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Definition of a tax

Definition of a tax. What is a tax? An enforced contribution exacted pursuant to legislative authority in the exercise of the taxing power and imposed and collected for the purpose of raising revenue to be used for public or governmental purpose.

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Definition of a tax

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  1. Definition of a tax What is a tax? An enforced contribution exacted pursuant to legislative authority in the exercise of the taxing power and imposed and collected for the purpose of raising revenue to be used for public or governmental purpose.

  2. According to the definitionTax cover the following characteristics: 1- the payment to the governmental authority by law. 2- the payment is required pursuant to the legislative power to tax. 3- the purpose of requiring the payment is to provide revenue to be used for public or governmental purpose. 4- special benefits and services or privileges are not received as a result of making the payment. The payment is not a fine or penalty that imposed under the powers of government.

  3. Standards for evaluation tax Equity . Certainly . Convenience . Economy Equity: A tax should be based on the taxpayers ability to pay. The payment of a tax in proportion to the taxpayers level of income results in equitable distribution of the cost of supporting the government. Certainty: A taxpayer should know when and how a tax is to be paid. And determine the amount of tax to be paid. If not, the taxpayer can ignore the payment ??

  4. Standards for evaluation tax Convenience: A tax should be levied at the time it is most likely suitable for the taxpayer to make the payment (when receive income) and have the money available to pay the tax. Economy: A tax should have minimum compliance and administrative costs. To maximize revenue for government.*

  5. Types of the US (federal) taxes • Income taxes • Employment taxes • Social security taxes • Unemployment taxes • Sales taxes (VAT) • Property taxes • Excise taxes • Wealth transfer taxes

  6. Local taxes Direct taxes (no ability to be avoided) 1- income taxes 2- property taxes Indirect taxes (can be avoided in some cases) 1- excise taxes 2- sales taxes (the same with VAT 14.5%) 3- customs

  7. VAT case for financial institution The total salaries for the Islamic bank = 40000$ and the net profit end year = 250000$ after vat for salaries Required: 1- calculate the vat must be paid by the bank monthly and at the end of year. 2- calculate income tax assuming income tax rate = 15%. And vat = 16%

  8. Answer 1- vat paid monthly = 40000* 16% = 6400 Vat for salaries end year = 6400* 12= 76800 2- vat for net profit = 250000* 16% = 40000 Vat for the year = 76800+40000= 116800 • Net profit after vat for profit = 250000- 40000= 210000 • Income tax = 210000*15%= 31500

  9. Case for the relationship between VAT and PROFIT Najeeb company LTD started trading without bookkeeping but all transaction with tax invoices entered to the statement of purchases and sales. When examine the calculation we know that : 1- total amount paid to VAT government office during the year = 5600 2- no ending inventory 3- total amount of fixed assets purchased which entered to statement of purchase and sale = 11600 and the depreciation rate 6%. 4- the base value for delayed purchase invoices for the next year =5000 5- during the current year paid the following expenses: 15000 salaries. 300 interest. 200 others.

  10. Required: Calculate the accrued income tax if income tax rate =15%. And VAT rate 16%. Notes: • The base value of delayed purchase invoices due to current year but did not entered to statement. • Invoices of purchasing the fixed assets have been entered to the statement of the year and that mean deducted. But these purchasing due several years. • So depreciation for one year should be deducted, That means we should add the base value of purchasing fixed assets to the profit value. • Expenses which did not pay VAT did not enter the statement and did not deducted. So we must deduct it.

  11. answer The profit from the VAT statement= Payment * 100/16 5600 *100/16= 35000 Add the base value of purchasing the fixed assets = 11600/1.16= 10000 Vat for fixed assets= 10000*16/100= 1600 to make sure of Vat Deduct the base value of purchase invoices delayed to next year (5000) Net profit before expenses not pay VAT 16% =40000 Deduct expenses not pay VAT as follow:

  12. Salaries (15000) • Interest (300) • Others (200) • Depreciation of fixed assets 10000*6%=(600) • Total of expenses 16100 Net profit = (40000- 16100) =23900 Income tax = 23900* 15%= 3585

  13. The relationship between VAT and other indirect taxes The most important step in calculation taxes by the following arrangement: 1- customs 2- the purchase tax (sales) 3 value added tax The following case show the details. A company will import raw material for trading with price 4000 and the customs 20% and purchase tax 60% and the vat 16%. Required: calculate the price after taxes.

  14. answer

  15. Calculation of importing several goods

  16. The difference between VAT and customs

  17. income Income defined (includes income from all resources) Minus: excluded income Equals: gross income Minus: deduction and exemptions Equals: taxable income * tax rate (from tax law) Equals: income tax Minus: tax prepayments Tax credit Equals: tax (refund) due with return

  18. case Omar work in private company with monthly salary 2000 NIS. Calculate the income tax if you know that he is married and has 2 sons under 18 years old. Note: The exchange rate for dollar 4 NIS.

  19. Answer: Annual income = 2000*12= 24000 24000/4 = 6000$ Exemptions Resident 3000 Wife 500 Sons 1000=500*2 Total =4500 Taxable income =1500* 8% 120$ annually Tax value per month = 120$/ 12 =10$ 10$*4 = 40 NIS Salary after income tax= 1960 NIS

  20. case Hassan work in private company with monthly salary 3000 NIS. He lives in a rent home 200$ monthly. He is married and have 5 sons. Required: Calculate the accrued income tax if you know that the exchange rate for dollar 4 NIS.

  21. Answer: Annual income = 3000*12/4= 9000$ Exemptions Resident 3000 Wife 500 Sons 2500=500*5 Rent 2000 Total of exemptions =(8000) Taxable income =1000* 8% 80$ annually Tax value per month = 80$/ 12 =6.66$ 6.66$*4 = 26.6 NIS Salary after income tax= 2973.4 NIS

  22. case Mr. Marwan work as manager for a company with monthly salary 9000 NIS and have bonus addition career 1500 and bonus addition high cost of living 750 and bonus addition for travel 250 Required: calculate the income tax if you know that he is married and have 2 sons. One of them study via Islamic university the exchange rate for dollar 5 NIS Note: Marwan work in private company so bonus for travel included with income tax

  23. Answer: Base salary 9000 Bonus addition career 1500 bonus addition high cost of living 750 bonus addition for travel 250 Total salary 11500 *12/5= 27600$ Exemption: Resident 3000 Wife 500 Sons 500= 500*1 Student (university) 2500 Total of exemption = 6500$

  24. Taxable income 27600- 6500= 21100$ 10000*8%= 800 6000*12%=720 5100*16%= 816 Annual income tax = 800+720+816=2336 Monthly income tax= 2336/12=194.6$ 194.6*5=973 NIS Salary after income tax = 11500-973=10527 NIS

  25. case Mr. Jehad work in the Investment Bank with monthly base salary 309$ and bonus addition high cost of living amounted 80% of base salary. and bonus addition for cash risk 25.7$ monthly. If you know that his contribution of saving box with 5% of base salary. And social security contribution (pension) 32.02$. Mr. Jehad get 14 salaries yearly (banking system) Required: calculate the income tax in case 1- single. 2- (married + 4) and gets additional income from part time work 200$ for 6 months annually.

  26. Answer: case 1 Base salary 309$ + addition high cost of living 247.2$ (309*80%) + addition for cash risk 25.7$ total monthly salary = 581.9$ Deduct nontaxable income • saving box 15.45$ • social security contribution (pension) 32.02$ Total of nontaxable income = 47.47 Net income = 534.43 Annual net income =534.43*14= 7482.02$ Deduct the exemption Resident 3000 Net taxable income 4482.02*8% = 358.56$ Monthly income tax 358.56 / 12 = 29.88$

  27. Answer: case 2 Base salary 309$ + addition high cost of living 247.2$ (309*80%) + addition for cash risk 25.7$ total monthly salary = 581.9$ Deduct nontaxable income • saving box 15.45$ • social security contribution (pension) 32.02$ Total of nontaxable income = 47.47 Net income = 534.43 Annual net income =534.43*14= 7482.02$ + ( 200$*6)=8682.02 Deduct the exemption Resident 3000 Wife 500 Sons 2000 (500*4)

  28. Net taxable income 3182.02*8% = 254.56$ Monthly income tax 254.56 / 12 = 21.21$

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