principles of business taxation

FINANCIALO P E R A T I O N S

PAPER: F1 LECTURER : ABIODUN MAMORA

LAGOS

LESSON 4: PRINCIPLES OF BUSINESS TAXATION

12/14/2012


INTRODUCTION

Taxes are compulsory levy imposed by the government of a nation on business and individual in other to

• Finance its expenditure• Stimulate one sector of the economy and control

another• Regulate its macro economic indicators

Major principles of good tax policy are as follows• Equity• Efficiency• Economic effect

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Types of taxes

•Direct tax e.g Income tax

•Indirect tax e.g. VAT

Incidence of tax


This is where the burden of tax rests. This can be formal incidence or actual incidence

Tax rate structure

1.Progressive tax

2.Proportional tax

3.Regressive tax

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Sources of tax rules1.Legislation2.Precedents3.Directives4.Agreement between different countries

Tax BaseThis is what is being taxed

Types of tax Tax base

Income tax income

Corporation tax profit

Capital gains tax Assets

Sales tax Consumption2/14/2012 4Mamora Abiodun +234802 415 7105


Trading Income

The standard profoma is as follows:

Less: income exempt from tax or taxed under (X)

Less: income exempt from tax or taxed under (X)

Accounting profit $x

Add: disallowable expenses X

Taxable profit X

Corporation tax at X% X

The taxable profit will then be arranged at the appropriate tax rate for that accounting period.

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Disallowable Expense

•Depreciation , amortisation

•Entertainment

•Taxes paid to other public bodies

•Donations to political parties

Tax Depreciation :PPE

Year of purchase-------------50% of cost=FYA

Subsequent years------------25% of WDV= CA

Year of disposal-----------Nil.(instead you calculate balancing charge/allowance)

Note: No time apportionment for mid year acquisition2/14/2012 6Mamora Abiodun +234802 415 7105


Trading losses

Loss relief is available to any company that has made loss in preceding tax year (s)Possible ways of relieving a loss are:

• carry losses forward against future profit of the same trade;

•Carry losses backward against previous periods;

•Offset losses against group company profits;

•Offset losses against capital gains in the same period.

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Capital Taxes

Taxes on disposal investment and other assets standard profoma is as follows

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Value Added Tax (VAT)

VAT payable= output tax – input tax

Output tax-VAT charged on sales

Input tax-VAT charged on purchases

Taxable supplies could be

standard rated, higher rated or zero rated.

Input tax can only be claimed back on taxable supplies.

Exempt supplies are outside the vat system and VAT

cannot be charged to customers but neither can the input

tax on purchases be claimed back.2/14/2012 9Mamora Abiodun +234802 415 7105


VAT calculation

• If the exclusive price is given

VAT= exclusive price x tax rate

• if the inclusive price is given,

VAT= inclusive price x tax rate

100+tax rate

Exercise: Test your understand 72/14/2012 10Mamora Abiodun +234802 415 7105

LESSON 4: PRINCIPLES OF BUSINESS TAXATIONEmployee Taxation

Employees are taxed on their earnings under income tax.

Earnings can include salaries, bonuses, commissions and

benefits in kind.

Benefits in kind are non-cash benefits in lieu of further

cash payments such as:

• company cars;

•Living accommodation;

•Loans;

•Private medical insuranceExercise: Test your understand 82/14/2012 11Mamora Abiodun +234802 415 7105


Corporate residence

Entities normally pay taxation on their worldwide income

in the country they are resident in.

An enterprise is deemed to be resident for tax purposes

either in the place of incorporation or place of

control/central management.

Generally a company will be treated as being resident in

the country of control, i.e. place where the head office is

located or board meetings held.2/14/2012 12Mamora Abiodun +234802 415 7105


Double taxationAn enterprise may end up being taxed in more than one country, this is called double taxation.

Double taxation relief

There are three main methods of giving double taxation

relief:

1)Exemption

2)Tax credit

3)Deduction

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Types of foreign tax

Withholding taxSome countries will deduct tax at source on items such as interest, royalties, rent, dividends, and capital gains. The net income (gross payment less tax) is then received by the beneficiary in the foreign country.

Underlying taxWhen a company pays out a dividend, it is done so out of post tax profits. Therefore, the amount of profit distributed as a dividend will have already suffered tax on profits.

This is calculated as follows:Tax on profits x Gross dividendProfit after tax

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LESSON 4: PRINCIPLES OF BUSINESS TAXATIONIllustration 10: international taxation

Homely is a UK company and owns 100% of the shares in a foreign company called faraway.

During the year Faraway earned the following income;

Profit before tax $200,000Income tax $(40,000)

Profit after tax $160,000

Faraway pays a dividend of $80,000 out of profit after tax to Homely.This dividend is subject to 15% withholding tax.

What is the total foreign tax suffered on the dividend?2/14/2012 15Mamora Abiodun +234802 415 7105


Record-keeping

Enterprise need to keep records to satisfy tax requirements for the following taxes.1.Corporate income tax2.Sales tax3.Overseas subsidiaries4.Employee tax

There will be a minimum length of time for the retention of records.The purpose is to enable the tax authorities to quest or challenge records up to several years later

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Tax Avoidance and Tax evasion

Tax avoidance is tax planning to arrange affairs,

within the scope of the law, to minimise liabilities.

Tax evasion is the illegal manipulation of the tax

system to avoid paying tax.

Evasion is the intentional disregard of the law to

escape tax and can include falsifying tax return and

claiming fictitious enterprises2/14/2012 17Mamora Abiodun +234802 415 7105

Thanks!

Abiodun MamoraAbiodun [email protected]@gmail.com

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principles of business taxation

Documents

tax profits

progressive tax

proportional tax

tax purposeseither

salesinput taxvat

tax rate exercise

tax vatvat payable

burden of tax rests