Category: Tax

Austin Towers is a convicted former spy for the former Soviet Union. Austin received a communication from a Soviet agent that $2 million had been set aside for him in account upon which he would be able to draw. Austin was told that the money was being held by the Soviet Union, rather than in an independent or third-party bank or institution, on the petitioners behalf. Over the next few years, Austin drew approximately $1 million from the account. During that period, Austin filed annual tax returns with his wife showing taxable income of approximately $65,000 per year.

Mr. Towers Liable for failing to pay tax for $1,000,000 in espionage fees?

Analysis

Section 61 internal Revenue code (IRC) defines gross income as all income from whatever the source (Aldrich & Ames, 1999). The income includes compensation for espionage services such as in the current case where Mr. Towers is compensated for his services as a spy agent to the Soviet Union. In a period of few years Mr. Towers has withdrawn approximately $1,000,000 from the 2,000,000 paid to him for espionage services for the Soviet Union. The amount has not been taxed as Mr. Towers and his wife have a joint filing status for approximately $65,000 per year which does not include the amount he is rewarded by the Soviet Union. According to the IRC, an amount ranging from $750,000 to $1,000,000 is taxed $ 248,300 plus 39% of the excess over $750,000 (§ 6662 Imposition of accuracy-related penalty on underpayments., 2010). The understatement of pension liabilities by Mr. Towers exceeds $ 1000 and thus under section 6662 (f) (2), a penalty should be imposed on him (§ 6662 Imposition of accuracy-related penalty on underpayments., 2010).

Mr. Towers has not reported the income received from the illegal espionage activities. Thus his failure to pay taxes on the received amount can be regarded as negligence or disregard of rules and regulations (§ 6662 Imposition of accuracy-related penalty on underpayments., 2010). In IRCs section 6662(a) and (b) (1) there is a provision for a penalty relating to accuracy amounting to 20 percent of the part of the underpayment that is attributable to negligence or disregard of rules and regulations (Aldrich & Ames, 1999). According to Rule 142 (1) below, Mr. Towers negligence conduct is unlawful. The term negligence is statutorily refers to any failure to make a reasonable attempt to comply with provisions of the internal revenues laws. Section 6662 [D] is defined as any careless, reckless or intentional disregard of rules or regulations (Aldrich & Ames, 1999). There are two mutually exclusive factors that may have led to the concealment of the espionage income.

The first reason is due to fraud, whereby the payments made were illegal and thus Mr. Towers was could not declare the source of the income. Secondly, the failure can be due to negligence of the IRC laws. Mr. Towers may be found liable for both fraud and negligence penalties (Aldrich & Ames, 1999). According to section 6662 (b), the two penalties are mutually exclusive, however, they can be asserted in the alternative. In this case the court may decide that fraud is not applicable leading to the consideration of the fraud case (Aldrich & Ames, 1999). It is established that fraudulent concealment goes far beyond and is inclusive of negligence or disregard of rules and regulations (Aldrich & Ames, 1999). Mr. Towers may be found guilty for swindling the Government under 18 U.S.C sec. 371 (§ 6662 Imposition of accuracy-related penalty on underpayments., 2010). Mr. Towers is required to make an argument to explain why he failed to pay tax for the $1,000,000 he withdrew and spent from Soviet Union held account. This analysis holds that Mr. Towers is liable for the section 6662 (a) negligence penalty (Aldrich & Ames, 1999).

Conclusion

Income from illegal espionage activities is illegitimate it has be concluded that should have paid tax for it. Therefore Mr. Towers is liable for failing to pay tax for the one million he withdrew from the account provided by the Soviet Union. He should therefore be tried for negligence or disregard of rules and regulations and or fraud.

References

§ 6662 Imposition of accuracy-related penalty on underpayments. (2010). Web.

Aldrich, H., & Ames, V. (1999). Tax Court & Board of Tax Appeals Reported Decisions: 112 TC 304, Code Sec (s) 451;6662. TCR.

Introduction

The periods in which countries tried to make cash from hosting politically depicted persons, shell banks or known terrorists cash and no questions asked are gone. There is a dramatic change in many offshore regimes, especially those that publicized the strictest privacy slogan which have now finally adhered to the battle aligned with money laundering, terrorist financing plus introducing operational administrations to guarantee this. Additionally, many nations have assumed information exchange and transparency principles in taxation division, based on harmful tax initiative for OECD (Oecd.org, 2011).

Conversely, the playing ground is uneven in information sharing on criminal act especially when it come to finances; for instance, some nations share information when asked concerning alleged criminal offence while others require double criminality standard by requiring that evidence of crime be shown to exist for both countries involved in extraditing a criminal. Determining whether a specific jurisdiction offers low or high level of safeguarding confidentiality both in civil and criminal matters certain factors must be considered, which includes; dependant or sovereign status, presence of Tax Information Exchange Agreements (TIEAs), and Mutual Legal Assistance Treaties (MLATs) among others (Oecd.org, 2011). For the purpose of this paper TIEAs and MLATs will be discussed and evaluated in context of Kenyas jurisdiction.

Tax Information Exchange Agreements

A nation may commit itself theoretically to tax information sharing both civil and criminal, though where TIEAs are effective such type of information is efficiently shared among nations. Therefore, discussion on types of TIEAs that exist for various countries and more specifically for Kenya is important. Since investors are usually eager to know what types of TIEA are present between countries and their own country (Oecd.org, 2011).

Generally TIEAs differ widely in practice but in theory there are some set standards put in place by OECD such whether TIEA envelop civil information on taxation plus criminal and the conditions needed to obtain information sharing through TIEA. Many TIEAs offer information sharing upon request and they are also restricted to tax information sharing if related to evasion of tax which is a criminal offence (Oecd.org, 2011).

Kenya is stretching tight the belt on tax avoiding transnational firms that charge the nation billions of shillings in revenue lost; according to Finance Minister, following the latest financial crisis, nations should uphold their revenue base by coordination and tax information sharing to shun transfer pricing and tax evasion. Currently companies are blamed because of benefiting from weak laws and lack of know-how in Kenya, to transfer profits to area with low tax jurisdictions and shun taxes in nations where firms have considerable trading action (Allafrica.com, 2011).

The recent budget proposes to modify the law to let the government enter into TIEAs with other nations; this will facilitate information sharing that tame tax evasion. Since practice of price transfer by firms distorts taxation and trade (Njoroge, 2011); the price transfer is actually abusive if purchase price in nations with tax rate which are high is inflated or gains from sales are temporarily reduced. This result to profit increase in nations with low rate of tax and costs are raised in nations with high rate of tax; this way, the firm decreases its burden of tax in high-tax-country and reserve its gains in low-tax-country. Such activities are responsible for losses amounting to Ksh. 42,000 million annually to some other jurisdictions (Njoroge, 2011).

This move by the country in information sharing with global and regional governments is likely to assist in bridging the big budget deficit; because the initiation of TIEAs in the latest budget will assist in sealing tax evasion dodges. Through this agreement, Kenya revenue Authority can efficiently impose Domestic Tax Laws especially on transnational firms operating in the country plus those employed in cross-border deals with associated foreign companies. Actually Kenya is likely to assume the OECD model which gives the revenue authority mandate to ask for records of tax payers, information on bank accounts plus beneficial ownership. Additionally, the model will let the tax authority to interview individuals in other jurisdiction of tax and undertake tax examination carried by other income authorities (Njoroge, 2011).

Although with the implementation of these measures by partner countries, company restated the requirement to impose Double Tax Agreements, which guards against private firms from paying taxes twice. This treaty will facilitate investment amongst partner countries and the more treaties a country have the more efficient the business operations are (Njoroge, 2011).

Mutual Legal Assistance Treaties

Likewise, with TIEAs its significant to search for what mutual arrangements in terms of MLATs and other similar cases are in position for information sharing between nations. It is significant to search for fine print as MLAT sets type of information to be shared and the situation under which this kind of information can be allocated (State.gov, 2006). For instance, it may translate that only information on tax matter can be shared if relevant to criminal issue and the circumstances under which States can share information in case of public interest. In such a situation one should focus on the concerned government policy statements to establish the way in which that type of provision can be interpreted (State.gov, 2006).

Kenya is rapidly becoming one of the most favoured regions for money laundering activities targeted by money launders due to its weak policies on MLATs. The country is used as a transport point for global drug traffickers and these activities continue to rise plus laundering of finances linked to Somali piracy, which is the most significant problem. Apparently, the countrys financial system could be laundering at least $100 million every year not to mention other earnings from narcotic trade that is also flourishing in the region (Thefreelibrary.com, 2010). Goods smuggled into the country are sold in the black market. Many firms in the country are concerned with such importation and exportation of goods. Kenyas financial system has big sectors and it actually acts as regional trade and financial centre for some African countries as such it is in a strategic position to facilitate black market trade in the region (Thefreelibrary.com, 2010).

Though wire services, banks plus other formal means do funds transfer which further complicates an already existing challenge since they are thriving and involve free informal nets of hawala plus other option payment systems that utilizes cash-based, unaccounted transfers that the Government of Kenya cannot trail. Emigrant, particularly the big Somali refugee populace, mainly utilizes hawala to receive and send payment globally (Thefreelibrary.com, 2010).

Additionally, the country has no offshore centre, no free economic zones and does not criminalize terrorist funding except narcotic cash laundering; section 49 of Narcotic Drugs and Psychotropic Substance Control Act (1994) for instance criminalizes cash laundering linked to cash trafficking plus terrorism-related activities (Docstoc.com, 2010). In 2009, the Parliament approved the Proceeds of Crime and Anti-Money Laundering Law (AML Law); which tackles the offences related to cash laundering and approves tracing, identification, seizure, freezing and elimination of crime proceeds in order to prevent laundering. The crime proceeds are economic benefits derived from any property, resulting from any offenses and legislation offers for civil and criminal restraint, forfeiture and seizure in addition to institution of FIU (Docstoc.com, 2010).

Globally, the law sets up know-your-client needs and the countrys banks retain limited records which should be upheld for transaction of at least $100,000 and global transfer surpassing $50,000; the law also requires the banks to report every cash transaction surpassing $10,000 (Allafrica.com, 2011).

The MLAT law also call for non-financial business comprising of agencies from real estate, accountant, stone and precious metal dealers, and casinos plus financial institutions and professions, to file Suspicious Transaction Reports. Section 45 of AML Law needs institution to supervise all transactions, focus on unusual transactions trend, and report the same (Allafrica.com, 2011).

The Kenyan law in the same way offers for tracing, freezing up and convulsion of assets although it has weak and inefficient legal frameworks that are also bureaucratic. As such, asset convulsions are infrequent, except intercepted narcotics and drugs but allow for asset forfeiture and seizure provisions which are rarely enforced (Docstoc.com, 2010). Kenyas law are generally weak when it comes to cross-border controls of currency since regulations are infrequently imposed and records are not reserved. The government regulations need that any quantity of money more than $5,000 be revealed at point of exit and entry for the purpose of record keeping, though this provision is hardly ever enforced, plus authorities do not keep record of money smuggling attempts (Allafrica.com, 2011).

Therefore the Kenya law is weak in several ways; first, it does not account for all crimes approach to cash laundering offenses since there is no single framework that incorporates all relevant regulations. Secondly, it is impossible to establish the degree to which the offenses comply with global standards and Kenya law does not mention terrorist funding which is not criminalized in the country. Finally, the law does not completely authorize the convulsion of lawful businesses utilized in money laundering (Allafrica.com, 2011).

Indeed, the government did not account for cash laundering and terrorist funding arrests, suits or any convictions from 2007 to 2009 as it lacks investigative skill, institutional capacity and equipment to do an independent investigation. U.S. and Kenya are not partners to bilateral MLAT which offers for information sharing but Kenya has unofficial arrangements with U.S. and U.K. for information exchange linked to terrorist funding, narcotics and any other severe crime investigations plus it has collaborated in such circumstances with U.S. and U.K. (Allafrica.com, 2011).

Conclusion

As we have seen Kenyan regulations in these two respects are still weak; the government must make sure that the AML Law operates efficiently and it should also criminalize terrorist funding and impose stronger laws that allow the authorities to confiscate financial assets from terrorism activities. Additionally, the law enforcement organizations must develop coordination to impose existing regulations to fight tax evasion, money laundering, smuggling and corruption.

Bibliography

Allafrica.com. 2011. Target on foreign firm on tax evasion. Web.

Docstoc.com. 2010. Tax co-operation. Web.

Njoroge, E. 2011. Regional data sharing to curb tax evasion. Web.

Oecd.org. 2011. Tax Information Exchange Agreements (TIEAs). Web.

State.gov. 2006. Treaties and agreements. Web.

Thefreelibrary.com. 2010. Countries/jurisdictions of primary concern. Web.

Introduction

Public policies are crucial to promoting public economic well-being, health, infrastructure, and K-12 education accessibility. In Texas, recent financial reports have revealed an increased concentration of wealth among high-income households. Local and state tax policies have played a major role in promoting inequality (Lavine). Texass tax system is primarily regressive, where the highest-income quintile contributes the least in state and local taxes while the bottom eighty percent pays more. Thus, Texass regressive tax system is unfair to low-income earners as it heavily taxes them compared to high-income earners.

Sources of Government Revenue

Texas draws its revenue from sales tax and franchise tax. The states sales tax rate is 6.25 percent with additional add-on taxes of about two percent from local authorities (Moreno and Uradu). Due to its overreliance on sales tax, unexpected changes in sales and excise tax revenues affect Texass revenue. Although sales tax is commonly associated with retail sales to consumers, in Texas, about 47 percent of the sales tax is derived from transactions between businesses (Champagne et al. 952). Texas imposes one of the highest sales tax burdens on businesses compared to most states. Consumer sales tax is primarily on consumption commodities, except household food, medicine, residential utilities, and medical equipment (Champagne et al. 960). While various services are not subject to sales tax, the authorities have advocated for their inclusion.

The franchise tax is Texass general business tax that applies to a moderately broad range of taxable businesses, including limited liability companies, subchapter-S corporations, and standard subchapter-C corporations (Lavine). However, partnerships, professional associations, and sole proprietorships are not subject to taxation. Small businesses are also exempted from taxation until their gross receipts exceed 150,000 dollars (Moreno and Uradu). Arguably, due to the income-based calculation approach used in to raise revenues from franchise tax, Texas has a corporate income tax. However, compared to states with corporate income taxes, Texass 4.5 percent is among the least tax rate applied to the tax income-based component (Moreno and Uradu).

Analysis of Texass Regressive Tax System

A regressive tax system is one in which higher tax rates are imposed on low-income earners compared to top-earning taxpayers. A regressive tax structure also differs from progressive taxation which imposes higher tax rates on those with higher income, therefore, those who earn more are taxed at a higher rate. In Texass regressive tax system low-income earners are the losers while high-income earners are winners. It is an unfair way to generating revenue because high-income earners pay a lower effective tax rate than low-income earners (Popescu et al. 1). Such adversely affects a states capacity to raise revenue due to income growth being primarily concentrated among the wealthy. This is commonly evident in states that immensely rely on taxes overly focused on low- and middle-income households.

However, the degree of unfairness may differ due to varying degrees of regressivity in Texas tax structure. For instance, sales tax is the least fair form of taxation compared to school property tax which is the fairest compared to other states. Unlike a regressive tax structure, a progressive tax structure is more favorable to low-income families who typically spend about 75 percent of their income on commodities subject to sales tax (Lavine). However, given that Texas exempts residential utilities, groceries, and medicines from sales tax, the extent of unfairness may be lower compared to states such as Washington State. The sale tax regressivity could also be reduced by increasing the tax payable by professional services and businesses catering to high-income earners.

Additionally, businesses with higher profits are imposed a higher business property tax rate. The tax freeze for senior citizens and $15,000 homestead exemption are particularly favorable to low-income homeowners (Lavine). Adopting programs similar to Massachusetts circuit breaker tax credit would promote fairness by considering homeowners capacity to pay property taxes. Without a circuit breaker tax credit, property taxes might increase without a rise in the homeowners income.

There are various advantages and disadvantages to the adoption of regressive tax laws in Texas. One of the main advantages of regressive tax laws is that they provide individuals with incentives to increase their earnings (Papanikolaou 2). Given that regressive tax laws are more lenient on high-income earners, individuals may aspire to reach such tax brackets to avoid incurring the higher tax rates associated with regressive tax laws. Supporters of regressive tax policies in Texas have also suggested that the decreased tax burden on the rich reduces incidences of tax evasion, which ultimately increases government revenue. The increased government revenue can be utilized to improve the quality of public services such as education and healthcare.

Regressive tax laws also facilitate saving, which is crucial in generating adequate capital to invest in businesses, significantly boosting the economy (Popescu et al. 6). The simplicity of a regressive tax system, such as that adopted in Texas, is also considered a major advantage. For instance, Texass sale tax policies provide for a consistent tax percentage on all commodities, making it easier to implement. Other tax policies such as income tax are challenging to implement due to their complexity and might require the utilization of government resources to promote their effectiveness (Papanikolaou 2). Texass regressive tax policies are also considered more favorable for the retention of skilled workers within a state. The regressive tax structure differs from a progressive tax structure which imposes taxes based on ones earnings making them unfavorable for workers.

Despite the apparent benefits of adopting a regressive tax system in Texas, there are some limitations to the approach. One of the main disadvantages of regressive tax laws is that it promotes inequality, making them increasingly unfavorable to low-income households. Regressive tax policies are more lenient on high-income earners to increase government revenue and stimulate economic growth. However, most of the tax burden falls on low-income households, diminishing their capacity to afford basic needs and their spending aptitudes (Hall and Kanaan 469).

Additionally, the increase in prices brought about by regressive tax policies may have a detrimental impact. For instance, in Texas, tariffs imposed on commodities such as fuel may result in increased fuel prices. The increase in prices also has an impact on the demand for certain commodities. A decrease in the demand for given products makes it challenging for some businesses to turn a profit due to unsuitable economies of scale. The nations regressive taxes have also caused political turmoil because they favor high-income earners. Most of the debates on the issue have focused on the ethicality of such laws because are oppressive to the poor.

Conclusion

Despite the apparent benefits of adopting regressive tax policies, Texas should strive for increased equality. Adopting tax policies that do not aggravate the gap in income distribution would increase opportunities for economic growth. Although regressive tax policies might be beneficial to the economy and generate government revenue, they immensely oppress low-income earners. However, the fairness of the tax system should be considered before implementing any reforms. The Suits Index is a crucial approach to mathematically assessing the fairness of a tax system by comparing the income earned to the percentage allocated to taxes.

Works Cited

Champagne, Anthony, et al. Chapter 11: Public Finance. Governing Texas, 5th ed.,  W. W. Norton & Company, New York, New York, United States, 2021, p. 952.

Hall, Jeremy L., and David Z. Kanaan. State Tax Policy, Municipal Choice, and Local Economic Development Outcomes: A Structural Equation Modeling Approach to Performance Assessment. Public Administration Review, vol. 81, no. 3, 2020, pp. 459474.

Lavine, Dick. Who Does Not Pay Texas Taxes? Every Texan, 2021.

Moreno, Tonya. A Guide to All Taxes in Texas. Edited by Lea D. Uradu, The Balance, The Balance, 2022.

Papanikolaou, Nikolaos. Tax Progressivity of Personal Wages and Income Inequality. Journal of Risk and Financial Management, vol. 14, no. 2, 2021, p. 60.

Popescu, Madalina Ecaterina, et al. Flat-Rate versus Progressive Taxation? an Impact Evaluation Study for the Case of Romania. Sustainability, vol. 11, no. 22, 2019, p. 6405.

Introduction

According to US tax law, a like-kind exchange, sometimes called a 1031 exchange, is a single transaction or a set of transactions that permit the sale of one asset and the purchase of a different replacement asset without creating a current tax obligation on the sale of the original asset. According to Section 1031(a), if the property is exchanged primarily for a property of the same kind that will be maintained for productive use in a business, trade, or investment, no loss or gain must be recognized on the transaction, for instance. This exclusion includes bonds, notes, stocks, trust certificates, and certain other types of property that are not related to the like kind.

Discussion

In the case of Fred S. Wagensen, the court examined several regulations. First, Regulation 48(a)(6) and Section 1.48-1(b)(1) state that an asset is not a section 38 asset unless the taxpayer is entitled to a tax rebate for devaluation with regards to it for the tax year (Legal Information Institute, n.d.). A deductible for depreciation can be authorized if the asset is of the kind covered by section 167s allowance for depreciation and may recover its basis through a depreciation method (Featherston, 1980). Therefore, cattle will be considered section 38 assets and only be eligible for capital credit if depreciable. The court ruled that the partnerships inventory covered all property, including breeding cattle. The breeding cattle are not depreciable since their cost was included in the inventory and utilized to calculate profits; as a result, the petitioner is not eligible for an investment deduction for the animals.

The case of Dollie H. Click failed to demonstrate that the homes in which the children and their wives resided were owned for investment reasons or use in commerce or business. Hence they did not comply with section 1031s rules (Sterrett, 1982). Three conditions must be satisfied to be eligible under section 1031. The trade must be:

1. an exchange;
2. must include like-kind properties; and
3. must keep both the transferred and the received properties for either investment or constructive use or company (Legal Information Institute, n.d.).

They claimed no evidence indicated the petitioner accepted the residences as exchange property to make an investment. They did not bother to resolve section 453 since the trade did not fall under section 1031.

In the present case, George and Iowa Corporation does not experience any benefit or loss due to the exchange of assets. In exchange for the FMV, George obtains the homes and gives them to his sons. Therefore, George should complete the transaction since it meets the criteria for a like-kind exchange. In the above example, the homes and the farms belong to the same class. A commodity for one purpose exchanged for another commodity for a different reason does not constitute a like-kind trade, according to section 1031. Thus, the trade does not meet the criteria for a like-kind exchange (Legal Information Institute, n.d.). Like-kind trades are not taxed since either party recognizes a gain or loss. The farm and the house are in class. However, there are two distinct agendas at play. Georges purpose on the farm is business, but his aim on the two houses is to gift them.

Conclusion

George can postpone the like-kind trade, but there are limitations. The first restriction is that he would only have 45 days after selling the property to find suitable replacement properties. George must finish the exchange by 180 days following the sale of the exchanged property (Legal Information Institute, n.d.). Additionally, George and his sons would have to consent to utilize the asset for trade. The deal will nonetheless count as a like-kind trade even if receivables or other gains that are not similar goods are received at its end. Gain could be subject to taxation, however, only to the degree that the proceeds do not consist of similar interests. This would reduce the basis as opposed to if the property had been provided as gifts. As a result, George could get cash in return and then give it to his sons, who might use it to buy real estate for their own purposes.

References

Featherston. (1980). Wagensen v. commr of internal revenue. Legal research tools from Casetext. Web.

Legal Information Institute. (n.d.). 26 CFR part 1  income taxes. Legal Information Institute. Web.

Sterrett. (1982). Click v. commr of internal revenue. Legal research tools from Casetext. Web.

Tax return Form 1120 shows the companys profit, deductions, taxes, credits, and payments. Deductions allow you to reduce the companys taxes by calculating them from taxable income. Some of them the company can make in the expense column in the income statement. In addition, certain categories of deductions allow you to reduce taxation for the company in the future or postpone it. Therefore, this paper will analyze the types of deductions presented in Form 1120.

Deductions directly related to the companys activities can be recorded as expenses in the income statement. For example, this includes salaries and wages and employee benefit programs. However, these must be programs that are not a separate category of deductions, like pensions. Therefore, this item includes insurance or health and welfare programs for employees (Department of the Treasury. Internal Revenue Service, 2019, p. 14). In addition, advertising, rent, and repair and maintenance expenses may be included in expenses, but only to the extent, they relate to a trade or business activity (Department of the Treasury. Internal Revenue Service, 2019, p. 12). That means that if any of the deductions on the Form is directly related to the companys activities, they can be mentioned in the expense column.

A separate category of deductions is Net operating loss (NOL). It occurs when a companys tax expense exceeds its income (Department of the Treasury. Internal Revenue Service, 2019). Therefore, the organization will not report this tax deduction every year. The deduction data is necessary in order to reduce the tax burden on the company. Therefore, it should be indicated only if the payment of taxes poses risks to the financial stability of the company.

Reference

Department of the Treasury. Internal Revenue Service. (2022). Instructions for Form 1120: U.S. Corporation Income Tax Return [PDF document]. Web.

Introduction

The evolution of a green economy (GE) has become the main concern for many countries. It requires significant law reforms at the local, regional, and global levels to assist in realising the fiscal opportunities, emerging from a change to less polluting methods of manufacturing and consumption, including fresh employment opportunities. This means managing associated design changes that comprise, for instance, possibly harmful impacts on conventional fiscal sectors to the so called brown economy.

This paper discusses the objectives of environmental taxes, assesses the arguments for and against a green tax shift, and examines critically the approach the United Kingdom has adopted in the past two decades.

Objectives of a Green Tax System

A green tax system is among the most significant fiscal tools available for dealing effectively with environmental issues, and as such assists in protecting the surroundings. Green taxes have the capability of transforming the tax system through generating a lot of funds that could be utilised in financing important reductions in other taxes (Ekins 2008).

The fundamental underlying principle for green taxes is obvious. Pollution imposes costs on the public. Forcing a tax ensures that the polluting organisation takes in (or budgets) broader costs when deciding on how much to contaminate. On these grounds, a rational aim is that of reducing contamination to a level that assumes full responsibility for not only the costs of the pollution but also the gains of the polluting action. According to Mirrlees et al (2011), a tax is often more efficient than regulation as an approach to achieving full accountability by the polluter.

When a polluter takes account only of the organisational costs of its actions, disregarding the public costs, it will contaminate more than it is publicly acceptable. Levies change the prices encountered by a polluter and the polluter changes its activities in response. Taxes on toxic waste discharged by industries during production allow industries with different enterprise frameworks and regulation costs to respond differently. Importantly, a green tax system facilitates an amendment where it is most simply or inexpensively endorsed. Industries with lesser amendment costs will do more in their effort to reduce pollution than industries where the cost of adjusting is high (Mirrlees et al. 2011).

It is important to note here that the key to attaining the possible benefits from green tax systems does not lie in the arbitrary introduction of environmental taxes with an indistinctly clear environmental explanation. Rather, it lies in the efficient utilisation of enticements to the environmental or other contamination concerns that the law seeks to address. The following section explains the difference between a Pigouvian approach to green taxes and a standards and pricing approach.

Pigouvian vs. standards and pricing

The standards and pricing approach utilises standards to change behaviour. On the other hand, the Pigouvian approach is founded on the utilisation of enticements. The latter means that polluters ought to react to fiscal indicators once a market in contamination is generated. Perhaps, one of the most broadly utilised techniques of fiscal enticements to adjust how firms carry out their production activities is taxation. The concept of green taxes can, therefore, be interpreted as a way to change polluting industrial activities by enforcing levies that can be evaded or reduced through green activities.

There are challenges of practical execution as far as the Pigouvian approach is concerned. On the other hand, standards and pricing approach follows specific measures of toxic waste; the system of trial and error determines which type of levies has shown to yield specific results. The following section outlines a discussion for or against some sort of green taxation (Sandmo 1976).

Environmental taxation

Deriving the exact amount of levies is not simple, partly because the taxation system is a deprived proxy for the costs being incurred. For example, the suitable levy on the fossil energy utilised by a driver in urban areas would be more than that for a driver in rural areas. Promoting the acquisition of smaller or more effective motor vehicles, in addition, implies that the impact on fuel utilisation in the future is greater compared to the impact on the number of kilometres driven, emphasising the fact that fossil energy levies are more efficient in minimising carbon dioxide emissions than minimising obstruction (Ekins 2008).

The fact that fossil energy levies are very defectively focused on the externalities generated through their consumption is one opposition to the idea that fossil energy levies ought to be increased. If greater fuel prices minimise congestion, then the maximum fossil energy tax level will be indirectly proportional to price increases. This indicates that there are several fiscal cases for adjusting fuel tax based on prices (Wallace 1995). The same concept indicates that fossil energy levies must increase over time as the level of consumption, and thus the level of traffic increases with revenue.

An additional concern with other pollution levies is that raising fuel tax may bring about adverse impacts. However, such impacts might be not harsh. The next section describes the development of pollution levies in the United Kingdom.

Development of environmental taxes in the UK

Three decades back, the Institute for Economic Studies published a decisive analysis of the United Kingdom taxation structure. Long taxation changes have been approached informally for too long without considering their impacts on the development of the taxation system in total. As an outcome, various components of the system appear to be lacking a realistic foundation. Contradicting goals are pursued randomly, and even specific goals are pursued in a conflicting manner (Wallace 1995).

Regrettably, such an account remains true at present. In some significant components, the taxation structure has developed in the right direction, but it remains the invention of regularly illogical, bit by bit developments rather than systematic plans. The taxation structure has in addition struggled in adapting to reflective adjustments in the social, fiscal, and organisational settings in which it works. In the United Kingdom, the taxation plan has failed to benefit as much as it could from developments in academic and pragmatic appreciation to the same way elements of the design impact peoples behaviour (Mirrlees et al. 2011).

The taxation structure in the United Kingdom, like that of most developed countries, is packed with injustices that are not easy to explain, detrimental, and ready for restructuring. The taxation basis for people remains a blend between a revenue system and a cost system, generating changes in individuals choices over income (Ekins 2008). The business tax system both generates changes over how industries increase income  between capital and liability funds  and to what extent these companies invest, and fails to be linked to the individual taxation system, generating uncertainties, regarding the legal organisation that medium enterprises particularly may choose.

References

Ekins, P 2008, Environmental and behavioural taxes in fair tax: Towards a modern tax system, in C Wales (eds), Environmental and behavioural taxes, Smith Institute, London, pp. 64-73.

Mirrlees, J, Adam, S, Besley, T, Blundell, R, Bond, S, Chote, R, Gammie, M, Johnson, P, Myles, G, & Poterba, J. 2011. Tax by design: the Mirrlees Review, Oxford University Press, London.

Sandmo, A 1976, Direct versus indirect Pigouvian taxation, European Economic Review, vol. 7, pp. 33749.

Wallace, E 1995, Green Taxes: can we protect the environment and improve the tax system at the same time, Southern Economic Journal, vol. 61 no. 4, pp. 915-922.

Companies engage in business to make profits after which they either reinvest back into the company for the purpose of expanding the company, or distribute the profit to the shareholders in terms of dividends. Mostly, this Profit is taxed as corporate income tax, and after the dividends are distributed to the shareholders they are again subjected to individual income taxation. This is what is referred to as double taxation since the same income is subjected to two rounds of taxation. Another form of double taxation is found on inheritance taxation where the owner of the property is expected to have been paying tax on his income. The person who inherits the property, on the other hand, will be required to pay taxes on the same property.

Countries try to avoid double taxation because of its negative effect on the movement of capital, which leads to disinvestment and afterwards low economic development. Most countries therefore use tax conventions; which give taxing rights to countries so that they can have clear understanding on which country should tax the income. For instance, it would be agreed that when the source country taxes the income, the country of residence should not again tax the same income from a particular person. To stress this point Vogel (1997) argues that;

Countries may also encourage people to join small corporations because the employees of these corporations may also be the shareholders of the company, to avoid double taxation these corporations may issue profits inform of wages and fringe benefits to the shareholders. (p.33)

Tax treaties provide tax relief such as; exemption on part or whole income, which the people have earned. There is also tax credit which countries give to the people as a relief to reduce double taxation.

Difference between legal and economic double taxation

Legal double taxation is different from economic double taxation because it is mainly concerned with a particular tax payer; there the income to be taxed and the period when the tax is imposed are identical. This difference is essential as it can enable people to determine whether they are interested in the particular tax payer, or they are concerned with different tax payers; who could have received income inform of transfer payment.

Levying tax on the companys income and taxing the dividends of shareholders is a form of economic double taxation in which, a company is considered to be a separate entity to the shareholders. The relief on this type of double taxation is the exemption given to some investors, such as charities or pension funds, who are shareholders in the company (Thomas 1994).

Methods used to relieve international double taxation

There are three general methods deployed in relieving international double taxation and they include: tax deduction method, exemption method and credit method. The two methods that OECD treaty approves, for double tax relief, are the exemption method and credit method.

Tax exemption method allows the source country to tax the income of the resident of a given country, and therefore the home country of this particular tax payer will not be expected to tax the same income. The method is generous of the three methods because the tax payer does not part with any deductions on his income once the source country has taxed his income. This method is also much simple to apply and it is cost effective.

Credit method allows the tax payer, who has paid taxes on his foreign income, to pay less domestic tax if the foreign tax is higher than what he is expected to pay in the home country. However, the difference could still be higher and the tax payer may have to part with huge amounts of money for taxes. Deduction method would be preferred especially because deduction will result in reduced income for the tax payer, but this is a good thing since with less income it means that the tax payer will have to pay less tax. Thus, the tax payer will enjoy the reduced tax burden, which he will have to face because the tax liability will be reduced.

Deduction method subjects the tax payers to higher rates of taxation and it offers less relief to tax payers because the combined taxes are high. Moreover, it discourages sourcing income from foreign country since foreign investors are expected to pay more on taxes than those who do business within the country.

The rate of tax applied on the foreign source of income, which the citizens of a given country get, will affect the level of taxes they will be required to pay locally. Credit method enables people, who have earned taxed foreign income, to have a reduction on the local taxes that they will be required to pay if the amount paid for foreign income is higher than the tax liability in the home country. This exemption method is the one which the citizens of the country are excluded from paying tax on foreign source income. The country leaves the foreign country, where the income was earned, to tax the income and therefore, the same income will not be subjected to taxation in the home country. This method encourages the citizens of a country to invest in foreign countries where taxes are lower as compared to the local levels of taxation. In this case the effective rate of interest on the foreign income will determine how people will invest their capital in different countries (Gelband 1997).

Under exemption method, it is important for countries to consider the levels of foreign tax. This is because countries with significant difference in the tax level may experience inequity, and people will invest in countries where the foreign tax on income is lower. In order to avoid this, these countries should try and establish tax structures which are almost similar to those of foreign countries that they do business with. It is therefore relevant for the countries to know the levels of tax levied on foreign income for the purpose of maintaining equity among the countries involved (Arnold 2002).

Implications for financing multinational enterprises

Countries are supposed to exempt incomes, which are positive and not losses so that countries; where the foreign income goes should exempt its citizens from taxation. Normally, only gains or profits are taxed but losses are not taxed, and this means that country A will not grant exemption to ACo since the company made a loss. However, country A will need the figures of the loss which ACo made in its operations in country Y for the purposes of calculating the domestic tax base.

If a country does not take into account the foreign losses, it will be doing a major mistake because it will not be planning its tax base. Any incurred loss therefore should be put into account as it will reflect the true position of the country financially. Losses incurred should be noted in order to be exempted from taxes whenever a country is calculating its taxation each year.

It also matters very much if a country uses exemption method or credit method, and to know which method a country uses, for the sake of calculating income, as well as to reduce chances of double taxation on income. Country A will have to establish how to tax the income for ACo because it has a branch in country X and a subsidiary in country Y. Therefore, if the interest is fully deductible, it posses a challenge to multinational enterprises as taxes are higher on foreign income than in the domestic country; and the profits could be lower in foreign countries (Erasmus 2010).

Prove of Tax paid to foreign government

Tax payment can be proven by producing evidence issued by foreign tax authority after one has paid for the tax (Dailey 1997).

Reference List

Arnold, B., 2002. International Tax Primer. New York: Kluwer Law International.

Dailey, F., 1997. Tax savvy for small business. Berkeley: Nolo Press.

Erasmus, D., 2010. Tax Intelligence: The 7 Habitual Tax Mistakes Made by Companies. New York: Xlibris, Corp.

Thomas, D., 1994. Eliminate the double tax on dividends. Journal of Accountancy, 178, Web.

Vogel, K., 1997. Klaus Vogel on Double Taxation Conventions. 1^st ed. New York: Kluwer Law International.

Introduction

Littlewood (1997) defines taxes as the charges levied against a citizens personal income or on the property or for some specific activity. Taxes can solve many issues. Firstly, they can pay for services; hence, making life easier for future generations, either by minimizing the countrys debts owed, or by putting up national infrastructure. Secondly, they enable to transfer of wealth from generations of the future to the current one by the increasing deficit. Lastly, taxes help to minimize harmful habits like in the case of cigarette taxes. The purpose of taxation can be summarized as very straightforward and understandable, for a good performance of a state (Huxham 1940, p. 12).

Basic Tax Principles

An excellent system of taxation is necessary in order to set high standard principles for taxation. Some governments do not follow principles and therefore result in ridiculous systems of taxation where special interests and politicians look for gaining by manipulating these systems to suit their advantages (Littlewood 1989).

Tax systems differ from country to country and some work better than others. The best tax systems should be as simple as possible as it makes it harder to evade taxes and should create the best incentives for wealth creation and preservation while eliminating destructive activities that may misuse wealth and the countrys resources. They should also be fair to all citizens. This may be by levying no tax to those that do not use up resources, not taxing the poverty-stricken people unless there is no other way to fund the government. Lastly, a good taxation system should have a sustainable stream of revenue by setting up incentives that promote or hinder sustainability for the society and the system itself (Littlewood 1989).

The Hong Kong Tax System

The Hong Kong tax system is one of the most successful in the world since its structure ensures very low taxes, as well as low government spending. This allows the Hong Kong tax system to enjoy very broad public support. In order to achieve this, the system observes two things. To start with, the country focuses on relatively large incomes, and withholding methods like PAYE and GST are not used. This means that poor people are exempted from tax and ordinary people are lightly taxed. The Hong Kong tax system also shows the possibility for a developed countrys tax legislation to be simple. This is achieved by trusting the judges and avoiding complex structures which have the legislature provide for everything. The Inland Revenue Ordinance uses only general terms and leaves the work detail to the courts (Cowperthwaite 1971, p. 79).

One of the reasons why the Hong Kong tax system is one of the most successful ones in the world is the enormous reserves accumulated by the government. People seem more content with the combination of very light taxes and very low public spending (Cowperthwaite 1971, p. 79).

Reforms in the Hong Kong tax system

Up until 1940, there was no income tax in Hong Kong when the colonial government offered to establish aid in financing Britain for supporting the country during the war. The proposal required a single tax on income and would cover the worldwide incomes of all residents in the country and income derived by its residents elsewhere. The business community then objected and Sir Geoffrey Northcote had to establish a committee dominated by businessmen who had to go along with some sort of income tax. They came up with a form of tax a bit different from a normal income tax in the fact that it had three separate parts. One, property tax was charged on the rental value of the property, salaries tax was charged from employment, and profits tax from profits of businesses. After the war, British and Hong Kong governments again proposed to establish a normal income tax but the business community opposed (Littlewood 1997).

The Hong Kong Jockey Club is committed to promoting responsible gambling practices and minimizing their negative effects. The club is authorized to operate pari-mutuel and fixed-odd betting which includes horse racing, football betting, and the Mark Six lottery. This way, the government only allows social gambling to a number of outlets thereby minimizing or eliminating excessive and possible harm to the community. The club is a non-profit organization and one of the largest employers in the country (Littlewood 2005, p. 689).

Hong Kong also enabled plastic-bag tax (HK$0.5 per plastic bag) which has enhanced the public image of the country as it is perceived as an environment-friendly country and has also enabled good environmental protection business developments. According to BC Magazine, the country is comparable to a lush paradise, an idyllic landscape covered with verdant flora (Young 1967).

Hong Kong raised the cigarette tax by 50% in the 2011-2012 budget. According to Lucy Lau, (chairman of Hong Kong council on smoking and health), the tobacco control measures provide efficient ways of encouraging people to quit smoking, and especially the younger generation (VanderWolk 2002). This levy also brought about issues with the sellers as the profit margin remained the same while the cost was high thereby chasing away customers (Young 1976).

Goods and Services Tax (GST) still debates a proposed value-added tax in Hong Kong. The consultation was launched in the year 2006 and brought about considerable controversy from the taxpayers to the lawmakers, journalists, and politicians. The government argued that in order to broaden the tax base and secure sustainable tax revenues, GST would have been a viable option. The tax was to be levied at a flat rate of 5% and other taxes would either be decreased or eliminated. It would include export of goods, residential property sales, GST postponement schemes, Tourist Refund Scheme, and even charities (Welsh 1997).

The government also proposed that for the first 5years, all revenues would be returned to the community either as tax relief, or other compensation measures like salaries, education, and infrastructure, but was largely condemned by major parties of the Legislative council. GST is levied at 10% on most goods and services as a value-added tax in Australia and was introduced in the year 2000 thereby replacing the previous Federal wholesale sales tax. In Canada, it was introduced in 1991 and replaced the hidden 13.5% Manufacturers sales tax. Other countries levying this tax include Singapore and New Zealand among others (Haddon-Cave 1979, p. 600).

The tourism sector in Hong Kong provides a fast-growing industry and is opening up business opportunities in other sectors including the retail trade and hospitality sectors. The outlook for Hong Kong in the year 2010 was a return to positive growth more in line with the past trend growth. Continuing the momentum in the latter part of 2009, the economy started off with strong, broad-based growth in both domestic and external sectors. With the current improving trend, the revival in the Hong Kong economy should hopefully stay on track for the rest of the year. How the situation will evolve will depend very much on the timing and tactics to be adopted by governments and central banks of the major economies (Kaldor 1955).

Tax reform schemes are necessary to enable the country to monitor and restrict the number of housing projects or investments that are coming up in the second-hand market places. This also enables them to reduce the number of people who are migrating into the country and make it possible for the Hong Kong government to be able to make profits from their own investments and reduce the amount of money that is paid in the rental of properties (Hall & Rabushka 1995).

It is very beneficial if Hong Kong became an Islamic financial hub. This is because it is advantageous in the sense that it helps to minimize risks and debt. When financial institutions do business together with the Islamic community they become partners and share in profits, risks, and losses. For Hong Kong to have good and profitable businesses, there will be a need for them to change the tax laws and stamp duties that have been put in place by the government. They may also offer tax exemptions to allow the investors to recoup their investment and also the local insurance companies to offer Islamic insurance. The government should also allow Islamic banks to open up branches in Hong Kong so as to open up more markets. This would result in cooperation with Taiwan in many areas including investment, finance, logistics, and trade, which would create large benefits for each side (Littlewood 2005, p. 689).

The opportunities would help the country to coordinate with the mainland economy and produce more internationally renowned brands, while at the same time creating business opportunities around. The opportunities would be beneficial to the country in terms of coordinating with the mainland economy and producing more internationally renowned brands, while at the same time creating business opportunities around (Miners 1991).

The unified tax system

Hong Kong has been able to unify trade with china and hence, be able to have opportunities to portray itself as a good holding jurisdiction for all China-related investments. Profits tax is important, especially to the international investors looking to enter these markets. The country also imposes income tax on a territorial basis. This means that the income that is taxed has to arise from Hong Kong, or else it is tax exempted. The key direct taxes in Hong Kong include Profits Tax, Salaries Tax, and Property tax. Other means of income that do not lie in any of the mentioned categories are not subjected to tax (OECD 1998).

Hong Kong does not levy payroll, turnover, sales, value-added, dividend and capital gains taxes. However, companies carrying on business operations, professions, or trade are required to pay profits tax. Offshore profits are profits that have a foreign source and are observed to be clear of the regional taxation system of Hong Kong. In 2008, assessable profits were lowered to a rate of 16.5%, from the initial 17.5%. This resulted in Hong Kong availing specific tax incentives in various kinds of activities. Chinas existing rates levied on domestic firms have been changing from 33 % and overseas invested companies 15% or 24% to a unified rate of 25% (Rabushka & Rose 2000).

The main difference between the tax system in Hong Kong and that of other countries is that other countries employ democracy, which results in continuously increasing income taxes. The future of the tax system in Hong Kong is likely to be affected by the adoption of a democratic system of government, which may, in turn, lead to increased taxes on business profits, as well as large personal incomes. The expected increase in taxes is due to some practices in the democratic governments such as taxation of all people, and reliance of the tax system on PAYE (OECD 2006).

The Hong Kong tax system amuses many people since it does not rely on heavy PAYE taxes. The heavy taxes are imposed by employers, by deducting the amount from the employees salaries before it reaches them. This move saves a lot of time and money for a government, which would otherwise be spent chasing defaulters and dragging them through courts. Hong Kong is able to eliminate the challenges of chasing taxpayers since it imposes light taxes that are easy to pay. This makes the system more legitimate than that for other democracies (VanderWolk 2002).

The difference in making tax payments between Hong Kong and other democracies is clear. In Hong Kong, people are aware of the amount that they pay as tax since they have to provide a cheque or hand over banknotes. People in democratic nations, on the other hand, seldom know the exact figure that is cut from their paychecks as tax. They focus only on the net figure, once all the deductions have been made. The lack of knowledge on the amount taxed makes their decisions or arguments on increasing tax rates and public spending misguided. People in democracies are more aware of the amount used in public spending than the amount they contribute a tax, and when they demand more from the government, the taxes have to increase in order to complement the public spending (Welsh 1997).

If Hong Kong was to introduce the PAYE tax system in order to exercise steep progressive income tax, it would raise concerns about the effectiveness of the low tax policy. The incorporation of PAYE would result in reduced allowances and increased tax rates especially on large incomes (Whiteman 1988).

Democracy is good; however, insisting on its implementation by provoking the masses with regressive taxes may not be a smart move. Substantially increased public spending might be a good thing, too; but, it is not advisable to whip up demand for it by means of provocatively regressive taxes (Willoughby & Halkyard 1993).

The Detailed Implementation Regulations, DIR of the new EIT law ensure that dividends are recognized as income on specific days; when the investors make resolutions to make profit distribution. This is normally done on the annual board meeting date. The Chinese authorities have taken into account the possibilities of using an application and examination formula that can assist in confirming the number of FIEs undistributed reserved earnings that are should be acknowledged for tax exemption. A Double Taxation Agreement involving a comprehensive income tax treaty was signed by China and Hong Kong on August 21^st, 2006. This new treaty extended the scope of the existing 1998 agreement that was later limited to business profits and income from personal services (Willoughby & Halkyard 1993).

Another industry that benefits from tax exemption relief due to the double taxation agreement is the investing companies in Hong Kong. This is due to the capital gains acquired when shared are moved from mainland companies that are mainly tax-free, provided that some criteria are met. To start with, the shares transferred should not be more than a quarter of the whole shareholding of the mainland company. Secondly, the Mainland Company assets are not comprised sorely of immovable property in the Mainland of China (Zee, Holland, & Welling 2004, p. 9).

Owing to the treaty, china contributes passive income, including dividends, interest, royalties and capital gains received by Hong Kong investing companies. This would be considered as preferential treatment due to the minimal withholding tax rates. It could also be viewed as a tax exemption due to specific conditions. Taxpayers are supposed to regulate their cross-border business transactions and tax affairs in a consistent manner. This is because they are allowed to exchange information and maintain proper, efficient record-keeping systems that aid in the support of commercial objectives underlying the business transactions. The significance of this is well seen in the case of companies in Hong Kong that assert offshore income. The significance of running suboptimal profit allocation strategies is seen when a company grows to be international (Zee, Holland, & Welling 2004, p. 9).

Conclusion

The taxation system in Hong Kong informs us about the requirements for any democracy to exercise low tax rates successfully. These are the concentration of the tax burden on relatively large incomes, exemption of poor people from taxes, imposing light taxes on ordinary people, and transparency of the tax system. The taxation system in Hong Kong has been in practice for over seventy years, with just a few policies and heavy reliance on a good and unbiased judicial system. The government sees the system as inadequate since it is difficult to implement progressive taxes on consumption taxes as opposed to income tax. The population, on the other hand, is quite satisfied with the low taxes. Though the system is effective, ad has minimal problems, it is observed to be grossly inadequate when compared to other systems in place around the world. Hong Kong has impressive fiscal policies, which have been attributed to the extremely light taxation. According to Littlewoods (2010), Hong Kongs real achievement is not merely that the burden of taxation is very light, but that the system is so structured as apparently to enjoy a strangely high level of popular support (Littlewood 2010).

References

Cowperthwaite, J., 1971, Hong Kong Hansard, Budget Speech, pp. 79.

Haddon-Cave, P., 1979, Hong Kong Hansard, Budget Speech, Annex 15, pp. 600.

Hall, R. E. & Rabushka, A., 1995, The Flat Tax, Stanford: Hoover Institution Press.

Huxham, H. J., 1940, Report of the War Revenue Committee, 12.

Kaldor, N., 1955, An Expenditure Tax, London: Allen & Unwin.

Littlewood, M., 1989, Consultative Paper: Sales Tax, Hong Kong, Hong Kong Government Secretaria.

Littlewood, M., 1997, HKLJ, The Taxation of Manufacturing Profits: A Re-interpretation.

Littlewood, M., 2005, How Simple Can Tax Law be? The Instructive Case of Hong Kong, Tax Notes International, pp. 689.

Littlewood, M., 2010, The History of Hong Kongs Troublingly Successful Tax System, Taxation Without Representation.

Miners, N., 1991, The Government and Politics of Hong Kon, Hong Kong: Oxford University Press.

OECD., 1998, An Emerging Global Issue, Harmful Tax Competition.

OECD, 2006, Towards a Level Playing Field: 2006 Assessment by the Global Forum on Taxation, Tax Cooperation.

Rabushka, A., & Rose, M., 2000, The Flat Tax: American and European Perspectives, Massachusetts: American Institute for Economic Research.

VanderWolk, J., 2002, The Source of Income: Tax Law and Practice in Hong Kong, Hong Kong: Sweet & Maxwell.

Welsh, F., 1997, A History of Hong Kong, London: Harper Collins.

Whiteman, P. G., 1988, Whiteman on Income Tax, London: Sweet and Maxwell.

Willoughby, P. & Halkyard, A., 1993, Encyclopaedia of Hong Kong Taxation, Hong Kong: Butterworths.

Young, S., 1967, Report of the Inland Revenue Ordinance Review Committee Part I. Hong Kong: Government Printer.

Young, S., 1976, Report of the Third Inland Revenue Ordinance Review Committee, Hong Kong: Government Printer.

Zee, H. H., Holland, G. & Welling, M., 2004, Policy and Administrative Issues in Introducing a Goods and Services Tax: Further Considerations, Hong Kong SAR , pp. 9.

Introduction

Low taxes and low government spending makes Hong Kong to be ranked among the most successful tax systems in the world. Hong Kongs tax system withholds Goods and services Tax, pay as you earn not used and focuses on big income sources. This has seen it gain a lot of public support from its citizens who benefit form the move to exempted form paying tax and lightly taxing the middle class (Huxham 1940, p. 12).

Characteristics of Tax System in Hong Kong

The Hong Kong tax system provides practical evidence for developed countrys tax legislation. It is evidence that developed countries can have a tax legislation that allows for a narrow tax base that is tied to operationally separate tax schedules from different sources of income. Hong Kong does not impose tax on the general income tax nor does it taxation rates. Hong Kong also does not tax income generated out side the region. Hong Kong tax rate also favors both the citizens and the government due to its stability while retaining the stamp duties (Huxham 1940, p.12).

Hong Kong tax system provides the developed countries with a practical tax solution. Hong Kong tax system allows the government to provide the necessary social amenities to the majority of its population. The various sectors such as housing, education, health, transport and communications are in relatively good state. Hong Kong, through its tax system, has managed to gather foreign currency to the tune of up to US $ 110 billion.

This can be attributed to the governments reliance on the land policy of the country, which empowers the government to acquired additional revenue through long term leasing of the land. The demand for land in the region is ever rising ensures that the government profits through land leasing being the sole supplier of the commodity. Though the government raises revenue that caters for the majority of the citizens social amenities, Hong Kong needs to fix the narrow tax base arising form the leasing of land transactions.

According to (Littlewood 1989), in an effort to broaden the tax base and introduce reforms to their tax system, Hong Kong government engaged the public on the possible methods to be incorporated in the tax systems. The public was against the Goods and services Tax (GST), and instead proposed other measures to broaden their tax base. These alternatives included: Carbon tax to help safe guard the environment, tax on products not considered essential, land and sea departure tax and a reduction on personal allowances through salaries tax. Other proposals included by the public and organizations included: Taxing dividends, interests accrued, world wide income of businesses and individuals, increasing rates on tenements. As well as introducing a capital gains tax and increasing progressive elements of Salaries Tax (Cowperthwaite 1971, p.79).

Extent of the Hong Kong tax reform

Hong Kong government has come up with measures to cushion the country against increased expenditure on health care brought about by the increasing ageing population. To achieve this, the government has licensed the Hong Kong Jockey Club to help in promoting responsible practices and reduce the negative effects brought about by such social activities. Horse racing and football betting are some of the many activities the club controls (Littlewood 2005, p.689). This move has enabled the government to control social gambling thereby reducing the obvious harm caused by such activities to the public. The Hong Kong Jockey Club is the biggest employer providing a large sector of the public with a stable source of income.

The government played a crucial role in the provision and maintenance of a clean and safe environment by imposing a HK$ 0.5 tax on plastic bags. This move has seen the country experience positive environmental protection business initiatives. The introduction of the plastic bag tax has seen the country transform into an environmental friendly country with beautiful vegetation.

Cigarette tax in Hong Kong was raised by 50% in the 2011-2012 financial year, which was included in the budget. The chair person of the Hong Kong council on smoking noted that people are likely to avoid smoking due to such control measures introduced by the government. (VanderWolk 2002). The tax imposed on cigarettes deterred customers from purchasing the products. This affected the cigarettes business leading the sellers of the commodity to raise issues touching on the goods and services Tax. (Young 1976).

Tax reforms introduced Hong Kong by the government concentrated on offering relief measures towards people on the low income bracket and the adoption of a reduced and single Goods and Services Tax. (Little 1997). The approaches that the Goods and Services Tax will be use in addressing low-income households and effects on the retail industry through reducing the consumption rates of the public are the important areas of contention in relation to the Hong Kong Tax reform. Offering credit rates to help improve the quality of life among the low income earners, offering credit for the charges associated with water and sewerage services and using cash allowance are some of the possible solutions the will help address the issues affecting the tax reform. Analysis carried out across the country indicates that the Goods and Services Tax has been successfully adopted in not less than 135 regions on a global perspective. (Dancey, Kesler & Resendes 1991.

Goods and Services Tax approach enables the government to collect of tax directly from the suppliers rather than from the consumers. The withholding of the tax from the consumers as a method of revenue collection allows the government effectively to transfer the burden downwards. The method allows the government to ease the burden on consumers while at the sane time collect revenue effectively. The people who agree with low tax policy oppose the adoption of the Goods and Services. They argued the objective of the Goods and Services Tax approach is aimed at taxing the low income earners through with holding.(Dansey 1991).The Goods and Services policy was drafted by accountants and new generation capitalist who believe that, its effective in eliminating instability and uncertainty of government revenue.

Disadvantages of Hong Kong Tax System

Hong Kong tax policy set up by the authorities make it difficult for local and foreign investors to set up a business in the region. Organization for Economic Corporation Development role is to provide a go ahead for the restructuring developments in the international income environment, following its model tax treaty and the interpretation to that treaty (OECD 2006). Every member of the OECD imposes Value-Added Taxes, this however does not include the United States. The OECD operates without international trade agreements the cover Value-Added Taxes. This converts to a lack of neither clear responsibilities of the OECD to oversee the reform for VATs nor the emergence of ecommerce. The organization has hence not been able to successfully introduce any meaningful reform to change the business environment.

There are cases whereby the investor earnings are taxed more than once: When the person exporting neither resides in the foreign country nor conducts any activity on the foreign country. In such instances, the exporter cannot get any income in terms of dividends, income license, or interest income from the foreign country. A withholding tax is introduced when Royalties paid to the parent, interest fees, tax dividends and the source principles and invoked by the host country. The parents home country will also tax all the residents around the world and invoke the principle.

While OECD Indentifies this as the proper way, it instead looks at the role played by the server to identify the gains that are attributable to the computer equipment. The changes made to the analysis to the OECD model tax treaty agree with the Hong Kongs views with reference to the concerns about the cross-border income characterizations issues.

OECD (2006) clearly states that a remittance made for any commodity or service should not be subjected to withholding. This means that cross-border sales to buyers of small packages and other electronic transactions will prompt commerce. The importance for the assessment unification of Hong Kongs Tax System based on the OECD jurisdictions. This is because the international standards make use of the all OECD member jurisdictions average figures as a benchmark.

OECDs Tax Model with regard to Hong Kong

The role of the OECD is to endorse restructuring endeavors in the international earnings scenario, based on its model tax treaty and the interpretation to that treaty (OECD 2006). When looking into the possibilities of double or triple taxation, one should evaluate the residence and source principles. The first implies that all residents of the country, including: private persons living in the country; and incorporated companies established in the country, can be taxed on their worldwide income, while the latter implies that all the wages earned within Hong Kong, whether by locals or non-residents, can be taxed.

This implies that earnings can be taxed more than once, since there are no measures provided to protect them from double taxation. There are particular instances when multiple taxation can occur. The first instance is in the case of direct exports; whereby the pure exporter is not a resident of the foreign country and has no foreign activity. The exporter does not receive any dividends, license income, or interest income from the foreign country. In such as case, the alien nation cannot bring into play either the residence principle or the source principle. Home taxes only.

The second instance is in a case of foreign subsidiary. When the parent receives income from the subsidiary, a withholding tax is introduced when the host nation invokes the foundation principle and tax dividends, interest fees, or royalties remunerated out to the parent. Furthermore, the parents native nation will, as a matter of standard, raise the residence principle, and tax all its residents on their international incomes.

The Departmental Interpretation and Practice Note (DIPN) were issued in the year 2001, by the Hong Kong tax authorities. This showed their willingness to put into play neutral tax rules to e-commerce. The role of the DIPN was to ensure that all businesses would be equal in terms of taxable revenues. One of the characteristics of the DIPN is that an administrative board of review or court can overturn it, since it is not a binding authority. The OECD suggests that there are particular instances when the permanent establishments can be constituted by just the servers; an opinion that is not shared by the DIPN. The Hong Kong domestic law defines a permanent establishment as the combination of physical space ad personnel.

According to the OECD (2006), the correct procedure to identify the profits that a server based in Hong Kong is attributable to is by looking into the product and location (what and where) of the actual business, that produced the profits, as opposed to the electronic procedures. While the OECD declares this as the proper way, it instead looks into the role played by the server, in order to identify the gains that are attributable to the computer equipment.

The modifications made to the commentary to the OECD model tax treaty agree with Hong Kongs views, with reference to the concerns about the cross-border income characterization issues. These modifications require that the substance of the electronic transfer be thoroughly checked, in order to identify whether the taxes on the payment should be withheld.

According to the OECD (2006), a payment made for a product or service is not subject to withholding. However, withholding as a royalty payment applies in the case where a payment is made to seek permission for the use of copyrighted material. This implies that cross-border sales to patrons of shrink-wrapped software, and other e-commerce transactions will instigate commerce, as opposed to royalty income. This is because the latter would be liable to withholding.

The need for a unified tax system in Hong Kong

Business transactions between financial institutions and telecommunications across countries will be improved with the adopting of a unified tax system. Hong Kongs inclusion will play an important part in the development of an improved tax system aimed at addressing trade at the international level. (Brooks 1992). Hong Kongs stands to benefit from a unified tax system as it will serve to increase the competitive power of the country at a global level (VanderWolk 2002). This is because Hong Kong can open up its region to the world by unifying the tax system to allow for international trade. The Hong Kong tax system allows it to more money than the federal tax system in the United States. The tax system has allowed to experienced tremendous growth a shown in the table below , its per capita GDP has risen form approximately $2.500 to over $27,000.The current tax system in Hong Kong is largely depended on tax revenue form property and income. According to OECD, the tax system relies much more than the correspondent proportion of revenue in the OECD member countries (OECD 2006).

It is clear that the current tax system used by the Hong Kong authorities is not the best compared to the other tax systems used in the rest of the world. The answer to the debate emerging from the Hong Kong tax system does not only depend on a technical answer, the adoption of the tax system that is politically acceptable and technically efficient. Hong Kong needs an objective broad tax base that will produce enough avenues for tax revenue. The most important solution for the tax issue for Hong Kong is for the authorities to broaden the tax base.

Conclusion

The rules pertaining to deductibility are appealing, as indicated in table 1, whereby the government revenue is about 20% of the GDP (Littlewood 2007). The hong kong tax system allows it to collect about 20% of GDP, which makes it better than the federal tax system in the US, which is just above 18%. This is amazing since the tax system of the former has low tax rates and minimal income double-taxation, as can be seen in table 2 in the government revenues for the period 2004/2005. Owing to its tax system, Hong Kong has experienced tremendous growth as seen in table 3, whereby per capita GDP has risen from approximately $2,500 to well over $27,000 (Littlewood 2007). This growth has been achieved over a period of several decades, during which the flat tax system was in implementation (Zee, Holland & Welling 2004).

The current tax system in Hong Kong is observed to be profoundly dependent on tax revenue obtained property and income. According to the data provided by the OECD, this reliance is much more than the correspondent proportion of revenue in the OECD member countries (OECD 2006). The solution to the debate between the Hong Kong government and its people on the inefficiency of its tax system does not rely solely on a technical answer, rather the adoption of a tax system that is politically acceptable and technically efficient. It is evident that the present tax system used in Hong Kong is not adequate in comparison with the tax systems used in the rest of the globe.

It is necessary to view the alternatives that are steady with regard to the international experience, as well as those that do not undercut international competitiveness. This move is emphasized by the advancements in international pressure on both tax rates and types of taxes. What Hong Kong needs is an impartial and secure broad tax base that will produce sufficient channels for tax revenue, that will be consistent.

Recommendations

The most prudent option for Hong Kong to broaden its tax base is a consumption tax rate that is significantly low; below 4%. Such a tax rate would be advantageous since it can broaden the tax base in impartial way, according to international benchmarks. In addition to this, such a tax rate is adequate enough to meet the extra revenue that is needed, without putting into risk the low tax status in Hong Kong., as well as its international competitiveness. Other benefits of a broad tax base include consistency, reliability and continuity into the future, and its ability to tackle the concerns raised in the current Hong Kong tax system (KPMG 2011).

A broader tax base only seems to be possible only with the considerations of a GST. Other options are likely to interfere with the tax design principles, as well as the stipulations of reference of the Advisory Committee, which would pose challenges in sustaining the international competitiveness and low tax rate environment in Hong Kong (KPMG 2011).

References

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Appendix

Table 1: Total Government Revenue as a Percentage of GDP

Table 2: 2004/2005 Hong Kong Government Revenues

Table 3: Hong Kongs impressive growth

Introduction

Currently, Hong Kong primarily derives its tax revenue from the Salaries Tax and the Profits Tax, this makes up approximately two-thirds of the total revenue from tax collection in Hong Kong (Arnold & McIntyre, 2002). The existing tax base of Hong Kong is extremely contracted, only 35 percent of the working population, which is approximately 1.2 million, contributes to the Salaries Tax. In addition, only the top 100,000 supply 60 percent of the total amount of the Salaries Tax. With regard to the Profits Tax, the top 800 out of the 750,000 registered business entities contribute 60 percent of the profits tax (Ayesha & Smith, 2008). The significant problem with having a tax base that is contracted is that it results in a lack of stable government revenue. In addition, the major revenue for Hong Kong has been extremely volatile as indicated in the following table with the amounts approximated to the nearest billion.

Table 1: Revenue for Hong Kong

The need for reforms in the Hong Kong Tax system

High rates of volatility as depicted in the table increase the difficulty of adopting medium and long-term strategies for offering public services and infrastructural developments. The situation is worsened by the fact that Hong Kong is currently facing an aging trend; it is estimated that the percentage of individuals above 65 years will increase from the current 12 percent to 27 percent during the year 2033 (Halkyard, 2010). This demographic trend implies that the contributions by the Salaries Taxes will reduce while resulting in an increase in healthcare costs and the provision of social services. Aging will result in a shrinking in the tax base of Hong Kong. Such estimates resulted in the proposed development of the Goods and Services Tax (GST) model with the principal objective of widening the Hong Kong tax base (Chen, 2011). It is approximated that effective implementation of the GST will result in a revenue collection of USD 24-30 billion, with a volatility of 25 percent. The Hong Tax Reform focuses on the adoption of a low and single GST rate, offering relief measures towards individuals who have low income. The government is also seeking public opinions regarding the implementation of the GST revenue with the objective of reducing the Salaries and Profits Taxes without compromising on the delivery of public services (Halkyard, 2010).

The significant areas of contention with regard to the Hong Kong Tax reform are the approaches that the GST will deploy to address low-income households and its impacts on the retail industry through a reduction of the consumption rates of the public. This will be achieved using cash allowance, offering credit for the charges associated with water and sewerage services, and giving credit for the rates in order to enhance the quality of living for the low-income earners in Hong Kong (Littlewood, 2010). A cross-country analysis reveals that GST has been effectively adopted in at least 135 jurisdictions from a global perspective (Littlewood, 2010). For instance, Australia adopted the GST framework during 2000, after which it initially resulted in increasing inflation and a decline in the consumption of the retail sector. Two years down the line, there was a notable improvement in Australias economy. Countries like Canada, Singapore, and New Zealand reported temporary and negligible impacts on the economy. Critics of the tax reform argue that the adoption of the GST contributed significantly to the decline of Japans economy (Hong, 2011). However, it should be noted that Japan implemented the GST when the economy was at the peak of its bubble. Proponents of the Hong Kong Tax reform cite its effectiveness in maintaining the competitiveness of Hong Kong through the implementation of a low GST rate. A lower GST rate will facilitate the lowering of the rates of the income tax, which in turn will play an integral role in attracting capital and talent, and enhance the business environment in Hong Kong (Shamdasani, 2010).

The implementation of the GST is a perfect instance of transferring the task burden downwards, which results in tax revenue collection through withholding, in the sense that tax is not collected directly from the consumers, rather it is collected from the suppliers. The basic argument is that people who agree with the low tax policy oppose the adoption of the GST; this is due to the viewpoint that the main objective of the GST is to impose taxes on low-income individuals, and that tax revenue collection is done using withholding. Proponents of the GST, who mainly comprise accountants and new generation capitalists, are of the opinion that the GST is the most effective approach for eliminating instances associated with instability and increasing rates of the volatility of government revenue (Hsu, 2001). Opponents cite that if taxes are imposed on poor individuals, there is a likelihood that they will want something in compensation, which is likely to result in a swell in public expenditure. Increased public expenditure can be a good methodology; however, creating its demand using regressive taxes is not justified. GST is usually associated with the need to increase public expenditure (Hong, 2011).

It is arguably evident that the present tax base in Hong Kong is extremely contracted; implying that there is a need to develop strategies aimed at expanding the tax base. The need for tax reforms in Hong Kong extremely relies on few tax classifications and a relatively small group of taxpayers. Presently, most of the tax for the government of Hong Kong is derived from the property market; this translates to the viewpoint that it increases the susceptibility of the government revenue in the fluctuations of the property market. In addition, the economy of Hong Kong is mostly external-oriented, meaning that it is vulnerable to global economic conditions (Halkyard, 2010). A direct effect of this is that the limited tax types are extremely vulnerable to the economic downturns on the globe. The population of Hong Kong is also increasing and there is a need to increase the government expenditure, which can only be achieved by implementing the reforms in the tax system. In addition, the contracted tax base in Hong Kong means that lowering the tax rates is not an alternative if Hong Kong is to maintain its competitive power and the challenges that are inflicted by the onset of globalization (Huizinga, 2007).

The characteristics of the present Hong Kong Tax System

Hong Kong relies on a low rate flat tax, which is usually effective in developed countries that depend on low taxes and small government expenditures. A low-rate flat tax implies that government enjoys the support of the public regarding the adopted public policies. Using Hong Kong as a reference point, it is arguably evident that the effectiveness of the low rate flat tax is effective in scenarios whereby the tax burden is concerted on relatively huge incomes (Slemrod & Bakija, 2004). As such, the tax burden is not distributed to lowincome individuals, and that working people should be taxed lightly. In addition, for the low rate flat tax system to be effective, the adopted tax system must have the highest level of visibility, as opposed to withholding, which is a core characteristic of the proposed Hong Kong Tax Reform under the GST approach (Holiday & Ngok, 2002).

The existing Hong Kong tax system makes use of the progressive consumption tax framework. The widely accepted principle of taxation is that an effective approach should impose taxes on consumption rather than income. This is because of the viewpoint that it is only fair to impose taxes on people on what they are taking out of the economy instead of their inputs to the economy (Littlewood, 2010). However, it is also thought that an effective tax system should be progressive; this imposes significant constraints when designing an effective tax system (Huizinga, 2007). This denotes the underlying complexity when designing a progressive tax system that is based on consumption, something which has posed core concerns with regard to the tax theory in the last five decades. It is arguably evident that it is impossible for people to track their consumption rates in order for the government to deploy a progressive tax on them. However, there is a possibility of getting consumption rates directly, on grounds that the rates of consumption are equivalent to the amounts of income less the savings (Jinyan & Elliott, 2003). For instance, if the government has knowledge regarding an individuals income and savings, there is a possibility that the consumption can be calculated and a corresponding tax is imposed on it. Simply stated, if an income tax is imposed, it facilitates the subtraction of savings and investment, and then the remaining amount denotes the tax on consumption (Halkyard, 2010). An approach like this implies that taxes could be charged progressively and its collection deploys the same methods as income tax. Under the current Hong Kong tax system, this is implemented by the enactment of a legislation that compels tax payers to pay the tax or through the use of withholding requirement on their respective employers using the PAYE scheme (Hong, 2011). The history of Hong Kong tax system faces a heated debate regarding consumption taxes that are progressive due to Inland Revenue Ordinance, which is mostly perceived as a method for imposing taxes on income. The integrated effects of this tax system are similar to facilitating a subtraction for savings, implying that the tax system is based on consumption (Tang, 1997).

Basic tax principles under the Hong Kong Tax reform

In the proposal of the Hong Kong tax reform using the GST approach, the basic guidelines on tax were deployed. Simple and certain implies that the adopted tax system had to be compatible with the existing tax system, which is low rate. Fair and equitable meant that the taxation approach on the government and individuals should be same (Littlewood, 2010). The principal of economic neutrality implies that the taxation cannot impose cases associated with market distortions and market decisions that are likely to affect the allocation of resources. The adopted tax system must also be efficient and effective in the sense that it should reduce the administrative expenses on the side of the government and also reduce compliance costs for the case of the business entities (Kaur, 2011). It is also important that the tax system should be purpose generating, in the sense that it must have the ability to generate constant revenue for the government that can cover comprehensively for the demands of public expenditure (Huizinga, 2007).

The role of a unified tax system in Hong Kong in the light of globalization

The era of globalization implies that economic activities are being undertaken on a global platform. This requires the implementation of efforts aimed at enhancing the taxation policies that are imposed on multinational corporations and the adoption of a regulatory framework regarding the flow of global capital and encouraging foreign direct investments in Hong Kong (Ngok, 2007). This also implies that effective strategies will be implemented to ensure that cases associated with international tax evasion are avoided at all costs (Tang, 1997). Therefore, the adoption of a unified tax system in Hong Kong in the light of globalization will play an integral role in the development of an improved tax system aimed at addressing trade at the international level, which also includes business transactions that exist between financial institutions, security investments at international level and telecommunication services across countries (Slemrod & Bakija, 2004). A unified tax system is thus a possibility in the context of Hong Kong. The underlying benefit of such an approach is that it will serve to increase the competitive power of Hong Kong at an international level (Hong, 2011).

It is important for the SAR government to be continually moving forward in terms of economic growth and to have the capabilities to address the global financial changes effectively; this is important in guaranteeing the competitiveness of Hong Kong from a global perspective, which in turn will further improve internal cooperation between Hong Kong and mainlandland China (Noronha & Vinten, 2003). This will ensure that the government of Hong Kong is effectively responding to the demands of its people, adopting frameworks for public expenditure aimed at increasing the living standards of its people and establishing social stability in Hong Kong. It is arguably evident that the implementation of the 12^th Five-Year Plan in Hong Kong will impose significant benefits to the business enterprises found in the city (Shamdasani, 2010). The 12^th Five-Year plan in Hong Kong will also play an integral role in eliminating the economic bottlenecks that the city is currently facing, thereby creating strategic opportunities and advantages that the city can make use of to establish sustainable development (Keen & Ligthart, 2003). This will be achieved through the elimination of critical social problems and reducing the income inconsistency that exists among the poor and rich in the city. In addition, the 12^th Five Year Plan will play an important role in the establishment of a solid economic establishment in the city (Shafer & Simmons, 2008). This implies that effective implementation of the 12^th Five-Year plan requires a strong collaboration at the regional level, which offers an opportunity for economic evolution and expansion in Hong Kong. All these strategies will play an integral role in ensuring the competitive power of Hong Kong (Pheny, 2009).

Conclusion

The primary issue of concern in the debate of the Hong Tax System is whether the existing tax system is efficient in meeting the demands of present day Hong Kong. The government is of the opinion that the existing tax system is inefficient, which is one of the core reasons why it tried to adopt the GST. On the contrary, most of the residents of Hong Kong are of a different opinion. The solution to the debate does not rely solely on a technical answer, rather the adoption of a tax system that is politically acceptable and technically efficient. It is arguably evident that the present tax system used in Hong Kong is not adequate in comparison with the tax systems used in the rest of the globe. The only framework that can be used to evaluate the Hong Kong tax system should base on what the people of Hong Kong actually want. This can be achieved by engaging them in the development of the tax system through a system of the governance that is based on democracy. When compared to other parts of the globe, it is arguably evident that existing Hong Tax system denotes the successes that can be accrued from a low rate flat system that is simple.

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