International Taxation

Chapter 2: Types of Taxes

Semester 2, Jan. – March
Rennes School of Business
Instructor: Akanksha JALAN
Types of taxes
• After understanding what a tax is, at the theoretical level, it helps to understand
the various types of taxes that exist around the world.

• For this purpose, we use the list of tax types provided by the Organization for
Economic Cooperation and Development (OECD).

• Major tax types are listed and briefly explained in the slides that follow.

• Link: https://www.oecd.org/tax/tax-policy/oecd-classification-taxes-interpretative-
guide.pdf

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1. Ad valorem tax

• ‘Valorem’ indicates value.

• Ad valorem taxes are charged on the value of something, which

could be goods, services, property or other assets.

• An ad valorem tax may be imposed at the time of a transaction

(sales tax or value added tax, VAT) or on an annual basis
(property tax) or on the happening of a certain event
(inheritance tax).

• Examples: VAT, property tax, sales tax.

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2. Bank tax

• Also called ‘bank levy’, it is a proposed tax on

banks.
• The use of this term became popular during the
global financial crisis of 2007-10.
• It is currently under discussion and often
referred to as the ‘financial stability
contribution.’

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3. Capital gains tax
• This represents the tax on the amount of gain made on the sale of a
capital asset.
• A capital asset is typically one that is held for a long period of time,
depending upon the tax law concerned.
• Capital gain is typically the difference between sale price and cost
of acquisition of the asset, adjusted for inflation over time.
• For instance,
• Canada treats only 50% of the capital gain as taxable income;
• India charges a 10% tax on short-term capital gains (assets held
for less than 1 year) and 20% on long-term capital gains (3
years or more). However, there are no taxes on capital gains
from sale of shares and mutual funds held for more than 15 year.
4. Corporate tax

• Refers to the taxes levied by different

jurisdictions on the capital or profits of a
corporation.
• Taxable profits are typically calculated as total
income less deductible business expenses.
• What is considered eligible for deduction and to
what extent depends upon the tax law
concerned.

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5. Excise duty
• Unlike ad valorem taxes, excise duty is unaffected by the value of
the tax base.
• Instead of value, excise is based on the quantity of a product
purchased.
• For example, the federal US government imposes an excise of 18.4
cents per US gallon of gasoline. State governments, on the other
hand, levy an additional 8 to 28 cents per US gallon.
• Excises are an important medium used for modifying consumption
patterns by taxing certain products such as alcohol, pornography
and tobacco. Such taxes are collectively called ‘sin taxes’.
• The UK charges an annual tax on vehicle ownership, called the
vehicle excise duty.

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6. Income tax
• This is levied on the financial income of natural persons, corporations and other legal
entities.
• This can be progressive, regressive or charged at a flat rate.
• Income tax on the profits of corporations is called corporate tax, corporate income
tax or corporation tax. This is usually levied at a flat rate.
• Example: President Trump’s Tax Cuts and Jobs Act reduced the US corporate income
tax rate from 35% to 21%, the lowest since 1939.
• Individual/ Personal income tax is usually charged progressively with higher rates of
tax with higher levels of taxable income. These are called tax slabs. It is usually paid
at a ‘pay-as-you-go’ basis with adjustments for payment/ refund at the end of the
financial period.
• Among European nations, Latvia and Estonia have the second and third lowest top
income tax thresholds, respectively. In contrast, Austria, France and Portugal have the
highest thresholds for their top income tax rates. (Source:
https://taxfoundation.org/top-individual-income-tax-rates-europe-2019/)
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7. Inheritance tax
• These are triggered upon the death of an individual, to be paid by the
person who inherits his money or property.
• Also called estate tax and death tax/ duty.
• The United States tax law makes a distinction between an estate tax and
inheritance tax.
• While Estate tax is imposed on the value of the estate (money and
property) of the deceased, Inheritance tax is imposed on the actual
beneficiaries of the estate upon death of the owner.
• For instance,
• UK’s inheritance tax is a tax on the assets of the deceased, making it
an ‘estate’ tax.
• Called the ‘droits de succession’ in France.
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8. Poll tax
• Also called per capita tax, or capitation tax, this represents a classic
example of a flat/ fixed tax rate.
• Represents the fixed amount of charge to be paid by each individual for
his right to vote.
• Poll taxes are administratively easy to impose and collect since the
number of individuals are finite, making it difficult to cheat on these
taxes.
• They are however, very unpopular since the poor end up paying a
much higher proportion of their income in poll taxes than the rich (since
the dollar amount is the same).
• Plus, some argue that poll taxes discourage couples to have children,
making it a difficult long-term situation for the country concerned.
• For instance, the US abolished poll taxes for participating in federal
elections in 1964. 10
9. Property Tax

• It is a tax charged on property on the basis of its ownership.

• These are usually charged on a recurrent basis, for instance,
yearly. The tax base is the estimated value of the property in
question.
• Property can include three elements – land, improvements to
land (man-made constructions such as buildings) and
personal property (movable items).
• Real estate is typically the combination of land and
improvements thereon.
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10. Social Security Tax
• These are used to fund promised incomes to retired workers in
countries with social security systems.
• These are levied on specific sources of taxpayer’s income, for
instance wages and salaries. In this case, they are also called
payroll taxes.
• The total amount of social security taxes paid by a taxpayer are
considered for determining the retirement benefits to which he
shall be entitled.
• For instance,
• The Federal Insurance Contributions Act (FICA) tax in the
US.
• The National Insurance Contributions (NIC) in the UK to
fund its national insurance system. 12
11. Sales tax
• These are levied when the goods are sold to the final consumer, who
pays the tax.
• It is believed that the presence of these taxes discourages retail sales by
making products more expensive.
• It is common for countries to exempt necessities such as food and
utilities from these taxes.
• The non-exempt items are typically luxuries, making this tax rather
progressive in nature.
• For instance,
• In Canada, this tax is called the Goods and Services Tax (GST)
and currently stands at 5%.
• In India, the new GST replaced the multiple state-level levies in
July 2017. Different rates apply to different classes of products.
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12. Tariffs
• Also called import and export duties, these represent taxes to be
paid each time goods cross a political border.
• Typically, these are designed to discourage imports and boost
local trade.
• A ‘trade bloc’ is a group of nations that agree to eliminate or
minimize tariffs against trade with each other and often place
tariffs for trade with countries outside the bloc (example, the
European Union).
• Classic ways of avoiding tariffs are smuggling, i.e. non-
declaration of goods leaving/ entering a political territory, or
declaring a false value for goods being imported/ exported.
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13. Toll
• A toll is a tax or fee charged to use a road, bridge,
canal or other public transportation.
• The objective is to raise money towards the cost of
construction borne by the constructing authority.
• Tolls may be charged at a flat rate, or depend upon
vehicle type, distance etc.
• The practice of deliberately avoiding certain routes
to avoid paying a toll, is called ‘Shunpiking.’

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14. Transfer Tax
• Historically, many countries require all legal contracts to have a stamp affixed to
them for validity.
• The stamp charge would either be a fixed amount or a certain percentage of the
value of the transaction.
• While most countries have now abolished the stamp, the stamp duty still remains.
• Now stamp duty applies only to certain types of transactions with the objective of
discouraging speculation in specific asset classes such as land and securities.
• For instance,
• In the US, transfer tax is charged by the state or local governments for real
estate property transfers.
• UK charges stamp duty on purchase of shares and securities, issue of bearer
instruments and certain partnership transactions.
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15. Value Added Tax (VAT)
• Also known by other names such as Goods and Services Tax (GST), Single
Business Tax or Turnover tax in different countries.
• It involves the taxation of ‘added value’ each time a value-adding process is
completed.
• For instance, a shoe-manufacturer buys leather and pays the VAT included in its
price to the seller of the leather (input-tax).
• He processes the leather, converts it into leather boots and sells it to a wholesaler
at a higher price. He collects the VAT on the difference or the value added (sale
price of boots less cost of leather) and remits it to the Government (output tax).
• The wholesaler now continues the process of VAT collection when he sells to a
retailer.
• The last amount of VAT is paid by the customer who cannot pass it on to anyone
else.
• VAT is typically administered through requiring the completion of VAT forms/
returns.
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16. Wealth (Net worth) tax
• Some countries tax the net worth of the taxpayer by demanding
a declaration of their balance sheets.
• These are used to assess the net worth, simply as assets minus
liabilities.
• A flat rate of tax of may be applied to net worth or to the
amount by which net worth exceeds a certain limit.
• This tax may be levied on both living and legal persons in a
country.
• Example:
• The ISF in France (Impôt de solidarité sur la fortune).
• There are no wealth taxes in the US, though it taxes
property.
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Thank you!