Unit 8 - TAXATION

A. Terms, definitions, theories

Income tax: The tax people pay on their wages and salaries (and business profits in the US)
Corporation tax: the tax on business profits (in Britain)
Progressive tax: A tax that is levied at a higher rate on higher incomes
Indirect taxes: Property taxes, sales taxes, customs duties on imports, and excise duties on
tobacco, alcoholic drinks, petrol, etc.
Most sales taxes are slightly regressive because poorer people need to spend a larger proportion
of their income on consumption than the rich
Value-added tax: A sales tax collected at each stage of production, excluding the already-taxed
costs from previous stages.
Capital gains tax: A tax on the profits made from the sale of assets
Capital transfer tax: A tax on gifts and inheritances
Tax avoidance: Reducing the amount of tax you pay to a legal minimum.
Making false declarations is called tax evasion and is obviously illegal.
Bringing forward capital expenditure (on new factories, machines, and so on) so that at the end
of the year all the profits have been used up is known as making a tax loss.
Multinational companies often set up their head offices in low-tax countries such as Liechtenstein
Monaco, the Cayman Islands, and the Bahamas, known as tax havens.
Criminal multinationals such as the Mafia tend to pass money through a series of companies in
very complicated transactions in order to disguise its origin from tax inspectors and the police,
this is known as laundering money.

B. Vocabulary
Match the type of tax with the definition

1. Income tax a. Tax on profits made by selling assets such as businesses,

2. Capital gains tax rented houses and shares.
3. Value Added Tax (VAT) b. A tax on specific transactions. For example, in the UK, it
4. Stamp duty is payable by the buyer of a house.
5. Wealth tax c. Tax on earnings, profits from investments and any other
6. Inheritance tax sources of personal income.
7. Corporation tax d. Tax on goods and services. In the UK it is charged at
17.5%.
e. In the UK, this is the name for the tax paid by companies.
f. Tax on assets (such as houses) payable in some countries,
but not in the UK.
g. Tax on the assets of a person who has died. Used to be
called "death duties".
Add tax and/or taxation before or after the following words to make two-word partnerships
1. accounting 2. allowance 3. authority
 4. avoidance 5. consultant 6. corporation
7. deductible 8. direct 9. evasion
10. free 11. haven 12. income
13. indirect 14. inspector 15. loophole
16. loss 17. payer 18. progressive
19. rates 20. rebate 21. regressive
22. return 23. sales 24. shelter
25. withholding 26. year

C. Reading

Reading
Generally, taxes are the major source of national revenues. Taxation is one of the disadvantages of
choosing a corporate form of business organization. Unlike other structures, a company is subject to
so-called double-taxation, where the corporate income is taxed first at the company level (corporate
income tax (CIT), and subsequently, the company’s shareholders income in the form of a dividend is
taxed (personal income tax (PIT)). Therefore, to lower the amount of taxes paid, many international
companies set up their businesses in low-tax countries, such as the Bahamas, which are referred to
as tax havens, or encourage their accountants to find a lawful way to minimize the tax burden, a
practice referred to as tax avoidance (as opposed to tax evasion, which involves making false tax
returns and is illegal).
Tax is a determined unilaterally, non-repayable, mandatory money payment collected by public
authorities in accordance with tax law. National tax authorities include the Tax Offices (Poland), the
Internal Revenues Services (IRS – the USA), and HM Revenue &Customs (HMRC – the UK)
There are a number of criteria applied to diversify classes of taxes. The first one is the subject criterion,
which comprises taxes levied on income (corporate and personal), property, and consumption.
According to the allocation criterion, taxes are divided into either direct taxes, which are paid directly
by the tax remitter to the relevant tax authority and include income and property taxes, and indirect
taxes, which are not paid directly but they are passed on to the tax payer by an increase in his or her
expenses. These taxes include any tariff taxes (eg. VAT) and are levied on sale of goods and services.
The tax remitter does not necessarily have to be the same person as the tax payer. The latter is a
person or entity whose income, for example, is taxable. The remitter is the person who actually
transfers due tax to the competent tax authority.
The amount of taxes levied depends on the tax base – the greater the amount, the higher the tax is
assessed, as well as on any tax brackets, which impose tax obligations in a progressive manner. A
progressive tax is levied at a higher rate on higher incomes. A flat-rate tax, meanwhile, is imposed at
a fixed percentage irrespective of the amount of the tax rate and accrued income for the entire year,
however, very often election of this form of taxation may result in a loss of tax reliefs.
Certain institutions or particular activities may be tax exempted (especially in the case of VAT), which
means that no tax is levied on a particular tax base. Taxes are declared in many cases in monthly tax
returns and there is also an obligation to present a yearly tax return which comprises all the
information on income earned, tax deductible expenses, tax deductions and taxes paid. If an entity
paid more taxes that was required, it receives a tax rebate and if it enjoys some tax reliefs, then all or
apportion of the tax may be refunded (tax refund).
Taxes must be paid in a timely manner and if an entity fails to do so, tax arrears may be incurred.

Reading comprehension tasks

Match the term with the definitions

1. Tax authority a. Legally minimizing the amount of
due tax
2. Corporate income tax b. Tax rate grows together with the
amount of generated income
3. Direct tax c. Tax paid by individuals
4. Double - taxation d. Taxation of both company profits
and shareholder’s income
5. Flat-rate tax e. Not taxable
6. Indirect tax f. Taxes paid on sale of services and
goods
7. Personal income tax g. Includes i.e. income and property
taxes
8. Progressive tax h. Tax threshold
9. Tax arrears i. Official body responsible for
levying and collecting taxes
10. Tax avoidance j. Expenses that are deducted from
taxable income
11. Tax bracket k. Low tax zones
12. Tax deductible l. Person or entity that actually
transfers money to pay due tax
13. Tax evasion m. Tax paid by companies
14. Tax exempted n. Occurs if taxes are not paid or paid
too late
15. Tax haven o. Tax declaration
16. Tax payer p. In other words, proportional tax
17. Tax refund q. Making false tax returns in order to
pay less tax
18. Tax relief r. A way of reducing a tax by
spending money on particular
purposes
19. Tax remitter s. Reimbursement of taxes due to tax
reliefs
20. Tax return t. Person whose income is taxable

Choose the correct term to complete the following sentences

1. Reducing the amount of due tax to a minimum allowed by law is called ______.
2. _______ means that both company profits and dividends paid to its shareholders are taxed.
3. Person who actually transfer money to pay the due tax is called a _______.
4. _____ allow companies to pay a lower tax.
5. _____ are paid on the sale of goods and services.
6. Tax with a fixed percentage irrespective of the amount of the accrued income in a year is called a
_____.
7. _____ represent business expenses that can be deducted from taxable income.
8. If you pay too much tax in a given period, you should apply for a ______.
9. ____ means that particular activities are not taxable.
10. Documents filed with tax authorities stating the amount of due tax are called _______.

D. Exercises
Complete the sentences using the appropriate words

Income tax, tax law, revenue production, taxation, benefit, definition, involuntary, penalties,
levied

1. Society could not function without some system of ______.

2. Current _____ has developed over a period of more than 85 years.
3. The federal ______ is an array of laws that imposes a tax on the income of individuals,
corporations, estates and trusts.
4. It is helpful to have understanding of taxes and how the federal income tax fits into the overall
scheme of ______.
5. A tax could be viewed as an _____ contribution required by law to finance the function of
government.
6. Payments to a government agency that relate to the receipt of a specific ______ are not
considered taxes.
7. The tax is _____ without regard to whether the tax payer receives a benefit from paying the
tax.
8. Certain payments that look like a tax are not considered a tax under the IRS _______.
9. Fines for violating public laws and _____ on tax returns are not taxes.

Match the terms with the examples. It's not easy – some of the terms have close meanings

1. tax relief a. Ms Brown is British, but to save tax she lives in Monaco.
2. tax break b. No tax is payable on winnings from the National Lottery.
3. tax exile c. From April 6th next year, theatres will not have to pay tax
4. direct taxation on profits below £20,000.
5. indirect taxation d. VAT
6. tax avoidance e. Ms Smith pays an accountant to find legal ways to reduce
7. tax evasion her tax liability.
8. tax free f. income tax
g. Liability for capital gains is reduced by 7.5% for each year
of ownership of the asset.
 h. Mr Jones made a profit of £100,000 from selling a
business, but didn't declare it to the Inland Revenue.

Use the correct form of these verbs in the following sentences

Avoid be liable deduct evade levy lower pay raise

1. If you inherit a lot of money, you ________ for capital transfer tax.
2. In some countries, employers have to ________ tax from your pay and _______ it direct to
the tax authorities, so employees have no possibility of _______ income tax.
3. Some people hire expensive accountants to tell them how to _______ taxes – legally, of
course!
4. The government always tries to _______ taxes in the year before elections.
5. The government has a huge deficit and is going to have to _______ either the rate of VAT or
income tax.
6. The government _______ special taxes on petrol, alcohol and tobacco.

Choose the best word from each pair in bold type

1. Alan's company is registered in his wife's name for tax reasons / motives.
2. Until last year, some companies paid part of their executives' salaries in valuable antiques, to
save tax. However, the government has now closed this wormhole / loophole.
3. In the UK, food and children's clothes are free / exempt from VAT.
4. Only about 4% of the population are in the highest tax bracket / level.
5. Any company which relocates to Wales will pay not tax for the first two years. This tax incentive
/ gift is designed to help reduce unemployment in the region.
6. Last year I paid too much tax, so this year I received a tax refund / rebate