1. Introduction to Company-Taxation

1. 1. IntroductiontoCompany-Taxation Prof. Dr. v. Wuntsch

2. Objectives & Competences Students will beabletodescribe • thebasicsofcompanytaxation in general, • German tax regulations in a foreignlanguage orforeign tax regulations in yourownlanguage, • different kindsoftaxesandtosolvecases, • thebasicsofInternational Taxationandtosolvecases. Prof. Dr. von Wuntsch

3. Benefits from globalization → Important benefits: • better allocation of resources • greater access to foreign goods and services • greater range of choice • decreasing costs of travel and transport • decreasing costs of information Prof. Dr. von Wuntsch

4. Negative aspects from globalization(see: Vito Tanzi): Crossborder effects of national policies: • “Spillover-effects” in an integrating world economy • Political competition derives from economic competition. This process has an impact on: → increasing tax competitionamong countries → tax incentives in order to attract foreign investments → Risk of reduction in tax revenue (“tax degradation”) → market distortions Prof. Dr. von Wuntsch

5. EXAMPLES: • Multinational companies establish integrated production processes with an incentive to lower world-wide tax liabilities • Transfer pricing and the risk of tax migration • Portfolio-investors and the problem of under- reporting interest flows → risk of capital flight Prof. Dr. von Wuntsch

6. Some General Questions • A. Is taxationjust ? (State andcommunitydemand? Who aretaxpayers? ... ) • B. Howshould a good tax systembe structured? (Should Cover all income? Progressive rate? Flat tax? ... ) Prof. Dr. von Wuntsch

7. Comparison with other Tax systems Tax Rate Regressive Tax Taxable Income Tax Rate Progressive Tax Taxable Income

8. LafferCurve

9. Definition of a Flat Tax “A flat tax is a tax system with a constant tax rate” 1 Tax Rate Taxable Income 1Source: James, Simon (1998) A Dictionary of Taxation, Edgar Elgar Publishing Limited: Northampton

10. Countries in Europe witha Flat Tax Countries considering flat tax systems Countries that have flat tax systems

11. European Taxation General Statements

12. Current Situation Tax policy in general is a basic of national sovereignty Corporate taxes can be seen as benefit taxes corporations pay for the public services they use (e.g. infrastructure) EU member states’ total tax revenues as a percentage of GDP at around 40% (Corporation tax only) National corporation tax law has to be in alignment with the various “freedoms” of the EC Treaty

13. Current Situation All member states in the EU tax company profits Tax rates vary enormously Differences in the way taxable profits are calculated and the level of corporation taxation

14. Corporation Tax Systems Classical System (without tax relief for shareholder) Classical System (with tax relief for shareholder) Exemption system: Tax exemption for shareholder Partial Imputation system: partial tax credit Imputation system: full tax credit Countries Switzerland Irland Belgium Germany (from 08) Denmark France Luxemburg Netherlands Austria Sweden Italy USA Greece Litovania Norway Japan Canada (Ontario) Spain UK Malta Norway Tax rates (%) 8.5 12.5 34 38.6 (29.83) 28 33.3 22 31.5 25 28 33 35 32 15 19 30 22.1 35 30 35 28 Relief Corporation Tax and Income Tax without any relief Parts of the dividend are not liable to income tax Shareholder is not liable to income tax on dividends A part of CT is imputed to the shareholder as a tax credit All of the CT is imputed to the shareholder as a tax credit Prof. Dr. von Wuntsch

15. → Tax havens in Europe: Switzerland Holding- and domicile companies: 0.4 – 3.5 % Capital Tax Luxembourg Holding companies: 0.2 – 1 % of the value of the shares (tax d`abonnement) Coordination Centers: Taxable base = 5 % of the calculated cost-price (without cost of personnel and financial cost) Prof. Dr. von Wuntsch

16. Netherlands Financial Companies: Only 20 % of the profits arising from financial activities are allowed to be taxed with the normal rate of 35 % CT. Ireland CT rate = 12.5 % CT rate in Center for international financial services in Dublin: = 10 % (till year 2005) → tax avoidance and anti-abuse rules (CFC Legislation and Transfer Pricing Guidelines) Prof. Dr. von Wuntsch

17. Taxation in the European Union Question: Should the European policy lead to the harmonization of taxation in the Member States ? Prof. Dr. von Wuntsch

18. Effects of tax competition States competeamongthemselvestoattracteconomicactivity Tax competitioncouldleadto a “racetothebottom” in tax ratesorrevenues Manyeconomiststendtoregard tax competitionasbeneficial

19. Taxation in the European Union Art. 5 EC-Treaty: →Principle of Subsidiarity The Community shall take action only if the objectives of the common market cannot be sufficiently achieved by the Member States. Art. 93 EC-Treaty: The Council shall adopt provisions for the harmonisation of legislation concerning turnover taxes. Prof. Dr. von Wuntsch

20. Taxation in the European Union Art. 96, 97 EC-Treaty: Differences amoung Member States shall not distort the conditions of competition in the common market. The Council can issue the necessary directives if consultation does not lead to the elimination of distortions. Prof. Dr. von Wuntsch

21. EU commission wants to initiate a single tax base for all EU taxes • jungle of tax systems hinders competitiveness of EU industries through • compliance costs • double taxation • protectionist regulations • harmonized tax system should improve fairness, efficiency, simplicity and transparency Goal

22. Double Taxation • Definition for direct taxes • tax subject must be taxable in two countries • tax object must be taxable in two countries • taxation must be within the same period of time in both countries • nature of tax must be equivalent • Who receives the payment? Prof. Dr. von Wuntsch

23. Do differences in taxation cause major distortions in the internal market of the European Union ? Conclusions and recommendations of the RUDING Committee (1992): → Elimination of withholding tax levied by source on dividends paid by subsidiaries to parent companies ( “Parent / Subsidiary Directive” ) → uniform withholding tax of 30 % for other dividends → rules concerning transfer-pricing adjustments ( Arbitration Convention ) Prof. Dr. von Wuntsch

24. → Prescription of a minimum and maximum corporation tax rate ( 30 - 40 % ) → Harmonization of the corporation tax systems → considerations of fairness and transparency among the Member States Question: How would you explain the theoretical concept of the committee concerning an efficient tax policy and allocation of capital Prof. Dr. von Wuntsch

25. The future of tax systems Competition • can reduce the ability of governments financing the welfare state • is likely to induce countries to reduce their effectiv tax rates on corporate income to attract capital • is likely to change the general concept of income tax → from the concept of global income tax to a schedular approach to taxation → Progressive and low tax rates on capital income, wages / salaries and rentals according to their degree of mobility→ “Dual Tax System” Prof. Dr. von Wuntsch

26. Basics Prof. Dr. von Wuntsch

27. Indirect tax Definition of tax • Direct tax VAT Consumption tax Corporation tax Alcohol Income tax Tobacco Trade tax etc. Oil Prof. Dr. von Wuntsch

28. Some General Questions • C. Should it make a difference in terms of taxation whether a business is organized as • (a) a Partnership or • (b) a Corporation ? Prof. Dr. von Wuntsch

29. General Questions • D. Whatis a partnership in termsofCivil Law? • E. Howshould a partnershipbetaxed? Prof. Dr. von Wuntsch

30. Company Taxation: Partnership → Business entity is no legal person English Term: General commercial partnership Limited commercial partnership German Term: Offene Handelsgesellschaft (oHG) Kommanditgesellschaft (KG) Prof. Dr. von Wuntsch

31. Company Taxation: Partnership Example: Profits before tax = 100 A limited commercial partnership has: • two limited partners (A, B) with a 20 % rate of participation per person and • a general partner (C) with a 60 % rate of participation Prof. Dr. von Wuntsch

32. Income A B C Profits: 60 + 60 + 20 + 20 + 20 + 20 + 100 + 20 + 20 + 60 Only the legal persons A, B and C are liable to income tax Prof. Dr. von Wuntsch

33. General Questions • F. Whatis a corporation in termsofCivil Law? • G. Howshould a corporationbetaxed? Prof. Dr. von Wuntsch

34. Corporation / Limited Company: → Business entity is a legal person English Term: Limited liability comp. Stock corporation GermanTerm: Gesellschaft mit beschränkter Haftung (GmbH) Aktiengesellschaft (AG) • Corporation / Company is liable to Corporation Tax •Shareholder is liable to Income Tax (if an individual) → Problem of double taxation Prof. Dr. von Wuntsch

35. Company Taxation: Incorporation → Corporation Tax in Germany Profits before tax CT 25 % CT 15 % Profit after tax till year 2007 100 - 25 75 from 2008 100 - 15 85 Prof. Dr. von Wuntsch

36. General Questions • H. How should dividends be taxed? • I. Which alternatives exist? Prof. Dr. von Wuntsch

37. Income Tax of shareholder: Gross dividend Withholding tax: 20% 25% („Abgeltungsteuer“) Cash dividend Taxable within assessment: 50 % of gross dividend from year 2008 75 - 15 60 37.5 from year 2009 85 - 21.25 63.75 0 Marginal income tax (45 %) tax credit (Withholding tax) payable income tax 16.87 - 15 1.87 0 Prof. Dr. von Wuntsch