Faculty of Economics and Political Sciences Cairo University

Tax regimes in Egypt & European countries Faculty of Economics and Political Sciences Cairo University Dr. Mohamed Zaky

Important concepts and definitions Marginal, average and effective tax rates Tax Bracket Difference between marginal and average tax rate Level of income tax of a given individual, as indicated by the amount of taxes paid on final dollar of taxable income Most countries employ progressive taxation USA -2008

Important concepts and definitions Marginal, average and effective tax rates The average rate of taxation that applies to our income. Mathematically, it’s our total tax liability divided by total income in any given year. The rate of tax applied to the last dollar added to your taxable income. E.g. if you are making $90,000 per year then your 90,000th dollar will be taxed at the 28% tax rate. Your 90,001th will be also taxed with the 28% rate until your taxable income reaches $164,550. It is calculated by dividing the total income taxes paid by your total income. It is less than the marginal rate.

Important concepts and definitions Tax incidence & Tax burden Tax incidence is the study of who bears the economic burden of a tax. Broadly put, it is the positive analysis of the impact of taxes on the distribution of welfare within a society. Tax incidence is related to the price elasticity of supply and demand. When supply is more elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply, producers will bear the cost of the tax. Tax Burden is The amount of income, property or sales tax levied on an individual or business. It varies depending on a number of factors including income level, jurisdiction, and current tax rates.

Important concepts and definitions Tax incidence & Tax burden Progressive tax Proportional tax Regressive tax The percent of income paid as tax rises as the income amount rises The percent of income paid as tax stays the same as the income amount rises The percent of income paid as tax decreases as the income amount rises

Important concepts and definitions Tax non-compliance Tax avoidance Tax evasion VS The criminal non-payment of tax liabilities. Reducing taxes by legal means Tax resisters Tax protestors Attempt not to pay tax believing that they have discovered different interpretations of the law that stipulates its inapplicability Refuse to pay a tax for conscientious reasons like not willing to support the government or some of its activities.

Important concepts and definitions Tax non-compliance • No General Anti-Avoidance Rule (GAAR) in UK, but certain provisions of the tax legislation (known as "anti-avoidance" provisions) apply to prevent tax avoidance. • The UK authorities use the term tax mitigation to refer to acceptable tax planning, minimizing tax liabilities in ways expressly endorsed by Parliament. • In the United States, thieves are required to report their stolen money as income when they file for taxes, but they usually do not do so, because doing so would serve as a confession of theft. For this reason, suspected thieves are sometimes charged with tax evasion when there is insufficient evidence to try them for theft.

Important concepts and definitions Taxcredit & Tax deduction • The definition of a Tax Credit is an item that reduces your actual tax. It differs from a tax deduction that reduces only your taxable income. • A tax credit is generally much more valuable than a deduction. The tax credit reduces the actual amount of tax that must be paid. • A deduction, on the other hand, only reduces the taxable income. Therefore, the tax deduction is subject to the variation in the progressive tax rate. A tax credit does not depend on the tax rate and so it is of equal value to a taxpayer regardless of his income level.

Important concepts and definitions Withholding tax: • Tax on income imposed at source, i.e. a third party is charged with the task of deducting the tax from certain kinds of payments and remitting that amount to the government. • Withholding taxes are found in practically all tax systems and are widely used in respect of dividends, interest, royalties and similar tax payments. • The rates of withholding tax are frequently reduced by tax treaties.

Tax rates in Europe 2009 Source: Eurostat

Tax reform in Europe Country experiences

Spain 43% Personal income tax 30% Corporate income tax 16% Value-added tax

Spain Personal income tax • Simplification, reduction of tax scale to 4 brackets (24 %, 28 %, 37 % and 43%) - 2007. • Savings including capital gains, are taxed at a progressive system of 19% on the first €6000, and 21% on 2010 income above. • Introducing tax credits like the additional tax credit of €400 to working and self-employed taxpayers to support household purchasing power.

Spain Corporate income tax • Reducing tax rate from 35 % to 32.5 % in 2007 and to 30 % in 2008. • Special tax regime for small and medium sized enterprises (SMEs): • Increasing the annual turnover threshold to be included within the scope of the special regime. • Increasing the taxable amount taxed at the reduced tax rate. • Free depreciation is granted for all companies up to 2015 • Expanding the R&D tax credit to companies with more than 25% of their research activity in another EU Member State or member of the EEA

Spain Value added tax • Special VAT consolidation regime applicable to corporate groups. • Possibility of claiming immediate VAT refunds. • Increasing the tax rates for tobacco and hydrocarbons in June 2009 and once more tobacco tax rates were raised again in December 2010

Greece 40% Personal income tax 25% Corporate income tax 19% Value-added tax

Greece Personal income tax • Increasing the progressivity of the PIT. • Abolition of tax exemptions. • The tax-free threshold amounts to € 12000, and is directly linked to taxpayers’ expenditures. • Individuals are subject only to a national income tax, as there are no local income taxes.

Greece Corporate income tax • Cutting the corporate tax rate over the last few years since 2001. • Additional tax of 3 % is levied on gross income derived from immovable property. This additional tax cannot exceed the tax calculated on the company's income. • Increasing the withholding tax to 25 % starting from 2012 on profits distributed by corporations, limited liability companies and cooperatives • No group taxation in Greece, i.e. all entities are taxed separately.

Greece Value-added tax • Increasing the VAT rates since 2010 – both standard and reduced rates. • Levying an excise duty on mineral oils, gasoline, tobacco, alcohol, beer and wine.

Poland 32% Personal income tax 19% Corporate income tax 22% Value-added tax

Poland Personal income tax • Reducing PIT rates four times since 1995. • Applying two tax rates since 2009 i.e. 18% and 32%. • Broadening tax base by abolishing a number of tax deductions, perceived as distorting consumption, savings and investment decisions, and by including fringe benefits and benefits in kind within taxable income. • Granting a tax credit for contributions to the obligatory health insurance scheme.

Poland Corporate income tax • Gradual reduction of the CIT rate from its 40 % peak in mid-1990s to the current 19 % in force since 2004. • Broadening the CIT tax base by limiting or abolishing various incentive schemes, investment credits and property-related tax shelters. • Applying the notion of a tax group. • Depreciation for tax purposes has been brought more closely in line with economic depreciation and the number of depreciation schedules has been drastically reduced

Faculty of Economics and Political Sciences Cairo University