Principles of Taxation
PART I : The fundamental principles of taxation
1.1. What is a tax ?
- Tax : payment (cash/kind) to pubic authority
- In kind : paying taxes in nature (e.g. with paintings) -> does not often happen
- Mandatory, non-contractual, non-tort (not doing anything wrong just paying taxed bc you
have to)
- Taxes must have a legal basis
- Payments based on contractual obligation are not taxes
- Gift, donation, voluntary payments are not taxes
- Payments on basis of non-contractual liability of tort are not taxes (e.g. fines, when you
purchase set from government)
- Tax : payment without consideration/compensation (do not get anything back)
- Government uses money for duties
- Get indirect support back (healthcare, security)
- The only way of avoiding tax payment is by putting oneself in a situation in which tax is not due
(e.g. not wanting to pay taxes on vehicle -> buy a bike) or to go to countries without taxes (e.g.
Dubai)
- Some taxes are not avoidable (e.g. inheritance taxes)
- Tax : in accordance with a rule of law
- Needs to have a legal basis = principle of legality
- No taxation without representation -> elect people in government and they decode upon
amount of taxes
- Tax : imposed by public authority
- Gov can impose taxes in two ways (nexuses of taxation : attached to state and state is
entitled to levy taxes)
- Person : you are a resident of the country, you pay taxes in this country
- Territory : government can levy taxes over transactions that occur in a state
- e.g. Belgian resident, Belgium will say I levy taxes on your income -> but built vacation
house in France (to rent), get income from that, Belgium will tax your house in France
because you are a Belgian resident but then France also wants to levy taxes because it
is their territory
- Two states claim tax jurisdiction
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,- Tax : used for purpose of public spending
- Tax money goes in money jar and used for everything
- Environmental taxes : dissuasion of polluting environment -> more and more impact
- Distinction of taxes to payments to the state is important
- Social security contributions : taxes from eco pov but not from legal pov
- Not protected in same way as taxes
- SSC look and smell like a tax but are not bc :
- They are used for specific things (not put in one jar)
- Used for social protection (illness, childcare, healthcare, social security)
- If something happens to you, you get contribution back bc of SSC -> not like a tax
- No direct proportional link
- e.g. pay $10 000 SSC -> next year accident, cannot work anymore -> solidarity (you
may get more from the state than what you gave, or less) -> they give depending on
your need (solidarity and insurance)
- Toll charges and fees
- e.g. France : les péages, fees to dock your boat in the harbour
- Not mandatory -> if you do not want to pay for the highways in France you take bumpier
and longer roads
- Clear compensation : pay bc you know you will get a compensation
- Government decide the price
1.2. What are the fundamental questions of taxation ?
“WHY do we tax and HOW do we tax”
- Why : the benefit of principle
- You pay taxes bc the government gives you indirectly goods and services (army, healthcare)
-> taxes are justified by indirect support from government
- Those who make more use of government support need to pay more
- e.g. a small house does not requires lots of protection but if you have a lot of money and
you have multiple properties -> will need more protection -> need to pay more
- Why : principle of sovereignty
- State has power over you, can levy taxes on you
- How : ability to pay and equally
- Ability : those who can afford more, should pay more -> look at eco capacity
- Equality principle : “equals are taxes as equals and unequals are taxed unequally” (amount
of taxes paid depend on your income)
- Horizontal equity : people in same situation/income should say the same tax amount
- Vertical equity : people not in the same situation should not pay the same tax amount
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, Progressive tax : the more wealth/income -> the
more taxes you pay
Consumption tax : essential goods (food,
medicine) have lower rate than non-essential
goods (alcohol, tobacco, luxury)
- How : principle of legality
- Tax is valid only if it is written in legislation (scope, base, rate)
- Must be approved -> parliament vote
- Tax system also contains executive decree, administrative regulations,… for
misunderstanding and problems
- If not agree with tax authorities -> cannot go to court
- If minister of finance and taxpayer do not agree -> justice takes on
1.3. The essential elements of a tax
- All taxes have the same basic structure (same important elements) :
1. Personal scope of the tax
- Subjects of the tax : rules determining who is the taxpayer
- Individuals resident or non-resident) : personal income tax (PIT)
- Legal entities : corporate income tax (CIT)
- Individuals or entities acting like eco agents : VAT/GST
- Consumption taxes : VAT/GST (e.g. producers of cigarettes are requires to pay tax)
- Environmental taxes : polluters pay principle -> the more you pollute, the more you pay
2. Material scope of the tax
- Rules on taxable event : what triggers the tax
- Earning income : income tax (PIT, CIT)
- Private consumption : VAT/GST (e.g. going to the hairdresser)
- Providing digital services : digital services tax (e.g.
3. Tax base
- Rules determining the object of the tax : how much
- Price of VAT
- Rules on valuation, deductions
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