enforce the payment
of the taxes
• ii. Taxpayer :
• The person or entity that pays the tax e.g. individuals, companies,
businesses, and other organizations.
• iii. Tax
• The amount paid to the taxing authority as a direct cash payment or
paid indirectly through the purchase of goods or services.
 Elements of taxes
• Every tax has three essential elements
• 1. a base
• 2 A rate of tax
• 3. Taxpayer, the person who pays the tax.
 Elements of taxes
• The base is the subject of the tax.

• There are four main bases of taxes

• 1. consumption/Expenditure (Sales tax )

• 2. wealth ( wealth tax)
• 3. Income and profit ( Turnover tax )
• 4. poll or head taxes ( income tax or corporate taxes)
 Elements of taxes

• The rate of a given tax is extremely important to evaluate its impact.

• They are usually discussed in terms of their average or marginal rate.

• A proportional rate, where the average is equal to the marginal rate.

• A progressive rate, where the average rate is less than the marginal rate.

• A conceivable rate, where there will be a regressive rate, where the actual
tax rates fall as the tax base increases, hence marginal rate is always less
than the average rate of tax .
 Elements of taxes
• Incidence of Tax :
• The incidence of a tax is the direct money burden of the tax. It deals with
who ultimately pays the tax.
i. Wholly on the consumer if, as a direct result of the tax, the price of the
commodity rises by at least the full amount of the tax;
ii. Wholly on the dealer if the price does not rise at all;
iii.Partly on the dealer if the price rises by an amount less than the full
amount of the tax.
• For example, if a tax is imposed on cigarette sales in order to discourage
smoking and hence cut expenditure on health, it must be ascertained
whether the smokers will be affected "adversely" by the tax.
• Taxpayer usually leads to the distinction impact between the impact
and the incidence of taxation.

• Considering the taxpayer, one must also know will only the individual
or the family unit share the liability.
 Types of taxes
• Consumption-based taxation involves the consumer being taxed on
his or her spending on goods and services.

• Most governments impose a variety of taxes on various types of

narrow bases consumption.

• For example VAT, GST

• Wealth Tax

• A wealth tax may comprise an annual levy on wealth or tax on the

transfer of wealth such as the death of gift duties.

• Land and property taxes can be viewed as forms of wealth taxes and
imposed on an annual basis.
• Personal income tax

• Taxes on personal income and business profits are major revenue

sources for most industrialized nations.
• Capital gains

• Capital gains can be defined as the profit resulting from the income in
the value of assets that are not part of the owner’s stock.

• The two major issues with the capital gains are

• Which capital gains need to be recognized for tax purposes
• How to impose taxes with inflationary gains.
• Corporate taxes

• In most countries, a company or corporation is a separate legal entity.

• Treating companies as taxpayers separate from their shareholders

allows the government to impose an income tax on them directly.
 Tax Administration

• The tax administrative system shows a significant shift from

traditional to modern culture.

• Several tax administrations have adopted a compliance pyramid that

tries to match taxpayer behavior to administrative responses.
 PRINCIPLES OF TAX SYSTEM

• The great Economist Adam Smith laid out some of the principles of
taxation.
• 1. Simplicity
• A tax system should be simple enough to enable a taxpayer to
understand it and be able to compute his/her tax liability.
• 2. Administrative Efficiency
• A good tax system should be capable of being administered
efficiently. The system should produce the highest possible yield at
the lowest possible cost both to the tax authorities and the taxpayer.
 PRINCIPLES OF TAX SYSTEM

• 3.Taxable Capacity

• This refers to the maximum tax which may be collected from a

tax payer without producing undesirable effects on him. A good tax
system ensures that people pay taxes to the extent they can afford it.
There are two aspects of taxable capacity.

• a) Absolute taxable capacity :Absolute taxable capacity is measured

in relation to the general economic conditions and individual position.
• b) Relative taxable capacity :Relative taxable capacity is measured
by comparing the absolute taxable capacities of different
individuals or communities.
 PRINCIPLES OF TAX SYSTEM

4. Certainty
The tax should be formulated so that tax payers are certain of how much
they have to pay and when. The tax should not be arbitrary.
5. Convenience
The method and frequency of payment should be convenient to the tax
payer e.g. PAYEE.
6. . Neutrality
Neutrality is the measure of the extent to which a tax avoids distorting the
workings of the market mechanism.
7. Productivity
A tax should be productive in the sense that it should bring in large revenue
which should be adequate for the government.
 PRINCIPLES OF TAX SYSTEM

8. Elasticity or Buoyancy
By elasticity we mean that the government should be capable of
varying (increasing or reducing) rates of taxation in accordance to
the circumstances in the economy.
• 9. Flexibility
• It means that there should be no rigidity in taxation i.e. the tax
system can be changed to meet the revenue requirement of the state;
for example travel insurance is not mandatory for all travelers.
• 10. Diversity
• It means that there should be variety or diversity in taxation. That the
tax base should be wide enough so as to raise adequate revenue and
also the tax burden is evenly distributed among the taxpayers.
 PRINCIPLES OF TAX SYSTEM

• 11. Equity
• A good tax system should be based on the ability to pay. Equity is
about how the burden of taxation is distributed. The tax system
should be arranged so as to result in the minimum possible sacrifice.
• Equity means people in similar circumstances should be given similar
treatment .
• There are three alternative principles that may be applied in the
equitable distribution of the tax burden:
• a. The benefit principle
• b. The ability to pay the principle
• c. The cost of service principle
 Discussion Questions

• Briefly explain the principles or canons of taxation.

• Explain about the taxable capacity?
• What is incidence of tax ?
• Define : Tax , Base , VAT,Taxpayer
• Explain the principles of the equitable distribution of the tax
burden:
• Follow the websites of ZATCA, GAZT, and SAMA for more details.