Similar Corporate Income Taxes in Europe

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Relative Corporate Income Taxes in Europe Prof. Dr. Geerten M.M. Michielse Technical Assistance Advisor IMF, Washington Georgetown University Law Center

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What will be talked about? Corporate Income Tax Systems Measurement of Business Income Thin Capitalization Inter-organization Dividends (EU Parent-Subsidiary) Corporate Reorganizations (EU Merger) Liquidations

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Corporate Income Tax Systems

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Current EU Systems

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Central & East European Systems

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Preliminary Conclusions Only CZE has mix on corporate level (APTS); GRC has moved from corporate level (DDS) to shareholder's level (DES); DEU, IRL and LTU have moved far from incorporation of duty risk (APTS/IMPS); FRA is steadily moving out of IMPS (by decreasing ascription %); Most nations support FWHT.

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Dividend Deduction and Split Rate Systems (universal viewpoints) Non-Resident Shareholders avoidance from DDS/SRS  separation? high withholding charge conveyance standard expense bargain insurance Permanent Establishment snapshot of dispersion parent organization designation issues

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Lithuanian Profit Tax (before 2003) Pre-assess profits 1,000 Profit impose (24%) 240 Dividend distribution 760 Withholding charge (29% of 760) 220 Profit tax 240 Less: WHT credit 220 MPT 20 At shareholder's level : profits assessable in full

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Czech Corporate Income Tax Pre-impose profits 1,000 Income charge (31%) 310 Dividend distribution 690 Withholding charge (15% of 690) 104 Income tax 310 Less: half WHT credit 52 MCIT 258 At shareholder's level : last withholding

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Advanced Profit Tax Systems (European perspectives) No withholding charge on profits paid to qualifying EU parent organization; No credit for withholding charge accessible; Higher duty rate on organizations claimed by qualifying EU parent organizations; Non-segregation issue.

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Solution : Advanced Profit Tax Pre-impose profits 1,000 Profit assess (20%) 200 Dividend distribution 800 Advanced benefit charge (25% of 800) 200 Profit tax 200 Less: Advanced benefit tax 200 Main benefit tax 0 At shareholder's level : profits assessable in full

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Finnish Imputation System Pre-impose profits 1,000 Corporate pay charge (29%) 290 Available for distribution 710 Imputation credit (CIT) 290 Grossed-up dividends 1,000 Personal pay assess (38%) 380 Imputation credit 290 Net duty due 90

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French Imputation System Pre-charge profits 1,000 Corporate salary assess (34.33%) 343 Available for distribution 657 Imputation credit (10% of 657) 66 Grossed-up dividends 723 Personal pay charge (49.58%) 358 Imputation credit 66 Net expense due 292

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Imputation Systems (universal angles) Distribution of remote source benefit to local shareholders Equalization assess? Appropriation of household source benefit to remote shareholders Tax credit? Dissemination of outside source benefit to remote shareholders Equalization assess exception?

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Cash Flow Tax Systems Croatia (1994-2000): Investment salary is assessment excluded; 'Defensive Interest' conclusion (typical rate of profit for value); Economic lease assessable (35%). Estonia (2000-… ?): Retained income are duty absolved; Distribution of benefit builds up benefit assess (26/74 th ); Final withholding charge (26%).

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Croatian Corporate Tax System Commercial profit 1,000 PI derivation (5% of equity) 500 Taxable profit 500 Corporate pay impose (35%) 175 Available for distribution 825 At shareholder's level : profits excluded

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Estonian Corporate Tax System Commercial profit 1,000 Dividend distribution 1,000 Corporate wage assess (26/74 th ) 351 Available for distribution 649 Withholding charge (26%) 169 Net profit received 480 At shareholder's level : last withholding

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Cash Flow Tax Systems (worldwide/european issues) Croatian variation : Characterization as wage expense? FTC nations wipe out PI reasoning Harmful duty rivalry? Estonian variation : Characterization as withholding duty? Hurtful duty rivalry?

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Harmful Tax Competition Open just to non-inhabitants or to exchanges to non-occupants; Ring-fenced from the local market; (i.e. they don't affect the national expense base) Granted with no genuine financial action and significant monetary nearness; Profit assurance withdraws from universally acknowledged (OECD) guidelines (??); Lack of straightforwardness.

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Epson case (C-375/98) Portuguese Inheritance and Gift Tax Arguments by ECJ: Chargeable occasion = installment of profits Taxable sum = pay from the shares Taxable individual = holder of the shares Decision by ECJ: WHT: any expense of whatever nature or however depicted, which appears as WHT on profits.

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Athinaika Case (C-294/99) Greek profit withholding charge under DDS Arguments by ECJ: Chargeable occasion = dissemination of benefit Tax specifically identified with size of dispersion No ingestion of misfortune convey forward DTA arrangement shows withholding charge Decision by ECJ: WHT if assess excluded salary re-consolidated in duty premise upon circulation, though generally absolved.

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Profit/Corporation Tax Profit Tax Distinction between Business Income and Other Income Profit versus Wage Tax Corporate Income Tax Distinction between Legal Entities and Individuals Corporate Income versus Individual Income Tax

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Common Law Systems (Characteristics) Fear for solid Administration brought about: Extensive Legislative Texts (due to usage of case law) Extensive Set of Definitions (textual translation) Separate Set of Tax Provisions (due to confiscatory character) Separate Capital Gains Tax (capital picks up versus customary pay)

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What will be examined? Corporate Income Tax Systems Measurement of Business Income Thin Capitalization Inter-organization Dividends (EU Parent-Subsidiary) Corporate Reorganizations (EU Merger) Liquidations

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Measuring Business Income How are expense laws identified with bookkeeping hone? What are the principle issues that should be resolved in measuring the pay of a business in its records? In what zones do the primary issues emerge by and by?

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Balance Sheet Commercial Balance Sheet data instrument e.g. to shareholders/indebted individuals administration apparatus  propensity to exaggerate Fiscal Balance Sheet state income instrument  inclination to underestimate

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Fiscal Accounts (current EU Member States) 'Self-sufficiency of Fiscal Accounts' Concept Separate legitimate arrangements FIN, GBR and IRL Jurisprudence ('sound business rehearse') NLD 'Solidarity of Law' Concept (i.e. business accounts) AUT, BEL, DEU, DNK, ESP, FRA, GRC, ITA, LUX, PRT and SWE

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'Solidarity of Law' Concept (contentions professional) Sound Business Practice & General Accepted Accounting Principles No conclusive motivation to go amiss Measurement of "distributable" benefit Juridical process can be streamlined More in accordance with mainland see

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'Solidarity of Law' Concept (contentions contra) End of conventional opportunity to pick a monetary framework and to disavow that decision Treasury turns into a direct invested individual in the utilization of GAAP Linkage is not unchallenged Different goals/purposes

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'Sound Business Practice' (Netherlands) Starting Point: Principles of Business Economics Exceptions, when clashing with: any Regulation in Tax Law; a General Intention; or Principle of the Relevant Tax Law.

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Commercial Code (Germany and Austria) "Maßgelichkeit" Principle: Assets and Liabilities Materielle Maßgeblichkeit (DEU) Commercial Valuation Formelle Maßgeblichkeit (AUT)

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General Accounting Plan (France) Accounting Boards ('tableaux comptables') utilized as a part of Tax Declaration must be set up as per bookkeeping rules and If no opposite expense law or direction gives an alternate arrangement, bookkeeping guidelines are connected

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Profit-and-Loss Account Method (Latvia) Article 4(1): "The assessable pay … might be the measure of yearly benefit (misfortune) as expressed in the benefit and misfortune explanation … ascertained as per [the provisions] of the law On Annual Reports of Enterprises , … . Assessable pay should be balanced … as per this Law."

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Measuring Business Income Balance Sheet measuring of salary by examination of two monetary explanations Profit-and-Loss Account measuring of pay for a timeframe

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Profit-and-Loss Account General Rule: Financial Statements Tax Provisions: Increased by e.g.: Non-deductible costs Provisions and saves Decreased by e.g.: Exempt profits Deferred capital additions

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Balance Sheet Net Equity Balance Sheet Ending 2002 Net Equity Balance Sheet Beginning 2002 -/ - Net Equity Accretion amid 2002 Profit Distributions/Private Expenses + Taxable Business Income

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Measuring Business Income How are duty laws identified with bookkeeping hone? What are the fundamental issues that should be resolved in measuring the pay of a business in its records? In what ranges do the primary issues emerge by and by?

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Fiscal/Commercial Profit (normal territories of deviation) Non-deductible Expenses Depreciation Provisions and Reserves Bad Debts Losses Inflation Capital Gains and Losses Tax Incentives

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Non-Deductible Expenses General administer prohibits private costs Technical (authoritative) profit dispersions, recoverable VAT Private Elements representation, excitement Avoidance thin capitalization Political undesirable fixes, punishments

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