Category: taxes

Introduction

The year 2001, saw America rise up to the prospects of a grim economic outlook since there were signs of an impeding depression. As a result, former president Bush decided to introduce new tax measures that were going to simplify the tax system, as well as, act as an incentive for economic growth (Harvard Law School 3).

The new tax system was meant reduced tax rates on individual income, child taxes, married couples tax and other tax groups. Certain taxes such as the estate tax were completely eliminated and deductions such as the poor only benefitted in terms of percentage cuts only (Citizens for Tax Justice 1).

However, the tax cuts, which were enacted during Bushs first term, are soon to expire and as a result, there is a lot of debate charitable deduction made available to non-itemizers; however, the biggest gainers were low income families because their percentage of tax cut was overwhelmingly huge.

However, this fact did not take long before it was highly politicized because of allegations that the wealthy benefitted most when it came to the dollar amount, while thegoing on between the republicans and democrats regarding if the tax cuts should be extended into the future or not.

Focus is also on the presidents plan to restructure the tax system, with certain allegations implying that, the presidents new tax plan is set to make small business owners pay up to half their earnings in federal tax (Los Angeles Times 2).

Calls to end the federal tax cuts are majorly spearheaded by the democrats because they are of the opinion that the tax cuts majorly favor the rich and consequently lead to the growth of the national tax deficit.

It is therefore their belief that eliminating the tax cuts should cover a major milestone towards closing the deficit gap created by impliemmntinf the tax cuts in the first place. This study seeks to explore arguments for, and against, the retention of the tax cuts.

Advantages of Extending the Tax Cuts

Letting the Bush tax cuts stay, is likely to save small business owners from having to pay hefty taxes to the federal government  a move which will ultimately influence the overall growth of the national economy (Los Angeles Times 1). This is true because small businesses submit individual tax returns the same way large businesses do and therefore, they would be harmed by a change in the tax system (Los Angeles Times 1).

It is also estimated that the rich who are allegedly being protected by conservatives of the Bush tax system, will pay less than they would, if the tax cuts were left to expire naturally (Los Angeles Times 3).

This means that though the tax cuts were largely seen to favor the rich, the rich would further benefit from the tax cuts if the Obama tax proposals are implemented. It is therefore better to let the tax cuts prevail because the rich would pay more taxes as a result.

Disadvantages of Extending the Tax cuts

Extending the Bush tax cuts would have significant impact on the American government national deficit because it is projected that if the tax cuts are extended over the next year, the government is expected to lose about 690 billion dollars.

It is also true that though the Bush tax cuts were meant to significantly cut taxes for everybody, it heavily favored the wealthy (Citizens for Tax Justice 1). It is therefore going to be highly inefficient for the government to extend the tax cuts because it benefits the rich the most.

Moreover, extending the tax cut means that the national debt is going to increase to about nine trillion dollars if it is extended for the next ten years (Center for American Progress 5). This means that, Americans will have to pay for the national debt at higher rates (in the future) because the government will have to borrow money to sustain itself, despite the deficit.

Furthermore, it is morally wrong to maintain the Bush tax cuts to benefit only 2% of Americas population, which is also the richest income group, while middleclass citizens do not reap as much benefit from the tax cuts (Citizens for Tax Justice 3).

In other words, there is no point of maintaining the tax cuts to people who do not need it, while letting other national issues like healthcare, infrastructure, education and the likes, suffer as a result.

Incentives

Despite the raging debate regarding if it is right to extend Bushs tax cuts or eliminate them altogether, democrats and republicans have agreed that the tax cuts should be extended, at least for people who earn 250,000 dollars, or less (Center for American Progress 5).

This means that most of the incentives for individual income, child tax credits and marriage couples tax would be extended, but the tax system changes for people earning more than 250,000. The incentives for the existing tax brackets are explained by Department of the Treasury that:

The top two brackets would be cut from 39.6 and 36 percent to 33 percent, and the next two from 31 and 28 percent to 25 percent. The lowest existing bracket would remain at 15 percent, but a new ten percent bracket would be added for the first $6,000 of income, $12,000 for married couples.

The proposal would also increase the child tax credit from $500 to $1,000 per child and make part of it applicable against the Alternative Minimum Tax (AMT) (5).

The following diagram shows these tax cuts:

Also, as a point of argument to bring everyone on board regarding the idea of repealing the bush tax cuts; in the defense of the democrats, several small business owners who were argued to suffer from the expiry of the tax cuts will not be influenced by the expiry of the tax cuts because it is estimated that only about three percent of them have earnings that exceed 250,000 dollars (Center for American Progress 2).

Moreover, it is also affirmed that some of these small businesses are not necessarily small, in comparison to the established corporate giants.

Economic Implications

It is no doubt that the bush tax cuts have had a severe effect on the national debt burden. In the year 2000, it was estimated that the real cost of implementing the tax cuts was going to be about 1.9 trillion dollars and in reality, the US suffers significant budget deficits of close to five trillion dollars (Center for American Progress 2). The following diagram shows this situation:

Interestingly, it is on record that, Bush inherited a record surplus in federal budget from his predecessor and though he assured the nation that he was going to reduce the public debt by about two trillion dollars, he increased the public debt to five trillion dollars as soon as his tax cuts were made law.

This means that his tax cuts came at a very high cost and the current government is only seeking to decrease this debt burden. Definitely, a sure way of doing so is not maintaining the status quo, which started the problem in the first place.

Experts therefore note that if the bush tax cuts are extended, Americans may soon have to pay very high interest rates to pay back the money that will have to be borrowed by the government to finance its social programs (Center for American Progress 2). Moreover, there will be no end in sight for the ever-growing American budget deficit.

The Bush tax cuts have also significantly influenced the funding of several basic social programs such as Medicare, retirement pension schemes and the likes. In detail, it is estimated that the funding for these social programs have been scaled down by almost three trillion dollars (Center for American Progress 2).

Also, in as much as the tax cuts were meant to boost economic growth and ease the creation of jobs, it is documented that three years after the tax cuts were made law, the total jobs shrunk from 132 million jobs to 131.4 million jobs (Center for American Progress 2).

Focusing more on the creation of jobs, though the Bush tax cuts never created any new jobs in the first three years, the economy faired well in the following three years, but this cannot be specifically attributed to the tax cuts.

Evidence is made of the Clinton tax raise in 2003, where the American total job estimate was 111 million and six years down the line, there was a 16.5% increase in job creation (Center for American Progress 2). This means that the rise in job creation during the last three years (of a six year time span after the tax cuts were made law) cannot be solely attributed to the tax cuts.

The Bush tax cuts also never did much justice to the economy either because the national economic growth rate was more stagnant when compared to the Clinton economy. There is a 10% difference in the economic growth rate between Clintons regime and after Bushs tax cuts were made law.

This is true because in the first six years after Clinton clinched power, the national gross domestic product (GDP) grew by 26% but after the Bush administration administered the tax cuts, the GDP only grew by a paltry 16% (Center for American Progress 2).

The following diagram represents the fall in GDP during the tax cut period:

This means that the tax cuts never added any value to the economic growth, as much as it should have (or was projected to). In fact, in comparison to previous GDP estimates after the Second World War, the GDP growth never decreased to 16% because it never went below 22% (Center for American Progress 2).

These facts were recorded despite President Bushs affirmation to the American population that his tax cuts would deliver real and immediate benefits to middle-income Americans (Center for American Progress 2).

To cement the failure of the Bush tax cuts, the national income for the population never increased in the same proportion it was predicted. The Center for American Progress affirms that:

Real income for the median American household went from $51,356 in 2001 to $52,163 six years lateran increase of just 1.6 percent. Under President Clintons tax rates, real median household income went from $45,839 in 1993 to $52,587 in 1999an increase of 14.7 percent (2).

These indicators simply show that the Bush tax cuts were a complete failure and in instances where positive results were registered, little evidence can be traced to the role decreased tax cuts played in registering positive results.

There is therefore no point of continuing something that obviously does not deliver what it was supposed to deliver. There is therefore no reason why the American population should expect any more from the Bush tax cut system than what they have experienced in previous years.

Tax Cuts On Middle Income Population and Pending Obstacles

Extending the tax cuts for the middle income population is proving to be a fruitful venture because of the current economic situation in America. In other words, it is important for the government to maintain the tax cuts for the middle income population; at least temporarily, until the economy completely picks up, before the government considers withdrawing it.

This is important because the economy is still on a recovery phase and withdrawing the tax cut is not going to ease the recovery efforts in any way. However, for the top earners, the tax cuts should be immediately withdrawn because they do not need the tax cuts as much as the middle income and low income earners do.

However, the biggest obstacle to achieving this goal is founded on the fact that the rich have a very strong influence on policy formulation while the poor have a very small say in the same process. Moreover, the policy makers are largely comprised of the rich and elite in the society and therefore, advancing agendas that may not be beneficial to them may be a difficult task.

Conclusion

This study notes that the Bush tax cuts have not added much value to the economy as it should have. Letting the tax cuts prevail any longer would only be counter progressive to the goal of achieving long-term and cheap means to economic prosperity.

However, there is an exception to eliminating the tax cuts for the middle income population, at least temporarily, because the economy is still in a fragile state and needs the tax cuts for this income group. This compromise therefore needs to be observed for the interest of the majority.

Works Cited

Center for American Progress. Three Good Reasons to Let the High-End Bush Tax Cuts Disappear. 2010. Web.

Citizens for Tax Justice. Ctj Analysis Of Bush Plan Updated To 2001 Levels. 2001. Web.

Department of the Treasury. General Explanations of the Administrations Fiscal Year 2002 Tax Relief Proposals. 2001. Web.

Harvard Law School. The Bush Tax Cuts of 2001 and 2003. 2008. Web.

Los Angeles Times. The Tax Cut Debate. 2010. Web.

Small businesses have certainly started to play an important role in the growth and development of a lot of economies in the world today, and they are becoming increasing popular. The reasons for this are not particularly hard to discern. Growing firms provide significant benefits to regions, with job generation, knowledge spillovers, economic multipliers, innovation drivers and cluster developments. The exact processes of growth and an analysis of the development and transitions from small to high growth rates and size development have generated limited study from an initial review of literature. The birth of new firms and their subsequent growth or failure has captivated the interest of researchers especially during the past decade and a half.

The central theme dominating this segment of research focuses on the question effects of federal tax policy on small businesses like my business organization that is involved in small-scale farming.

Individuals and organizations tend to change their behaviors in response to changes in federal tax policies. The policy on economic incentives to businesses affects my organization in a number of ways. Tax policies come along with various economic incentives that are precipitating factors for involvement in a number of activities and investments. According to Page (1983), Implications of Federal tax policies of significance to farmers are particularly notable in tax burdens, land prices and the ownership of capital assets, the cost of capital relative to labor, the size and organizational structure of farms, management and husbandry practices, and product supplies and prices.

In addition the above, there are the tax burdens. The federal tax policies of various farm tax provisions have the profound effect on small farms and business organizations that trade in farm out puts. The special agricultural tax preferences have significantly reduced the tax burdens on farm income. This has led to increased earnings in my organization which recorded profound increase in its income by 30% for last quarter. Where the business case shows gains or net cash inflows, taxes operate to lower overall gains because operating income and capital gains are normally taxed; If the total income tax rate is, say 30%, a $100 operating gain becomes a $70 net gain after taxes (Pechman, 1987).

A lot of changes in our levels of income are expected to be realized after an analysis of the CBOs budget. This is because, tax policy incentives to farmers and farm input have been further enhanced to assist the small farming business units record high income turn over. Furthermore, policies in regard to new tax provisions that include income averages, an improved level of self employed insurance remittances, increased levels of capital expensing, and low tax rates on gains accrued from capital on the new budget by CBO is envisaged to slow down rates of our the organizations progress. Budgetary Effects of the American Workers, State, and Business Relief Act of 2010; Senate Amendment 3336, as introduced by Senator Baucus as a substitute for H.R. 4213 has had direct impact on farming businesses.

The federal tax structure and budget may affect by organization in number of ways. According to this budget, the department of transportation received  $72.5billion + $48.1billion from the recovery act, this amount is expected to impact positively within my organization. Agriculturally based, my organization depends on transport to effectively deliver its produce to the consumers at exact times. This is in view of the fact that this amount is expected to be spent by the department of transport for improvement of safety and reduction of congestion.

In addition to this, the federal government has appropriated $5 billion for the improvement of the railway system. These will stir growth within the export industry and make heavy cargo movement faster and cheaper.

The department of agriculture received  $26billion + $6.9billion from recovery act that is aimed supporting the small farmers and the rural residents involved in small farming acidities. These funds are aimed at the expansion of broad band within the rural areas, the development of rural energy that has hampered the fast development of this critical sector of our economy. Lastly, this amount is expected to be used in the provision of strong support for child hood education. The most notable impact to my organization will be increased national supply of home-grown renewable fuels with a budget of $250,000,000 this years federal budget.

Lastly, the department of commerce that received a federal budget of $13.8billion+$7.9billion from recovery act will be involved in the development of weather satellite and climate centers. The roles of technological innovation in economic development and entrepreneurship are heavily stressed within this budget. This budget allocation is therefore expected to positively impact on my organization.

In conclusion, the impact of federal tax policy and the federal budget run widely and affect a range of activities undertaken by small scale businesses. It is therefore true that my organization is expected benefit from a wide range of governments incentives and budget allocations.

References

Page, B.I. (1983). Who gets what from government? University of California Press.

Pechman, J.A. (1987). Federal tax policy. Washington. Brookings Institution Press.

The development of the information and communication technologies sector leads to significant changes in economic activity that require the introduction of appropriate instruments of state regulation, including tax and customs tariffs. At the present stage, it is important for the state to ensure taxation of transforming business processes and financial transactions. The formation of the digital economy is a process of global changes in all areas of activity, especially public administration. The emergence of the newest financial instruments based on digital technologies in the economies of countries requires solving a number of problems in taxation. Moreover, not only the state is interested in the prompt resolution of taxation issues, but also market participants  taxpayers. This is because the absence of specific legal aspects of the definition of digital money does not represent the possibility of amending the Tax Code and other legislative acts on taxes and fees.

The formation of the digital economy determines the need for appropriate development and improvement of the processes and mechanisms of state regulation. The area of taxation, tax policy and customs and tariff regulation are not an exception here, and even, on the contrary, require priority attention. Taxes, fees and customs duties, as well as the mechanisms for their administration, must be consistent with the transforming economic processes and technologies of financial transactions.

The active transformation of traditional ones and the creation of new sectors of the economy due to the rapid development of information and communication technologies require revision and rethinking of some principles and approaches of tax law. It implies consideration of the formation of the state tax policy. First of all, the digital economy is characterized by the predominance of intangible assets over tangible  these are the main product manufactured by companies in this sector. For example, the so-called software as a service (SaaS) is popular. In this case, the consumer pays for the right to use, for a limited time, the capabilities of the software located in the virtual data storage (in the cloud) (Boccia & Leonardi, 2016). The first difficulty is connected with this  the mobility of intangible assets. In order to reduce the amount of taxes paid, companies prefer to formalize the rights to such assets to affiliated enterprises registered in offshore jurisdictions.

The most important component of the global digital economy is e-commerce, which includes e-trading, e-capital movement, e-data interchange, e-money, e-marketing, and banking. All the main problems of taxation of e-commerce are typical for the EAEU countries, the European Union and the United States (Haslehner, 2019). One of such problems relates to the taxation of digital products and online services in the B2C (transactions between end-users and enterprises) and C2C (transactions between end-users) segments.

First, it is difficult to carry out control of e-commerce. Nowadays, it is possible to establish the identity and location of the buyer only by the data of the bank card. However, if payment is made through an anonymous system, it becomes impossible to identify the buyer. The problem of the tax authorities inability to trace electronic transactions is unresolved for all states. The possibilities for tax evasion in the face of a lack of reliable technology seem endless (Olbert & Spengel, 2019). Therefore, it is necessary to develop new technologies to identify transactions in cyberspace. One of such identification mechanisms can be a cloud-based electronic signature, with the help of which people could register all their actions on the Internet, in particular, conduct and confirm transactions. Also on the agenda, there is the development of the smart contract blockchain technology, which provides guarantees for transactions and fixes all changes in the process of their registration.

Many countries are developing legislation for the taxation of Internet commerce on their own. However, this does not bring many results, since international trade is carried out on the Internet, and for its effective regulation, appropriate international rules are needed. Under the influence of the digital economy on the taxation system, the structures of tax legislation are becoming more complex. For example, EU Implementing Regulation No. 1042/2013 establishes special provisions that determine the location of the end-user of electronic services (Olbert & Spengel, 2019). Many governments are concerned that companies such as Apple and Facebook are accumulating profits in jurisdictions with low taxes, rather than where users are located. The Organization for Economic Co-operation and Development (OECD) has been studying this problem for several years. In February 2018, it presented for consideration three options for its solution. In October 2019, it outlined the main approach she proposed  companies must pay taxes in the countries where they make a profit, and not only at their place of registration (Haslehner, 2019). The OECD plans to come to an agreement on this issue by the end of this year.

Currently, the generally accepted approach to solving the problem of the mobility of intangible assets is to link the place of sale of services to the location of the buyer. For example, on January 1, 2015, Directive 2008/8/EC entered into force in the European Union, which established that the place of sale of electronic services is the location of the buyer. At the same time, this approach cannot be considered fully effective. In particular, it is difficult to apply in the model of multiple buyers (crowd-funding) in the case when several thousand users, who are residents of different countries, finance the creation of an intangible asset. Also, one of the features of the digital economy is that the number of buyers is not always equal to the number of users (Faulhaber, 2019). For example, Kaspersky Anti-Virus software can have one customer  an individual and two users (the company sells one license that can be installed on two devices). Another option is the possibility when there can be one customer  a legal entity with one hundred users of employees who can be physically located in different countries (jurisdictions). Another tax challenge in the digital economy is the definition of a permanent establishment. The Baseline Erosion and Profit Shifting Action Plan (BEPS) reflects the following approaches to a fairer and more efficient solution to this issue through (Englisch, 2016):

• Approval of new criteria for taxation based on the concept of significant digital presence, and not on the theory of permanent (physical) representation of the company;
• Exemption of offices from the status of permanent representations, if their only purpose is storage, display, delivery of goods or collection of information for the company;
• Approving a tax on digital transactions at the source (service provider) and limiting the ability of companies to show profits in countries in which they do not conduct real economic activity, but only own intellectual property.

Also, to solve the problem of establishing a presence in the BEPS jurisdiction, the concept of a significant economic presence was investigated, the main indicators and principles of which are as follows (Englisch, 2016):

• Availability of gross income received from buyers in the given state;
• Setting a certain threshold value for such income;
• Compulsory registration for companies receiving gross income from the state above the threshold;
• Presence of a local domain name;
• Availability of local website content oriented towards the internal buyer, payment options;
• Entering a value called MAU  monthly active users;
• The fact of the conclusion of contracts through the online platform.

In addition, it is necessary to recognize that some approaches and rules have lost their relevance. The obsolescence of the market price concept in the digital economy is one striking example. The practice of applying tax legislation should be revised taking into account the objectivity of the applied pricing policy. In the context of the development of new business models of the digital economy, it is necessary to harmonize the tax laws of the countries, to work out and consolidate legal norms. In order to implement the principle of certainty and reduce the risks of tax evasion, it is proposed to use the developed scheme for determining the location of the end consumer of electronic services (Boccia & Leonardi, 2016). The creation of new technologies and the use of modern tax administration tools will reduce the risks of tax evasion in transactions made in cyberspace.

From a tax point of view, e-commerce transactions should be divided into two components. The first one implies remote purchase of tangible goods (services) through virtual stores or platforms, but the delivery of goods (services) is carried out through sales channels mechanically with payment or electronic payment or in cash to the courier (representative of the seller). The second one requires remote purchase of digital content (including electronic services), the order, payment and delivery of which are carried out virtually using modern information and communication technologies. Tax problems in the first case are related to tax regulation and control of sellers activities (their profit from sales), but the movement of goods (services) can be tracked and subject to indirect taxes (Boccia & Leonardi, 2016). In the second case, digitalization of commerce complicates external control over the receipt of payments by sellers, as well as the fact of delivery of virtual content to consumers.

In the process of cross-border e-commerce transactions, the movement of goods and a number of services between countries can be tracked and monitored for the payment of the corresponding indirect taxes and fees (customs duties, VAT, excise taxes, which are usually shifted to the consumer), but the country where the buyer is located does not claim to tax remote income: a seller who is a resident of a foreign jurisdiction. At the same time, the jurisdiction of the final consumption of goods (services) may require remote retail exporters to pay VAT. Thus, modern tax administration tools would reduce the risks of tax evasion in transactions made in cyberspace.

This is done to equalize the conditions of competition, since in the case of distance selling, sellers from foreign countries may have unreasonable advantages in the market of the country of sale of products associated with compensation for VAT when exporting in the country of residence and the absence of a tax agent who pays VAT for them when importing. With cross-border supplies of digital content closely interconnected with intellectual property rights, as well as taking into account the rapid digitalization of services, it is also difficult to control the fact of delivery of such virtual products, which complicates taxation.

If remote ordering and virtual payment via electronic communication channels are used, in the case of delivery of tangible goods, the seller as an exporter is refunded the value of VAT, but he will have to pay export duties (if any) and excise taxes. Further, after the goods have crossed the border of the buyers jurisdiction, the buyer is responsible for paying the import duty for remote deliveries (without the participation of resellers in the country of destination). In some cases, especially for bulk deliveries for the purpose of subsequent resale, the buyer will also have to pay VAT (sales tax) and excise taxes (for excisable goods).

The specificity of modern international trade is that it is dominated by non-digital content. Currently, digital products account for less than 1% of the value of world exports and imports, and their share has even declined: in the early 2000s, it exceeded 2% (Haslehner, 2019). In addition, the issues of taxation in cross-border supply of digital content are quite well regulated: since 1998, the OECD has purposefully addressed this problem by proposing both criteria for classifying the place of origin of income from a sale and purchase transaction. Moreover, interpretation of existing tax agreements taking into account e-commerce transactions with digital products was carried out (Haslehner, 2019). Accordingly, the main tax problems in cross-border e-commerce transactions currently relate to the movement of tangible goods ordered using electronic communication channels between sellers and buyers.

At present, due to the not too noticeable absolute and relative importance of electronic commerce, including cross-border, the fiscal effect of taxation of its income and operations for national budgets is still insignificant. In such conditions, tax regulation of cross-border e-commerce should focus not on the tasks of increasing the collection of direct and indirect taxes in this area, but focus on the stimulating role of taxes. In turn, it would contribute to the dynamic development of a potentially significant virtual area of international trade. Low taxes on income and cross-border e-commerce transactions can even contribute to positive economies of scale driven by the growth of trade and related activities.

It is obvious that in the context of digitalization of both national economies and the entire system of world economic relations, significant changes will appear. Cross-border flows of goods, services, and intellectual property products, the movement of which is mediated by electronic channels of information exchange, will continue to grow. Due to e-commerce, in particular, the traffic of postal items in national and cross-border messages, in which goods ordered from online stores are sent, has significantly increased. This has a positive multiplier effect for the development of transport, communications and logistics centers, postal and forwarding services, it contributes to additional employment of the population as drivers, couriers and operators of the mail delivery system.

The corresponding additional income of business and the population, in turn, will be taxed on labor and capital, increasing the revenue side of state budgets. Undoubtedly, these consequences should be taken into account by the tax systems of all countries interested in the development of the world and international organizations involved in tax regulation. Among the main problems of tax regulation of cross-border e-commerce transactions, researchers include the following: 1) competitive advantages of foreign remote sellers of goods sold through Internet platforms over Internet retailers of the country where the buyer is located based on differences in national tax systems; 2) a high degree of buyers sensitivity to changes in taxation and customs regulations applied to foreign Internet sellers; 3) possible abuse in the field of B2B associated with electronic commerce by transnational business structures for tax optimization purposes; 4) imbalances in direct and indirect taxation in integration communities that stimulate cross-border trade based on differences in the rates of income taxes, VAT and excise taxes;

The task of tax regulation of electronic trade in goods is to create equal competitive conditions for internal and external online sellers. This is done by leveling the low tax burden of distance retailers from countries that actively stimulate exports. However, increasing the fiscal burden on imports through online shopping needs to be approached with caution, as higher prices due to higher taxes have a negative impact on consumers, reducing their disposable income. According to experts, the desire to regulate almost the entire spectrum of relations in the field of digitalization with the help of legislative acts deprives the corresponding legal array of flexibility (Boccia & Leonardi, 2016; Haslehner, 2019). In addition, in the context of large-scale digitalization, the possibility of regulating a number of social relations within the national jurisdiction of the state becomes very relative.

In this regard, the role of international legal regulators is noticeably increasing. Modern financial relations and their legal and tax regulation, most likely, are subject to in-depth research from the standpoint of defining the concept of electronic money for tax purposes. It implies consideration and study of the specifics of these legal relations as an object of taxation. Moreover, studies of foreign models of legal regulation of taxation in the digital economy are necessary, as well as creation of legal relations and their regulation in the taxation of crypto-currencies.

Based on the supranational nature of the crypto-currency, it can be assumed that there is a certain jurisdiction with a reasonably low tax burden, within which a number of taxes cannot be levied  at least in relation to the production of new units of the crypto-currency. The latter is popular due to low transaction costs; tax avoidance is not a factor in their development  offshores are in demand exclusively as tax havens. User anonymity makes crypto-currencies an analogue of offshore companies, and, despite the fundamentally different nature, the risks of erosion of the tax base due to crypto-currency are even higher due to the fact that they do not depend on financial intermediaries (Haslehner, 2019). Interaction with banks today allows the tax authorities to receive information on the movement of capital.

Based on the supranational nature of the crypto-currency, it can be assumed that there is a certain jurisdiction with a reasonably low tax burden, within which a number of taxes cannot be levied  at least in relation to the production of new units of the crypto-currency. User anonymity makes crypto-currencies an analogue of offshore companies. Often in different countries, the first initiatives to introduce crypto-currencies into the legal field were put forward in the context of tax regulation and tax administration before the official recognition of the status by the authorities. Gradually, the scientific community comes to the conclusion that crypto entrepreneurship is an income-generating activity that is subject to taxation.

It is important to note that the financial authorities have not formed an agreed position on the taxation of crypto-currencies in countries where mining is most profitable. It takes into account factors such as the cost of electricity, ease of doing business, availability of renewable resources, average Internet speed and average annual air temperature (Canada, China, Switzerland, Russia) (Faulhaber, 2019). In a modern economy, activities related to crypto-currencies need a preferential treatment, for example, the release of transactions performed in an insignificant volume, not exceeding a certain threshold. The arguments in favor of preferential taxation of mining are, firstly, activities related to crypto-currencies, based on promising blockchain technology, and secondly, reducing the costs of tax administration. The third factor is the growing international tax competition due to the fact that proposals are put forward abroad to soften the approach to taxation of crypto-currencies.

The era of digitalization, the digital economy, tax transparency force the whole world to keep pace with the times and develop new concepts and mechanisms to create a level playing field for all business entities in the tax area. Until the OECD developed a single concept that would allow all countries to play by the same rules, as in the case of the BEPS plan, some states have chosen their own path and adopted legislation providing for taxation of large digital companies (primarily digital corporations such as Google, Amazon, Facebook, Apple).

France became the first European country to impose its tax on digital services from American tech giants, and other European countries have followed suit over time. On July 11, 2019, the French parliament finally approved the legislation on the so-called GAFA tax, which stipulates that every large IT company with at least 750 million euros in profit, of which 25 million euros  from products and services sold in France, must pay 3% of the income of its local unit to the state (Haslehner, 2019). It should be noted that the introduction of such a tax caused an ambiguous reaction from the United States and the OECD. Italy also followed this path, setting a new tax of 3% in the 2020 budget (Haslehner, 2019). The last country to introduce such a tax is the Czech Republic  the government there has approved the introduction of an annual tax for Internet companies Google, Amazon, Facebook and Apple.

In general, the increase in the share of the digital economy in the volume of the traditional economy, with the inevitable inevitability, confronts the scientific and expert community and the state with the need to revise many well-established approaches to taxation. It can be assumed that the changes will affect not only many norms of the Tax Code, but also the provisions of conventions on the avoidance of double taxation, approaches to the regulation of transfer pricing. Obviously, tax systems need to be neutral with respect to various types of e-trading, as well as e-commerce and traditional forms of business.

Taxpayers carrying out similar transactions should be subject to corresponding tax obligations. At the same time, tax rules should be clear and easy to understand, so that taxpayers have the opportunity to determine in advance the tax consequences of transactions, including the time, place, and procedure for calculating the tax. Opportunities for tax evasion should be minimized while balancing the scope of action and the magnitude of the risks, but at the same time, the tax system should be flexible and dynamic and keep pace with developments in technology and commerce.

References

Boccia, F., & Leonardi, R. (2016). The challenge of the digital economy: Markets, taxation and appropriate economic models. Palgrave Macmillan.

Englisch, J. (2016). International tax law: New challenges to and from constitutional and legal pluralism. IBFD.

Faulhaber, L. (2019). Taxing Tech: The future of digital taxation. Va. Tax Rev., 145. Web.

Haslehner, W. (2019). Tax and the digital economy: Challenges and proposals for reform. Wolters Kluwer.

Olbert, M., & Spengel, C. (2019). Taxation in the digital economy: Recent policy developments and the question of value creation. ZEW Discussion Papers, No. 19-010.

The effects of the Tobin tax on the direct and indirect financial intermediation

Tobin tax is a type of taxation that is commonly used to restrain speculative trading in order to raise revenues. The European Union has suggested the inclusion of a financial transaction tax in their countries. However, this is faced with opposition from fifteen countries, including the United Kingdom. The tax has both negative and positive outcomes. If implemented, the tax will play a major role in ensuring there is fiscal consolidation without having any direct impact on the economy. In addition, the tax can enhance long-term investing, hence contributing to the market constancy (Reisen 1).

On the other hand, financial services would not be exempted from any value-added tax, thus making sure there is a reduction in a competitive business. However, the Tobin tax would have a huge negative impact on the UK financial services. The reason is that the commission has put it clear that the financial transaction tax will not only be implemented to financial institutions that are within the FTT region. It will also be applied outside the FTT region in case the transaction is carried out with a counterpart, which headquarter is in the region (Reisen 1). In addition, financial investors are more likely to be affected by the tax. For example, invested vehicles that require constant trading will suffer from the highest tax strain.

The ability to hedge risks

The implementation of an FTT would lead to increased hedging risks and costs. The reason is that whenever an investor involves in a project using foreign currency, he/she/company is faced with an exchange rate risk. With the Tobin style of taxation, investors would be unwilling to sell their risks. Therefore, hedging will create insufficient risk allocation. Moreover, tax on derivatives will make it very expensive to hedge against any risk.

Effects on global bond, equity, and derivatives markets

Global bonds, equity, and derivatives markets will be negatively affected. MMFs will be required to incur tax on secondary markets since there may be an increase in operational costs. There will be a huge effect of FTT on money market funds. Investors who contribute to funds will be forced to pay double taxes (Food 1). The first way they will be paying tax will be through selling and buying units of a fund. The second way will be when the fund sells or buys securities that it uses to invest.

What the tax might mean for you?

The Tobin tax will mean a lot to me. According to my understanding, the Tobin tax makes those who are targeted by it more likely to avoid the levy. Small businesses will be left behind struggling. The likelihood of people losing jobs will increase. The financial trading will go up since banks will be trying to recapture the cost of doing business. An increase in the cost of doing business leads to losses in a business. A business will be forced to cut the cost through job losses. The main impact would be on small businesses.

Will it affect the US?

Tobin tax will not be introduced in the United States. The reason for this is that the United States of America was against its implementation globally, especially after the 2008 economic recession. The government of the United States insisted that the Tobin tax was not well-suited to the free movement of capital. Several other bodies, such as The Financial Services and the US Chamber of Commerce, have already raised their voices against the tax. The two bodies have already written a letter to the commission indicating their reasons for opposing the Tobin tax. Economists in the United States argue that the Tobin tax has never been tested anywhere else in the world.

Works Cited

Food, Chris. Tobin tax push causes dismay. Financial Times. 2013. Web.

Reisen, Helmut , Tobin Tax: Could it work? OECD Observer. 231/232(2002): n.pag. Web.

Introduction

The government taxes the property of individuals after their death. As a result, taxation does not affect the successors as they inherit an after-tax estate. However, the heirs must pay any outstanding property taxes from the deceased individuals estates income. Therefore, family-business proprietors should be extremely careful when planning to reduce their property taxes to ensure that the estate beneficiaries do not suffer in the future.

Main Body

In Connecticut Fairfield, tax laws such as the unified credit exemption regulations are complex because they keep changing. For instance, the government increased the exemption to $1 million, $3.5 million, and $5.12 million in 2002, 2009, and 2012 respectively (Tax Foundation). Due to this reason, property owners try to look for ways of reducing government taxes on their property in case of death. However, some proprietors forget to address essential generational transfer aspects such as the relationships with their relatives, the CEOs retirement needs, and their monetary requirements. Therefore, proprietors should aggressively plan their business continuity early by properly leading their families and estate managers to avoid using the tax courts in the future when the owners are dead.

Governments introduce different laws on property inheritance taxes every year. Before the millennium, the American tax laws allowed authorities to credit inheritance taxes to business owners accounts. Governments use the credits to improve the economy, particularly during economic depressions (Lahijani 97). In early 2005, the American tax laws permitted the authorities to treat inheritance taxes as deductions but not as credits. This decision had a two-fold effect because some states tax liabilities increased instead of decreasing. Since the implications for individual businesses differ depending on the state and property, estate owners do not have to consult tax experts. However, the proprietors should plan their estates appropriately and transfer essential values to the next generation, including non-family members who might manage their property in the future.

Conclusion

In summary, tax laws such as the unified credit exemption regulations keep changing in Connecticut Fairfield, and other parts of the world. These amendments greatly affect citizens either positively or negatively as the tax liabilities increase or decrease, and the amounts of money transferred to estates beneficiaries change. Therefore, estate owners should considerably reduce their property taxes according to the tax laws to ensure that those who inherit the estates remain comfortable in the future.

Work Cited

Federal Estate and Gift Tax Rates, Exemptions, and Exclusions, 1916-2014. Tax Foundation, 2014, Web.

Lahijani, Richard. Happy 45^th Anniversary to the Earned Income Tax Credit. Thoughts on One of the most Expensive Costing Credits in the US Tax Law. The Journal of Applied Business and Economics, vol. 22, no. 4, 2020, p. 97.

The debate that tax cuts may increase disposable income or reduce burden and boost economic growth is controversial and unsettled. Some believe increasing tax burden on corporate inversely affect the social welfare of the economy while others argue that they enhance growth.

Those who are not satisfied with the tax-cut arguments believe that the revenue earned from increased taxes can be directly invested in developmental activities. This essay discusses some of the arguments for and against reduction of corporate taxes and the way it may affect the social welfare of the economy.

One of the arguments presented in support of tax-cut is that taxes have an overbearing burden on firms. The tax burden argument suggests that taxes already are overbearing burden on the organizations that pay them. These taxes are believed to directly affect the business revenue and/or increase the cost to the companies. More directly, taxes have a negative effect on the profit of the businesses.

When profits are lowered, it reduces the capability of firms to expand their business, employ new people, or invest in newer avenues. Further, the supporters of this argument believe that as different states different tax burden, the businesses tend to move to states that keep the tax burden lower. In other words, the supporters of the tax-burden argument believe that with higher tax rates, the profit of firms are reduced therefore, reducing the capacity of companies to expand business.

However, the tax-burden argument has certain flaws. Critics believe that state and local taxes on businesses have a relatively small burden operating costs and therefore have little effect on firms profit. These after-tax profits are also lower as these figures do not capture the real tax cut as the tax incidence (i.e. people who actually pays the taxes) are not considered while making these accounting calculations.

Further, after-tax profits of the firms do not vary significantly after the state taxes are applied to their profits. This is so because the federal taxes have a leveling effect on the state and local taxes deductions. Further, taxes provide support to the public, which in a way is aimed to reduce costs of businesses. Therefore, taxes are not essentially burden to the firms.

Therefore, understanding the pros and cons of the tax-cut arguments shows that state and local taxes have a small burden on the businesses and are unlikely to affect their operating costs.

Another prevalent argument for tax-cut is supply side argument. It is argued that tax cuts allow firms to increase their profit and therefore their savings, which is directly invested towards economic growth. Individual tax cuts also enhance the propensity of people to save more and therefore increases their desire to earn more. In case of businesses, applying similar argument, it can be intuitively deduced that lower taxes would increase profit, and therefore, higher liquidity to invest in different areas of business.

Some of the problems with the supply side argument are that research demonstrates that the positive effect of tax cut as an incentive to worker more is grossly overestimated. The second problem with the argument is that tax cuts may actually act as a negative impetus to work as people will have more disposable income with lower taxes and therefore may feel less need to work.

Evidence shows that as after-tax income has increased over the years, people have chosen to retire earlier in their work-life-span, which actually shows that tax-cuts may lead to the desire to work less. Further, supply-side tax cuts may increase income inequality between those who work hard and those who do not. So the critics argue that as tax is not related to work effort but directly to income, income inequality may not induce greater work.

On the other hand, greater inequality of income may increase the amount of the dissolution among those who fail earn more. Further, even if there is a greater savings among individuals of a state due to tax-cut, overall it will have very little effect on differential savings in comparison to other states, and therefore, lead to very little investments. The supply side tax-cut arguments do not fully comprehend the demand side effect of tax cuts that are more likely to reduce economic growth.

The demand side argument for tax cuts is that economic growth and businesses grow as people spend more or have higher demand. Hence, with tax cuts, which would lead to greater disposable income, individuals can spend more, therefore increasing demand. Therefore, this is likely to increase jobs.

This demand side argument has two weaknesses. First, state tax cuts do not have any significant effect on the spending impulse of individuals, therefore, not affecting demand. However, such tax cuts actually reduces local government revenue, and therefore, within state public spending. The second weakness is that demand side theory supports tax increase by local authorities.

Proponents of tax-cuts believe that a reduction in local taxes would positively affect the business climate as it shows that the state being supporting of business. however, the weaknesses of this argument is that businesses are influenced by the mere concept of perception of a state being lenient. A firms decision to do business in a state is based on many more factors than just tax burden. The second reason against this argument is that it may negatively influence the business climate.

Lower taxes, it is argued, would make the local governments more competitive in attracting businesses for it is assumed that states engage in economic competition amongst each other. However, certain weaknesses against this argument are that local governments must provide tax cuts and incentives to lure businesses and retain them in the state.

However, such tax cuts may send out a wrong signal and give out a perception that the local body has difficulty in retaining businesses. State taxes are meant as revenue for local bodies to utilize it in local developmental activities. A reduction in the taxes would imply reduced income of the local bodies and directly affect the developmental activities.

In order to enhance developmental activities, it is more advisable to redirect the revenue earned of taxes towards strengthening child education system. This would help many poor and underprivileged children would otherwise receive no education and proper way of life. Child development programs actually help in enhancing the intellectual and educational capability of the children.

Further, such programs would also help in higher graduation rates from schools, leading to higher employability and consequently, earning. A better life earned through a better education would eventually lead to better health among the children. Higher incomes imply less welfare dependency, therefore reducing state burden, and lower crime rates. Eventually this would lead to greater government savings.

Abstract

This study is designed to provide a broad range of proposed GST in Hong Kong. The provisions of GST and other taxation laws applicable to taxation that have filed in chapter 1 to 7 are discussed in details. This study also explained the provisions of the IRD that relate to the Goods and Services Tax in Hong Kong. This study, generally, criticised the proposed Goods and Services Tax in Hong Kong.

Introduction

Tax administration of a particular country is a significant concern as the issue of development solely depends upon the fact how efficient and working the tax mechanism of a particular country. Countries of the world have different taxation policies in the light of their particular economic structure and socio-economic consideration. Taxable capacity of a country depends upon the sum of profits, wages and rents (Shoup 1960, p.192).

While discussing about the taxation system of a Particular country, GST or Goods and Services Tax is an important topic. Different countries of the world have introduced the system for developing their economic advancement. Developed countries are making the example that Goods and Services tax is tremendously helping to boost their economies. Hong Kong is an important place in the Asiapacific region for trade and commerce due to its laissez faire policy and infra-structure development. As it is considered the hub of trade and commerce, foreign investors find Hong Kong for developing their industrial and commercial relations worldwide.

One of the reasons for choosing Hong Kong as an ideal place for businesses is its simplified taxation system. The existing tax mechanism of the country does not levy Goods and services tax. As the country has faced a budget deficit and economic disturbance in the recent years, it has decided to introduce Goods and Services tax (GST) in the taxation system. To this end, Government has proposed an enactment for the introduction of the said instrument entitled Arrangement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income. The said legislation was signed on August 21, 2006 and took effect (for Hong Kong residents) from April 1, 2007 (Stender 2006, p.1).

Problem Statement

As a part of its tax reform initiative, Hong Kong has proposed this tax legislation. After forming a committee, the Government has entrusted them with the responsibility of drafting a proposed tax instrument. Accordingly, the committee has prepared a draft copy of the said tax legislation and subsequently Government has arranged the means for the publication of it with an ultimate intention of giving this into effect. But, the instrument is crippled with numerous problems. It is seemed that while enacting this draft legislation, committee did not consider the need and interest of the people; rather it was more devoted in developing the ways and means for generating more revenues in public fund.

The provisions as drafted in this instrument articulate that all the goods for consumption and necessary services would be subject to tax, i.e. every commodity used in the day to day life of the citizenry are levied. Again, the exports and imports goods have also been levied. This hinges on the development of businesses and investment. The rate of Goods and services tax (GST) is too high as an initial rate. The legislation was not consulted with the businesses and professional bodies. But, for the necessity of the successful implementation and determining the merits and loopholes of the legislation, consultation with the businesses, professional bodies and citizen group was badly necessary (Dowell 2004, p.67).

Definition of Key Words

While attempting research over the topic, several keywords have been used in the present study. The key words as has been used warrant explanation for the conveniences of proper understanding and duly evaluate the key messages of the study. The key words that have been used in the study are as follows:

• Inland Revenue department (IRD): This is the central board of revenue in Hong Kong which is empowered to oversee, monitor and regulate the entire revenue functionaries in Hong Kong.
• Goods and Services Tax (GST): This is referred to the tax levied in almost in every economy of modern times and is levied on every goods that are consumed in each stage from production to the final disposal in the hands of customer.
• Value Added Tax (VAT): It has semblance with the goods and services tax to some extent. But, certainly, it has some characteristics which differ from goods and services tax or any other type of tax.
• Securities and Futures Commission (SFC): It is one of the auxiliary bodies in the tax administration of the country. It closely helps Inland Revenue department for the disposal of its functions.
• Special Administrative Region (SAR): It is considered that Hong Kong is one of the provinces and economic capital of china.
• Taxation: Taxation means the process of levying or taxing. There are some certain considerations for levying tax. The key considerations of Levying or imposing tax are determined in the context of a given economic structure.
• Sale Tax means the tax that are levied upon the goods or product used for the human consumption. The rules and rate of determining sale tax are prescribed in pursuance of the legislative instruction of a given country.
• Exemption indicates the meaning of tax relaxation or invoking the benefit of reduced rate tax payment. This is applied where there is a question of increased tax rate or certain products are kept away from the ambit of tax jurisdiction.

Objective of the Study

The objective of the present study is to identify the defects and loopholes of the proposed tax legislation in Hong Kong. Through this attempt, the researcher intends to explore the deficiencies and things to be done for the improvement of the legislation and make it an enactment dealing with public welfare. The study also intends to specify the means of procuring more benefits from the enactment and accordingly recommend the suitable guidelines for its successful implementation. Ultimately, the study aims to provide the scope of ensuring maximum output for the true benefit of the common people and making a wider avenue for the more development in Hong Kong through businesses and investment by virtue of this legal instrument.

Methodology

This an analytical as well as empirical study with a view to discovering the defects of the proposed legislation and finding out the possible outcome for ensuring the merit and efficacy of the proposed legislation. To gain success, the researcher has proceeded with a different outlook in order to reach the key considerations of the topic. To this end, the researcher has taken the help from different sources in order that relevant data and information collected can help to make the topic a quality paper which has the potentials to make a radical change in the tax administration in Hong Kong. For this, researcher has taken the help from different texts, journals and internet. The information gathered from that sources have greatly helped the researcher to synthesize the relevant facts and reach in the decisive findings.

Historical Background of GST

A favorable tax regime is important for a country as it helps in promoting economic development. A regular and stable tax system enhances the stability of a fiscal policy and provides the force to introduce and implement the long-term economic policies for the essence of economic sustainability. To introduce a better and world class tax regime, Hong Kong has long been striving to reform it. Accordingly, the tax department has also been sticking to review the tax mechanism and bring requisite changes in it. Hong Kong greatly relies on its tax department as 60% of the total government revenue is collected from tax revenue.

Speaking from an international standpoint, the existing tax base in Hong Kong is too narrow as its source is merely confined to salaries tax and profits tax. So, it is the timely approach to broaden the tax base. To address this problem and introduce a better tax regime, Government has set up an advisory committee in 2000 to examine the feasibility and justifiability of a broad-based tax regime. The committee in its recommendation argued for introducing a Goods and Services Tax Goods and Services Tax (GST)) in Hong Kong.

Asian Financial Crisis

Asian financial crisis is a turning point of recent history in the Asia -pacific region. After the crisis took place in the years of 1997 and 1998, the idea of a Goods and Services Tax (GST) got a momentum position in Hong Kong. The economy of the country is mainly depended upon land sales, lease exchanges, revenues from the sale of government assets. The recent statistical data estimates that in the fiscal year of 2005-2006 , 6% of the total population amounting to 34 thousands hundred taxpayers paid about 75% of salary tax, while in 2003-2004 fiscal year 1% of businesses contributed more than 60% of the total profits tax collections(GST for Hong Kong 2006, p.1). Due to budget deficit, the government in 2000 took a plan to experiment the feasibility of a broad based tax like Goods and Services Tax (GST). Subsequently, Government established a Task Force to find out the core reasons of budget deficit. The Task Force in its report found structural issues being responsible for the deficit (Kibria 2006, p.6).

Formation of Advisory Committee

In 2001, an Advisory Committee on New Broad Based Taxes was introduced in order to ascertain the suitability of introducing new types of broad based taxes. It was held that with the introduction of consumption tax being levied, the tax base of Hong Kong could be broadened. In addition, International Monetary fund in 2004 emphasized upon the Hong Kong Government to consider Goods and Services Tax (GST) for the sake of improving its taxation system.

Abolition of Estate Duty

Estate duty has been abolished in 2005 which has come into effect on February 11, 2006 though it had a positive role in redistributing income between rich and poor. In addition, Revenue (Profits Tax Exemption for Offshore Funds) Ordinance 2006 has been promulgated in March 2006.Additionally, in 2006, Government has arranged a draft legislative instrument entitled Arrangement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income. The said legislation was signed on August 21, 2006.

Importance of Hong Kong as a Heaven of Commerce

Hong Kong is considered as an ideal place for trade and commerce. It is also treated as a heaven of trade and commerce in the Asia- Pacific region for the following grounds:

Good Governance. Hong Kong is an important place for the investment and deal trade and commerce in a healthy way. Decades long, it has been gaining an increasing global fame for the ideal environment in regional and international trade and finance. It is considered as the second largest foreign direct investment recipient country in Asia, next to China. Of course, there are various reasons for being Hong Kong as the most congenial place for cross-border trade and commerce. Good governance is effectively working in Hong Kong as there is rule of law, effective civil service, corruption free public administration, independent judiciary and freedom of press.

Open Market Policy. Hong Kong has a simplified taxation system, skilled manpower, world-class banking system, ICT advancement and All these are contributing to make Hong Kong a prominent place of commercial dealings. One of the reasons of becoming a place of such importance is its open market policy. As a result, Hong Kong has been benefited with huge foreign investments (Rowse, 2003).

Geographical Location. Geographical location, secured and multi-cultural environment and improved communication facilities have attracted the foreign investors. In fact, the concentration of businesses and professionals resulting from geographical location and infra-structural development has strengthened the position of Hong Kong as the hub for business, logistics, finance and services for the region.

Vision of Government. The Government of Hong Kong possess the vision of keeping its business-friendly environment for the mutual interest of the gradual economic growth of Hong Kong as well as help other countries in developing their position in international trade and commerce(Rowse 2003). Everything necessary for the efficient and sound operation and management of a foreign company is present in Hong Kong. So, in the context of international trade and commerce, Hong Kong is gradually getting its momentum position.

Concentration of Export-oriented Industry. Another reason for its significant as a point of trade and commerce is its labour-intensive and export-oriented industries, such as electronics, textiles and clothing, toys and plastics. It maintains a level playing field for foreign and local companies.

There are three types of companies: the limited liability company, the company limited by guarantee and the unlimited company (Luxembourg Chamber of Commerce 2007). The most companies registered in Hong Kong is limited liability company. Such company are limited by shares and may be either private or public company. To operate its functions and activities, each limited company must obtain a business registration certificate. Businesses can mostly be carried out in the form of a sole proprietorship or partnership.

Improved Service Delivery. Hong Kong is prominent for its improved service delivery. It provides, sector-specific issues arrange meetings with professional associations and appropriate companies or organizations and provide PR support during the launch of a new company and foreign companies think Hong Kong as an ideal business place (Yahya 2008).

Simplified Taxation System. The formula of a sound economy in Hong Kong is its low taxes and low government spending. Hong Kong in its commercial policy puts maximum concentration on protecting the interest of Citizens and companies.

Provisions of Proposed GST

Before revealing the discussion as to the provisions of Goods and Services Tax (GST), it is reasonable to give a detail account about the existing tax administration and types of tax prevalent in the current tax mechanism in Hong Kong.

Tax Administration

The entire tax mechanism of the country is regulated through three separate agencies. These agencies in Hong Kong are predominantly engaged to deal the revenue issues of the country. Among all the agencies the most prominent one is the Inland revenue Department. The two other agencies are The Securities and Futures Commission (SFC) and The Trade Department. The Inland Revenue Department (IRD) is the central revenue agency to deal the necessary tax matters in Hong Kong. It oversees monitors and regulates the entire dealings of tax affairs of the country. It is also responsible to supervise the functions and commercial dealings of foreign enterprises in Hong Kong.

The Department is also entrusted with the responsibilities of supervising and collecting corporate and personal tax. The Securities and Futures Commission (SFC) is responsible to monitor, oversee and regulate the Stock Exchange of Hong Kong and the gradual advancement of investments outside Hong Kong. Due to the continuous efforts and policy implementation of the agency, it is gradually improving in matters of manufacturing real estate and any other productive property.

It is commendable that another revenue agency, i.e. Trade Department in Hong Kong plays a pivotal contribution in maintaining tax policies as well as ensuring sound taxation system and help accelerating the economic promotion and development of the country. The Trade Department issues information regarding import and export licensing requirements. Thus, it helps in improving foreign trade and commerce which has been contributing to the growth of trade and commerce as well as boosting the economy of the country.

In order to earn a better result, Inland Revenue Department (IRD) has made many significant changes in its organizational structure. The Department has introduced Information and Communication Technology and has trained its staffs to increase their professional efficiency and make the tax regime more functioning and effective. In its ICT usage, Inland revenue Department (IRD) has included e-filing, e-enquiry, e-payment, e-stamping and the enquiry of business registration particulars through websites.

As a part of its continuous effort, IRD in 2005-06 has further attempted to identify and develop more convenient and user-friendly e-services for the conveniences of its taxpayers. In addition, the department has facilitated its staffs technical database resources and training materials which have excelled their professional standard. The year of 2005 is marked for a significant incident in the history of Hong Kong taxation, for its huge amount of tax collection by Inland Revenue Department (IRD) which has been recorded as high of $145 billion (Yee-ming & Alice 2006, p.1).

Types of Taxation

Every economic system has some distinct features as the determinants of different economic system vary due to different economic considerations. As a result, different economic systems espouse different economic policies. There are several types of tax in the existing tax mechanism of the country.

Corporate Tax

In accordance with the existing tax policy of Hong Kong, all earnings and profits are subject to tax from whatever sources they are accrued. So, the corporate earnings are also subject to tax, i.e., the financial gain earned from trade or business within the territory of Hong Kong is levied in accordance with the provisions of tax legislation. The tax rate is 17.5% since assessment year 2003-2004 in case of incorporated company while the rate is 16% since assessment year 2004-2005 in case of unincorporated company (Mergers, pp.3-4).

Besides, Non-residents in Hong Kong are also governed under the relevant tax legislation of the country in the same way alike the citizenry of the country. So, the income of Non-resident earned by means of trade, commerce, profession within the territorial limits of Hong Kong is under the ambit of tax. In addition, profits earned from exhibition of films, television programming and royalties for the use of a patent trademark, copyright, know-how or other intellectual property are levied. In order to levy corporate tax, following three tests should be satisfied as has been decided by the Privy Council in the Hang Seng Bank Case (Horwath Hong Kong 2003):

1. The company must be carrying on a trade, profession or business in Hong Kong;
2. the company must be generating profits from that trade, profession or business of a type which are subject to profits tax i.e. trading profits / fees as opposed to non taxable capital gains or dividends; and
3. those profits must have a Hong Kong source i.e. they must derive from or arise in Hong Kong.

Personal Income Tax

Apart from any firm or company, income may be taxed in the hands of an individual (Sawday 1939, p.86). Any income which is derived by a person from his estate or any other source is subject to personal income tax (Newton & Bloom 1991, p.47). One of the major problems concerning personal income tax in most cases is that the statement of the said personal income is not properly reported (Consequences, Newton & Bloom. Cited in Newton 1991, p. 125). Personal Income tax in Hong Kong is determined on the basis of the income earned by the individuals. The relevant provision of tax legislation suggests that Individuals are taxed on income derived from employment, offices and pensions in Hong Kong. Non-residents are also subject to the salaries tax if they reside in the colony for more than 60 days in a tax year. The salary tax is assessed on the range from two to 25 percent of net income after deductions and allowances, subject to a ceiling of 15 percent of gross income (HKTDC 1998).

Interest Tax

Interest tax is a kind of tax which is charged on the total interest obtained or received in Hong Kong. The rate of interest tax levied is 17% (HKTDC 1998). Of course, there are a number of exemptions in regard to interest tax. For instance, interest of individuals on deposits is exempted from tax if they engage such capital in doing business with financial institutions.

Property Tax

Under the existing tax legislation, property is also subject to tax. In this case, the tax rate is determined at 17% of annual income derived from property. In determining such rate, 20 percent of total income is reduced for the purpose of considering the matters of repairs and maintenance, land and buildings used for such income (HKTDC 1998). Provisions of Property tax in Hong Kong exempt personal residences and property owned by a corporation carrying on a business in Hong Kong from being levied on the ground of taxable property.

Stamp Duty

Stamp duty in Hong Kong is levied at the rate of which limit may be extended up to 3.75% on the conveyances of immovable property which is payable by each party to the contract in the equal shares subject to the provisions of commercial negotiation. The rate of duty is computed in reference to the degree of higher consideration or the market value of the asset being transferred (Roy 2006, p.4).

Withholding Tax

Withholding taxes are applicable in cases of royalties or other similar payments to a non-resident party. The rate ranges from 5.25% to 17.5%. The higher rate is charged where the payer and the payee are related and the said intellectual property was owned by a person within the territory of Hong Kong. The rate may be reduced in case of the fact that the recipient is entitled to the benefits of one of the few comprehensive double tax agreement where Hong Kong is a party (Gandhi 2007, p. 45).

Other Taxes

Tax provisions of the country have extended its jurisdiction in some other areas. Government policy in regard to vehicle has set tax provisions. So, under the relevant policy and tax enactment, there is a registration tax in Hong Kong on automobiles, motorcycles, trucks and buses. 0.1 % capital duty is applied while authorized share capital increase.

Essentials of Goods and Services Tax

It is very much conspicuous that the essential ingredients of Goods and Services Tax (GST) are: (i) it is applied in all domestic consumption of goods and services and (ii) It is paid by the final consumer. Of course, unlike single-sales tax, Goods and Services Tax Goods and Services Tax (GST) have no cascading effect.

Provisions of Proposed Goods and Services Tax

Sales tax has some other equivalent meanings. It is also treated as Goods and Services Tax (GST) and value added taxes (VAT). Goods and Services Tax (GST) and Value Added tax (VAT) are the same in the meaning that both are applicable in case of consumption by the private individuals. So, the sales tax or Value added Tax (VAT) is different from that of income tax or any other type of tax But, there are some certain distinctions between Goods and Services Tax (GST) and VAT (Value Added Tax) and other taxes.

Goods and Services Tax (GST) is applied on the net value added to a particular good or service while Single-stage sales taxes are applied once either in manufacturing or production or wholesale distribution or in retail sales stage. Again, Goods and Services Tax (GST) is applicable in all services, but sales tax is restricted to a limited range of services. The Asia Pacific region is randomly adopting the Goods and Services Tax (GST)). Examples of some front liner countries adopting Goods and Services Tax (GST) in the Region are Australia, New Zealand, Japan and Singapore. From a thorough analysis over the provisions of goods and services tax in Hong Kong, the following characteristics have been appeared (Runil 2007, p.23):

Continuity

Goods and Services Tax (GST) is a continuous process as it relates to the collection of tax at each stage of production and distribution. Though the intermediary customers are to pay tax, ultimate burden of tax is shifted on the final customer.

Principle of Taxable Supply

Goods and Services Tax (GST) is based on the concept of taxable supplies i.e. things provided are subject to tax. In order to get the privilege of claiming credit in a business transaction, every person making taxable supplies exceeding a legislatively specified sum or engaged in certain business must be registered for Goods and Services Tax (GST).

Shifting of Tax Burden

Under Goods and Services Tax (GST), the tax burden is shifted away from income and run towards spending. As the principles set out, under Goods and Services Tax (GST) everyone is to equally pay as well as suffer the equal hardship.

Rate

There is a difference of rates in Goods and Services Tax (GST) system in the context of a given countrys economic policy. Some states apply reduced rates, exemptions and numerous special arrangements in accordance with their policy demands. Again, New Zealand and Singapore have successfully implemented a single rate Goods and Services Tax (GST) with very few exceptions (Goods and Services p.2).

About Tourist

The proposed Gods and services tax (GST) in Hong Kong asserts that if the tourists buy goods for their consumption outside the jurisdiction they would be paid at the time of purchase and the same is refunded to them when they are on the international departure and it is proved that goods are being exported.

Self-Assessment Tax

It is a self-assessment tax. The entire dealing of Goods and services tax (GST) depends upon the free-will of the taxpayers to comply with the relevant tax legislation. This compliance make the taxation system simplified, while multiple tax rates and tax exemptions make the process complex and burdensome.

Individual Perspective

The nature of Goods and services tax (GST) as has been enshrined is mainly concentrated on focussing from two perspective : a. individual perspective and b. business perspective.The proposed Goods and Services Tax(GST) would have the following characteristics in case of individuals :

1. The taxpayers would get the privilege of a reduced tax rate.
2. an one-off supplement would be provided to the households Social Security benefits; 3. an annual cash Goods and Services Tax(GST) allowance on a per-household basis for low-income households not receiving CSSA;
3. a universal annual Goods and Services Tax(GST) credit for each household to be used against water and sewage charges for an initial five-year period; and
4. a universal annual Goods and Services Tax(GST) credit per household to be used against rates for an initial five-year period.

Business Perspective

In cases of businesses, Goods and Services Tax(GST) has the following features :

1. a cut in profits tax;
2. abolishing the capital fee to encourage more businesses to incorporate in Hong Kong;
3. reducing the motor vehicle first registration tax and duties on liquor, petrol, diesel, aircraft fuel and methyl alcohol;
4. cutting charges for import and export declarations;
5. abolishing the 3% hotel accommodation tax;
6. increasing tax-deduction limits for charitable donations; and
7. one-off set-up assistance to small and medium-sized businesses that volunteered to register for Goods and Services Tax(GST).

System of Taxation and GST in Hong Kong

System of Taxation

In order to make a fruitful discussion over Goods and services Tax in Hong Kong it is necessary to give a an overview about the current taxation system in Hong Kong.For the purpose of determining the issues of tax, taxation system of the country rely on two principal considerations; taxable source and non-taxable source.

Taxable source

Inland Revenue Department, the central revenue authority in Hong Kong considers the following things in determining the relevant points of tax or revenue matters. All the profits arising out of the transactions performed or executed inside Hong Kong is subject to tax. The criteria of determining the source of businesses depends upon various considerations. The profits are fully taxable on the fact that both the contract of purchase and contract of sale are executed in Hong Kong.

When either the contract of sale or of purchase is performed within Hong Kong; profits earned from the transaction is subject to tax. In addition, if a sale contract is made to a Hong Kong customer or a purchase contract is made for purchasing commodities or goods to a Hong Kong supplier or manufacturer, the contract is supposed to be held in Hong Kong and the profit is taxable. Again, in case of the fact that a purchase or sale contract is made even from Hong Kong over phone or by fax, the transaction is presumed to be done in Hong Kong and subject to the jurisdiction of tax (Guidelines 2003).

Non-Taxable Source

If the activities of business in Hong Kong are limited to the following matters, the profits of the business would be non-taxable (Guidelines 2003):

1. Issuing or accepting an invoice to or from an ex-Hong Kong customer or supplier of the group on the basis of terms already concluded by an ex-Hong Kong associate.
2. Arranging letters of credit.
3. Operating a bank account, making and receiving payments.
4. Maintaining an accounting records.

GST in Hong Kong

From a perusal of the provisions of Goods and Services Tax in Hong Kong, following characteristics have been appeared.

Unstable Economic Structure

The purposes of implementing a Goods and Services Tax (GST) in Hong Kong are: to stabilize public finances, sustain economic growth and ensure future prosperity (Reforming Hong Kong 2006, p.2). Government has not designed the said taxation system to generate more revenues in its fund. But, most of the citizens are against this as Government has not made enough consultation with professional bodies and political parties before publishing the Consultation Document. For the lack of Government efforts in making the citizens well-convinced about Goods and Services Tax (GST), strong demonstration was made from the peoples corner as being proved to them as unpopular and economically rigorous. This instrument does not match with the concept of a stable financial structure (Pinaki 2005, p. 29).

Impractical

Considering the practical difficulties and economic instability and necessity of reforms in the tax administration, the Hong Kong government issued a consultation document outlining proposed reforms by introducing a simple Goods and Services Tax (GST) structure to the current tax system in Hong Kong on 18 July 2006 (A Goods and Services, p.3). The proposed Goods and Services Tax (GST) framework would adopt a broad based tax system and levy on all expenditure items with limited exceptions applicable to some financial services, residential property sales, rentals and exports of goods and services (A Goods and Services, p.2). Actually, it has no practical value.

Unreasonable

GST Goods and Services tax (GST) would be charged on all taxable imports of goods. The proposed Goods and services structure (GST) also provides that Goods brought into the territory of Hong Kong for the purpose of consumption would be subject to GST. Of course, Goods which are passed through transit would not be taxed. Importers and exporters would be required to lodge goods declarations with Customs before taking delivery of their goods. Of course, registered exporters would be treated as being governed by the provisions of paying tax and are required to lodge goods declarations with Customs before shipping their goods. But, A summary of the proposals for a Goods and Services Tax in Hong Kong (2006) states that,

the goods which would otherwise be exempt or zero rated would not be taxable imports and accordingly they would not come under the provisions of goods and services tax (GST). Temporary imports and returned goods would not be subject to GST. It is proposed that the Goods and services tax (GST)-free threshold would be set at $3,000 for goods in cases where it would be brought by individual incoming travellers15 and $4,000 for imported cargo16. If the threshold allowance were to be exceeded, the full value of the imported goods would be subject to GST (p.8).

From a perusal of those provisions regarding export and import matters, it is deemed that the legislation is quite unreasonable.

Less Exemption and More Encompassing

It is apparent that this instrument has covered more items, but has relaxed a few from the ambit of tax. From a minute analysis from the proposed goods and services tax (GST) legislation, it is clear that Hong Kong would adopt a broad based tax system and would levy tax on all expenditure items, with very few exemptions. So, only some financial services, residential property sales and rentals and exports are exempted.

Zero-rating Arrangement

In pursuance of the proposed Goods and Services Tax (GST) structure, zero-rating arrangement would be applicable to all financial sectors which would render the Hong Kong as a significant point of financial supplies (A summary of the proposals for a Goods and Services Tax in Hong Kong 2006. p.18). Consequently, the shape of Hong Kong would be radically changed and would be turned into a new horizon of economic world. Of course, these financial supplies would be ensured in consultation with the financial regulators and financial industry in order to avoid abuse to the producers of same kind of products. This consultation is certainly a safeguard and effective check for the effective implementation of viable tax legislation.

Effects of Goods and Services Tax

Of course there are some negative impacts of taxation. There is no tax which has not a tendency to diminish production (Shoup 1960, p.45). In the same way, it has been argued that income taxation discourages work, sales and value-added taxes discourage consumption, and capital gains taxes discourage investment (CSI Summary 2006, p.2). Even that levying or imposing and collecting tax is important for the effective operation of state mechanism.

Economic Effect

The implementation of Goods and Services Tax (GST) may affect the economy on a short term basis due to increasing consumption and inflation (A Goods and Services, p.4). Of course, this inflation depends upon the particular economic situation of a country and Goods and Services Tax (GST) rate. Lower rate of Goods and Services Tax (GST) can help in mitigating the short-term economic effects.

Political Effect

From political point of view, this instrument would be subject to more hardship. Politically, Government would face a great difficulty as this change would increase civil service administration costs, which would be problematic in the current political and economic climate. Of course, Government at its minimal effort can reduce the personal allowances to eradicate the budget deficit and contribute in the development scheme of the country.

Societal Effect

As the provisions enunciate that all the people would be subject to tax, there is no doubt to assert that it would severely impact upon the society. People would not accept such legislative decision imposed upon them as the rate is too higher and logically it is a preposterous and a meaningless attempt. The fact of becoming all the people subject to tax would certainly create a societal instability and dissatisfaction among the people against such ridiculous decision of the government.

Defects of Goods and Services Tax (GST)

Hong Kong has a very narrow tax base. Government still has not been able to establish a sound taxation system. The reasons behind this shortcoming is: it is confined to a very limited number of persons as only around 37 percent of the territorys 3.5 million working population taxpayers (Simmons, p.1). In addition, the tax base is levied in limited range, i.e. the provisions of the existing tax mechanism enunciates, few taxes are levied on goods and services, and no tax on dividend income, income from overseas sources, and capital gains.

But, this is uncommon in any developed economy. Government has not been able to include more people in its taxation scheme by reducing the level of personal allowances. This level is much higher than other developed economies. But, Government is doubted for the introduction of this sales tax instrument. Such introduction may hamper the plan to sustain the momentum of economic recovery and allow the economy time to recover from earlier economic setbacks (Hong Kong Budget 2004, p.4). Because, the inherent defects of goods and services tax are seemed to be too much harsh for the people (Raffel 2003, p.8). The defects as has been manifested in this proposed legislation may be summed up as follows:

Registration

The proposed legislation suggests that there will be a high registration threshold whereby businesses with annual turnover over HK$5 million need to register. Of course, Exports of goods and international supplies as well as financial supplies will be zero-rated while sale and rentals of residential properties will be exempted (Gilbert 2005, p.24). Such provision is sufficient to discourage businesses and investment in the country.

Levy upon Export and Import Goods

The provision of levying tax upon export and import goods is quite irrelevant as it suggests the trend of pricing upon the goods of human consumption. This provision can help the common people stand against the government.

Inclusion of Whole Items

The provisions of this act stipulate that all the goods and services would be subject to tax. Consequently, people have been worried as to their consumption and expenditure of necessary commodities in their day to day life. Such provision has made a negative impression upon the people regarding the said tax legislation.

GST in the Global Taxation

Goods and services tax (GST) is broad-based and capable of ensuring a stable revenue system. In modern economy, more than 120 countries [see Figure below] have introduced Goods and Services Tax (Budget Consultation 2004, p.1). Singapore follows a fixed Goods and Services Tax (GST) rate of 5% which is equally applicable to all products and financial services even in the case of the exemption of some products (GST for Hong Kong 2006, p.2).

The Australian government launched an education, awareness and compliance program to help businesses cope with a Goods and Services Tax (GST), with AUD500 million set aside to assist small and medium sized businesses to prepare for the levy (GST for Hong Kong 2006, p.2). So, to make the legislation effective and reach it to the citizens doorsteps Government of Hong Kong should also introduce such program as without citizens participation and public discourse, no program can see the ray of hope and success. In addition, Canada, New Zealand and several other countries of developed world have adopted GST in their economies which is accelerating their sustainable economic growth.

Criticism of GST in Hong Kong

Recently, Hong Kong has taken the approach to introduce sales tax. But, introduction of this act implies a perilous consequence, as the rate would never be decreased rather increased which would affect the economy in a larger extent. In addition, this increasing tax would not strengthen the economic structure in anyway (West 2000). For the following reasons, it is considered that sale tax is not a fair and just policy:

Threat for the Growth of Trade and Development

Much debate has been taken place regarding the proposed Goods and Services Tax (GST).The current global economy is the result of globalization which has been derived from the laissez faire concept. The laissez faire policy does not suggest that there cannot be any tax on the goods and services; rather it speaks about a flat rate of income tax equally applicable to all goods and services in a single market for the total population of the world. Though some proponents argue in favor of sales tax, it is quite irrelevant to the laissez faire principle. The introduction of sales tax can jeopardize the normal growth of trade and development.

Unpopular flavour

Speaking about the proposed sales tax or Goods and Services Tax (GST), critics point out that it would jeopardize the economy and contribute to yield an unstable taxation system in the country. Karlsson (2006) states the Henry Tangs speech as follows:

Although the public understands that Goods and Services Tax (GST) [General Sales Tax] can broaden our tax base, it is clear from the views collected that we have not been able to convince the majority to accept Goods and Services Tax (GST) as the main option to address the tax base problem (Karlsson 2006).

But, the ratio of income taxpayers is notoriously negligible; around 35% of the total workforce pay income tax. Again, this act articulates that people of average income or vulnerable section of the society would be subject to increased tax rate. One of the impediments covered by this enactment is that it puts tax on every commodity of daily necessities (A Goods and Services, p.4). This is a burden on the people as people would be suffocated in bearing the tax on ever commodity they consume and the national context would be much troubled. Introduction of sales tax in such situation would not be unaaceptable and efficacious.

Groundless Effort

After a year of review and consultation with the concerned quarters, Govt has launched the plan to the nation though it has been vehemently criticized for its unpopular flavour. The Government decided to generate around $3.8bn in its budget from the proposed tax legislation (Newhouse 2006). Actually, the tax reform attempt through Goods and Services Tax (GST) has been proved as a baseless shooting and huge loss of public exchequer. It severely lacks the practical value and utility.

Danger of losing significance

Hong Kong has long been reputed as an important place for the traders and businessmen for their commercial transaction due to the flexible and non-interference policies of its government. Last year Hong Kong has earned more than US$13.5 billion from the foreign investors (Lee 2006). Tax legislation of the country does not levy sales tax. Recently, in order to avoid the fiscal ups and downs Government has decided to broaden its tax base at the rate of 5% which would exclude financial transaction such as mortgages and loans and include almost every necessary components of day to day life (Lee 2006).

There is little doubt that with the adoption of such taxation policy, country would certainly lose its significance as a centre of trade and commerce. Consequently, Hong Kong would face a great difficulty in matters of economic depression and low investment which will lead to the collapse of economic foundation of the country.

Against the Notion of Public Welfare

Government under the proposed tax act plans to collect HK$20 billion each year from the sales tax and reduce the personal salaries tax, the corporate-profits tax and enhance the quality of public services. But moderately speaking, this proposed legislation preserves the interest of rich people and affects the poor masses as the current 17.5% corporate tax would be replaced by the proposed 5% rate (Lee 2006). It is logically believed that people are entitled to get the maximum opportunities of Government services and Government is ready to provide every assistance, coordination and essential services to its citizenry and protect them from all sorts of hazards and jeopardy. But, the introduction of sales tax is quite inconsistent with the notion of public welfare and principle of good governance. It is imperative on the Government to reconsider the issue for protecting peoples interest.

Complicated Legislation

A low and simplified taxation system is better for a country. In this concern, Hong Kong has a long standing reputation in the economic world. One of the reasons of more foreign investment is the adoption of laissez faire policy and simplified taxation system by the Government of Hong Kong. So, the scheme of broadening tax base is quite irrelevant consideration and a possible threat to the future prospects and gradual development of the country. The proposed tax legislation regarding sales tax would make the tax mechanism complicated and import economic instability in state administration.

Impractical

The entire concept of broadening Hong Kongs tax base is merely an academic solution or confined to the theoretical outlook. It lacks practical implication and overlooks the possible impacts of such groundless decision. The budget deficit in Hong Kong has been caused due to the collapse of the property market (Lee 2006). This approach of filling the budget deficit by enacting a reverse legislation and affecting the people cannot be viable. Again, tourism industry would be greatly hampered and as a hub of trade and commerce Hong Kong would lose its significance. Consequently, the ultimate consequence of introducing this legal instrument would carry a hardship and depression in its economy.

Adverse to the Businesses

Economy of a particular country relies on the soundness of its business transaction. Commercial transaction, i.e. trade and commerce of the country is regulated and promoted with the close assistance of businessmen. So, without their participation and cooperation, economy of a country cannot be developed and provide an outstanding result. In order to get the proper output, business policies for the regulation and promotion of economic development must be categorically designed. Relevantly, it is a matter of great concerns that business policies or concerned legislation of a country must conform to the interest of the businessmen.

But, as regards the provisions of proposed tax legislation, businessmen have been worried considering the fact that they would in more proportion be subject to tax rather than the consumers. This has made them skeptic as to the perilous consequences and prospects for the development of the businesses for their better sake. Again, the persons who had not to pay tax have understood that they are also going to be levied by the force of Goods and Services Tax (GST). So, these marginal people as well as businessmen have taken their positions against this.

Non-Responsive Government

Government has not contributed its best effort to disseminate the positive impact of this act. It has been proved that the Government is much callous in reaching the correct message among the public. Government could easily choose the option to make people understand as regards the significance of the said Goods and Services Tax (GST) to boost the economy of the country. There are several examples in the countries of the world that have been able to develop their economy with the introduction of GSTIt is little more than a decade that Australia has recorded a successful example in adopting Goods and Services Tax (GST) in 2000.

Australian Prime Minister John Howard, in order to persuade the people in supporting Goods and Services Tax (GST) used logical fallacies technique in 2000. While using this technique, John Howard added that as the current taxation system is not seemed proper for the up gradation of Australian community, it is necessary to change the taxation system in order to reach our dream, goal and becoming a major financial centre in the Asia-Pacific region (Heung-man 2007, p.10).

But, Government of Hong Kong did not take such efficacious means to convince the people as to the merit of the legislation. Existence of a different economic policy is another reason for the unpopularity of this enactment. Because, though Singapore has been successful through the introduction of Goods and Services Tax (GST) and has increased the ratio of Goods and Services Tax (GST) now stands about 19% (Heung-man 2006, p.14), there is a much difference between the two economies.

The economic policy adopted in Singapore is unlike to that of Hong Kong, i.e. states interference in the regulation of all sorts of economic affairs while Hong Kong has the different approach, i.e. follow the laissez faire. So, the traders and businessmen become perplexed at the Government decision on the ground that the taken policy might collapse the potentials of trade and commerce. But, inevitably, in some cases it is essential to make state interference on the national economy.

Overlooking Citizens Interest

Modern state philosophy suggests that citizens should be afforded a certain degree of conveniences, facilities and privileges within the possible limits of a given state. The Goods and Services Tax (GST) has been portrayed to the citizens as antagonistic to this vision. As a result, being the instrument as adverse to the interest of people, public demonstration was staged claiming its unenforceability.

Rigorous for Common People

It is impossible for any state; howsoever developed and efficient management of its economy, to equate all the people in the same economic footing. For the multifarious variables including economic policies of the state, people cannot achieve the same economic status. Marginal or destitute people suffer from economic hardship and become subject to oppression and deprivation. To speak from a logical point of view, the provisions of this act would severely affect them as the concerned provisions articulate that all the citizens are liable to pay tax for the reason that they are the beneficiaries of public services. In addition, as the workforce is limited in number and total populations are not able to earn, enforcement of this legislation would bring a serious effect in the national arena.

Threatening for retail competitiveness

The proposed Goods and Services Tax (GST) would loosen Hong Kongs retail competitiveness compared with cities in the Pearl River Delta. Many Hong Kong residents have already made a number of regular purchases outside the SAR (Special Administrative Region). So, the impact of the introduction of a consumption tax would not be an aspiring outcome (Broadening Tax Base 2004, p.1).

An Instrument of Manipulation

The common phenomenon regarding Goods and Services Tax (GST) prevalent in various countries is that the subsequent Goods and Services Tax (GST) rate is much higher than the rate was initially introduced (Broadening Tax Base 2004, p.2). The tax levied on personal income or profits derived from business transaction is more visible than sales tax. As it is physically invisible, People cannot realize the burden of sales tax.

So, policy makers are taking the opportunity of manipulating the citizens through the introduction of sales tax. In fact, though it is considered that sales tax is designed to help developing the economy of a country; in true sense, it does not contribute in accomplishing such purposes. In fact, this increased rate of Goods and services tax (GST) would harshly affect economy and an adverse relation between citizens and government which would generate dissatisfaction, non-cooperation and ultimately produce mal-governance in state administration.

Increased Administrative Cost

In the view of taxation authority, complex Goods and Services Tax (GST) regime would increase staffing costs (A Goods and Services, p.3). This expenditure is unnecessary and extra loss of public fund replacing the existing simplified taxation system. Virtually speaking, this unnecessary expenditure through the introduction of proposed tax enactment is ridiculous and against the principle of public policy.

Dissimilarity of Opinion among Government Officials

Public have become much worried as there are differed opinions among Government officials regarding Goods and services tax (GST). This transpires mismanagement and inefficiencies of public administration which is frustrating for democratic norms and values. Because, the Government policies and decisions are of much importance and they should be circulated and disseminated with sense of responsibility. The issue arising out of differed opinion among Government officials is quite enough in the minds of the people to produce distrust and no-confidence on Government

Baseless Argument of Public Service and Protection from Economic Downfall

It is argued that many people do not contribute to the costs of public services. So, they should be equally liable to pay revenue to the public exchequer. In addition, to avoid the future economic downfall, introduction of Goods and Services Tax (GST) is essential(Reforming Hong Kong 2006, p.6). But, this can not be a valid defense as states are liable to provide the citizens best comfort irrespective of the status of the citizens.

Recommendations and Conclusion

The proposed tax legislation of Hong Kong lacks certain defects and loopholes. In fact, this legal instrument was legislated with a view to making a change in the national economy in ensuring a sound and stable financial structure. It is not unsurprising that legislation possess some shortcomings. The approach of adopting this legislation is public welfare and filling up the budget deficit for ensuring the betterment of the country. As Public welfare cannot be excused on a mere cause, Government should be more active to repair the defects and immediately enforce it. From a through study over the topic, the present study has found some ways and means for the improvement and implementation of the proposed Goods and Services Tax act which may be recommended as such:

• The capable workforce in comparison to total population of Hong Kong suggests a wide gap which is very much irrelevant to the economic development of the country. Rather the issues of terrorism, hike of oil prices are some major impediments. So, in the context of the practical situation, it is essential to introduce Goods and Services Tax (GST) for adding the benefit in its taxation system as people would provide additional revenue and ensure a stable taxation system in the country.
• Inevitably, taxation is important for the effective operation and management of state administration. The proposed Goods and services tax (GST) though to some extent has an unpopular and non-democratic flavor; it is of much significance for the interest of the people and gradual economic promotion of the country.
• In the proposed legislation the rate is likely to be levied is much higher. Considering the issue of goods and services tax (GST) over the world, it is found that the successful countries took a strategy where they initially levied at a minimal range and subsequently increased the rate on the context of the given economic situation. The proposed rate of 5% is quite irrelevant; rather it could be 2or 3 percent.
• This legislation would facilitate few tax payers to get the benefit of sales tax. Actually, the whole matter depends on the point of how the tax schedules would be revised. In order to ensure the effectiveness of sales tax and opening the avenue to the people availing its true dividend, it is necessary to review the existing tax mechanism and if necessary, steps should be undertaken to restructure the tax administration of the country.
• The strategy of the Government should be developed. Due to lack of proper strategies and policies, Government has lost its popularity. The proposed plan to increase sales tax has caused a 6 percent drop in public trust in the government (Taipei Times 2006, p.5)
• The level of personal allowance subject to tax can easily be minimized by half and a drastic reform can be introduced in the system. If this is so done, the number of tax payers would be increased from 1.3 million to 2.2 million and generates an extra $14 billion in tax revenues (Simmons, p2).
• Hong Kong has a developed economy. So, introduction of consumption tax is not a bar in accordance with the economic context of Hong Kong; rather it is a unique and timely approach for strengthening economic development. Government should wisely ponder the gravity and importance of consumption or sales tax and introduce it for the sake of enhancing the further development initiatives and facilitate the people invoking maximum benefit at the best extent.
• In the global context, Countries have taken the view to introduce Goods and Services Tax (GST) as a part of tax reform in their tax reform or promotion of revenue system program. The purpose of such reform is not to increase the revenues, but to remodel the tax system and make it more equitable. Accordingly, Hong Kong has taken the view of introducing this. But, the correct message of this reform initiative should be reached to the people through proper means.
• Goods and Services Tax (GST) is considered as opposing to the interest of people and accordingly resistance is made against this. So, steps should be undertaken to make the people well-convinced and accordingly grass root basis network should be developed. For this, linkage program with educational institutions should be ensured in order to educate the students and disseminate throughout the society as regards all the necessary issues of Goods and Services Tax (GST).
• Public forum should be formed to more categorically single out the loopholes and deficiencies of the proposed tax legislation. As public discourse ensure valuable suggestions, comments and guidelines, arranging such public discourse or citizens forum can help in developing and implementing the proper strategy
• It would add 5 millions dollar annual turnover to its economy, exempt small and medium sized businesses from this collection, reduce or eliminate compliance costs for small and medium sized businesses(Reforming Hong Kong 2006, pp.13-14). Of course, unregistered businesses would not be able to reclaim Goods and Services Tax (GST) on their inputs. Additionally, it can minimize complexity and compliance cost for businesses and administrative costs for Government.
• Media should be more active to contribute in producing and arranging various program and articles concerning the detailed discussion about the legislation. This would widely help the people for their better understanding over the legislation and potential outcome arising out of the legislation. Policy makers would get the sufficient guidelines to frame a more accurate and working tax mechanism.
• Undeniably, public administration of the country is regulated through Government officials; the success of public administration of a particular country greatly relies on the efficiency of the public servants or Government officials of the country. Generally, Government staffs are not familiar with the handling of tax affairs and sound management of tax administration. To improve the efficiency of tax administration capability of Government staffs should be increased with the introduction of training program. More training programs can enhance the performance capability of Government officials in ensuring well-functioning taxation system.
• It is imperative for the Government of Hong Kong to consider exemptions for the purpose of giving a definite shape of Goods and Services Tax(GST) and make it workable. Political parties should be united on this issue to introduce a better taxation system and make the people its true beneficiaries.
• All the Government functions should go with a view to benefit the mass people as they are the key component of democratic governance. Though Goods and Services Tax (GST) may be considered as a working tool for the benefit of a particular economy, alike other states, Government of Hong Kong should also pay a due regard to the interests of low income or vulnerable section of the society so that the said Goods and Services Tax (GST) may not hamper them. Relevantly, in this regard, Government should minutely consider small and medium sized business enterprises which are actually the foundation and principal means of Hong Kongs economic structure. So, the consideration of the potential impact of financial services sector and accordingly erect a body of policy implementation is a sine qua non for the government.
• In the view of taxation authority, complex Goods and Services Tax (GST) regime would increase staffing costs or administrative expenditure. It is recommended that in order to get the benefit from Goods and Services Tax (GST), steps should be undertaken to minimize the administrative cost. Because, if a simple Goods and Services Tax (GST) system is implemented in Hong Kong, it would follow an amount of administrative cost which is currently levied from principal sources in the existing revenue mechanism (Goods and Services p.3). In this aspect, axiomatically, it can be stated that a special committee should be formed for the purpose of finding out the ways and means to develop an improved structure for rendering the better services by the tax administration so that administrative cost can evenly be minimized. If the administrative costs take away larger portion of the revenues, it would be a meaningless effort and produce no outstanding output for the benefit of the people.
• One of the impediments covered by this enactment is that it puts tax on every commodity of necessary goods that are used in day to day life.. As a result, people would be much troubled. So, exemption or reduction of tax from daily necessities to some extent may eliminate the regressivity of tax legislation. In this concern, policy makers should categorically specify the criteria of determining the daily necessities and exemptions to be applicable over certain goods and services as well so that revenue administration of the country is not hampered in anyway.
• To make it successful, Government has many options to choose. The prime and foremost concern is that due to lack of publication and dissemination, it could not reap the benefit. In this regard, Government could undertake Seminars to able the Government officials understand and properly evaluate the Goods and Services Tax (GST) scheme and in certain cases recommend the measures to be taken by the Government to develop the mechanism in broadening the tax base. As the matter is concerned with the greater interest of the nation, common masses were required to be convinced well. To accomplish this purpose, Government in its conveniences can hold seminars in estates, community centers, and the offices of professional bodies to answer citizens queries and Produce TV or radio programs to reach the true message of Goods and services Tax Goods and Services Tax (GST) to the citizens doorsteps (Heung-man 2006, p.15).

Compensation scheme should be introduced to compensate the affected persons and groups for the introduction of Goods and Services Tax. In this regard, the standard of determining the damage to the affected persons or groups should be singled out.

Annotated Bibliography

Lee, Wendy., 2006. Tax-free may flee Hong Kong. Wall Street Journal Exclusive. (Lee 2006):

This article states about the Government decision concerning broadening the tax base of Hong Kong in order to enhance development initiatives in its territory. The gradually developing economy of Hong Kong is mostly relied on income tax and profits tax. The article also examines the impact on the Hong Kong economy caused by this proposed legislation.

GST for Hong Kong? (2006).

This article deals with the issues associated in reforming proposed Goods and Services Tax (GST). The article states to consider the points which may impact in the national economy. The writer has proposed the Government and concerned authorities to address the issues for making a successful tax reform.

Stender, Neal., et al. 2006. China Investments & Operations: Advantages of Hong Kong Holding Structure Now Include Tax Preferences, 1-7.

This article examines various issues of revenue matters both in PRC (Peoples Republic of China) and Hong Kong. The writer has advocated that PRC (Peoples Republic of China) business regulations are on the way of gradual change. Due to this, the relevant regulations and directions are becoming more complex and rigid in cases of companys financial dealings and tax matters.

Shoup, S. Carl., 1960. Ricardo on Taxation. New York: Columbia University Press.

The tax in America was introduced near the end of the Seventeenth century to replace a still earlier tax that had atrophied in much the same way as this one was destined to do. The new tax was imposed at a rate of 20 percent on the full rental value of real estate and on an imputed income of 6 percent of the capital value of all personal property, including money, but excluding stock on land and household property. The above mentioned statements are about the taxation system in America as has been ascribed in this book. This book discusses the taxation policy as suggested by Ricardo. In addition, the book also puts focus on various types of tax including profits tax and wage tax. Besides, the book has concentrated its discussion on sales tax. It has been recommended that sales tax is important for the development of a country.

Sawday, K.S., 1939. A Practical Guide to the New Income: Tax Law. Calcutta: S.C. Sarkar & Sons Ltd.

This book has provided a detailed discussion about the Indian fiscal policy and different types of tax that were prevalent under the then tax regime. The book has discussed amongst other the criteria of determining tax rate and asserted the importance of income tax and capital gain tax in the development of Indian economy. The book has also argued that sales tax is the inevitable consideration for the sound economic policy of Indian economic structure, though practically it is seemed impractical and unimaginable thought in the Indian context.

Newton, W. Grant., & Bloom., D. Gilbert., 1991. Bankruptcy and Insolvency Taxation. New York: John Wiley & Sons, Inc.

This book is well designed in context of America in order to provide a broad range of guidance on the tax aspects which must be made by companies in financial trouble. It has also discussed about the provisions of the Internal Revenue Code and the Bankruptcy Code applicable to businesses. Besides, the book has put attention on the tax consequences to creditors of loss from debt forgiveness, discharge of indebtedness, tax procedures and tax preferences and liens.

References

Dowell, K., 2004, A History of Taxation and Taxes in England from Earliest Times to the year 2002. London: Hithoran Publications.

Rowse, T. J. M., 2003. Invest Hong Kong: Government of the Hong Kong SAR. State of Business Magazine 16(1). Atlanta: Georgia State University. Web.

Luxembourg Chamber of Commerce in Hong Kong., 2007. Double Taxation Agreement between Hong Kong Luxembourg. Web.

Yee-ming, L. M., & Alice, P. J. Commissioners Overview. Inland Revenue Department Annual Report 2005-06, 1-3. Web.

Mergers & Acquisitions Asian Taxation Guide. Price Water House Coopers, 1-18. Web.

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In an article by Schoen (2012) published on the NBC News website, the author reported on the amount of tax revenue spending. The author claims that the U.S. government spends more than $3.5 trillion annually on various services including Medicare, homeland defense and safety, education, transportation, and the interest on debt obligations. Many taxpayers believe that an income tax is unnecessary despite the services the collected funds are supposed to cover. Nevertheless, income tax is necessary for the U.S. economy, mainly because there is no other way to gather enough revenue to enable all the mentioned services, at least under current circumstances. However, economic experience worldwide suggests that there are a number of ways to provide high-quality public services without relying on income tax. Countries such as Saudi Arabia or Hong Kong have created an economic model that allows for alternative means of collecting tax revenues to provide necessary services. Moreover, these countries demonstrate a surprisingly high economic capability. Thus, it may be necessary for the U.S. government to remodel the tax system. Possible approaches, advantages and disadvantages, and other aspects of this topic will be the focus of this paper.

Saudi Arabias Way of Providing Benefits

In their book, Alshahrani and Alsadiq (2014) covered various aspects of Saudi Arabias economic model. The authors stated that fiscal policy is a key element of Saudi Arabias macroeconomic policy given the importance of public expenditures in financing investment and consumption activities and their role in meeting the growing need for public social services (Alshahrani & Alsadiq, 2014, p. 4). Governmental spending has grown steadily since 1970, increasing at an astonishing rate of more than 9,500%, also an indication of higher overall economic performance, according to the authors. This is evidence of high governmental expenditures in Saudi Arabia, which may mean greater efficiency in economic performance.

Saudi tax rates indicate that most taxes are collected from various types of entrepreneurial activities. For example, businesses that deal with producing oil and hydrocarbons are taxed at a rate of about 85%. Businesses exploiting the natural gas sector are taxed at a rate of 30%. Saudi shareholders are also taxed at a rate of 2.5%. Residents and foreign companies providing services within the Saudi borders are not taxed. Resident entrepreneurs are taxed based on the total income they achieve while conducting business in Saudi Arabia. Every company located in Saudi Arabia or registered in the Regulations for Companies in Saudi Arabia is considered a resident. Non-resident companies, on the other hand, are taxed based on the incomes achieved or directly connected with any permanent establishment.

Thus, the primary source of tax income for Saudi Arabia is the taxation of various types of businesses. Thus, taking the economic efficiency of the country into account, taxation is efficiently carried out without resorting to the implementation of income taxes collected from residents who are not involved in any kind of entrepreneurship. This model of taxation is greatly influenced by Saudi Arabias amount of resources thatunlike practices in many other countries that base their economy on extracting oil or natural gasare exploited to achieve great income rates. Potentially, this system of taxation applies to any country with an inherently vast supply of natural resources and a stable economic base.

Possibility of Adopting the Taxation Model

As correctly noted by Henrekson and Sanandaji (2014), the majority of small businesses in the United States have no employees other than the owner (p. 1760). The first challenge that profoundly affects chances for the United States to adopt the Saudi tax system is that it would cause great inequality among businesses. However, it would be reasonable to eliminate this challenge by adjusting tax rates depending on the incomes of entrepreneurs. Additionally, businesses in highly profitable sectors may be subject to increased taxation compared to smaller businesses and those not involved in such sectors as the extraction of natural resources, for one example. It would then be possible to create equality as well as achieve highly effective taxation.

The assumption that tax rates are spread unequally and must therefore be adjusted is supported by the statement presented by Foremny and Riedel (2014). The authors claimed that recent theoretical and empirical papers stress that corporate tax rate choices are influenced by the size and structure of the economy, the governments budgetary situation and tax competition behavior (Foremny & Riedel, 2014, p. 49). The authors went on to theorize that the tax system in general and tax rates for both small and large entrepreneurship are highly influenced by a countrys political state. This potentially means that politicians may resort to opportunistic approaches to exploit the tax system for their benefit. Thus, it is also necessary to determine whether the political environment of the United States is stable enough to prevent similar obstructions from occurring.

Tax evasion has posed a significant problem to the U.S. budget in the past and present. In an article about the relationship between corruption and tax evasion, DeBacker, Heim, and Tran (2015) concluded that companies led by entrepreneurs from countries with high levels of corruption tend to evade taxes in much greater numbers in the United States, especially if the company is small (in terms of total income). It must also be noted that U.S. businesses are often established by foreign entrepreneurs, naturally creating greater possibilities for corruption to spread among smaller businesses.

In all, it is indeed possible for the United States to adopt the Saudi taxation system. Potential obstacles involve the time and effort it would take to make the change, as well as corruption rates that might decrease potential tax incomes. Nevertheless, in the span of about five to ten years, a fully adopted system would result in much greater efficiency and create more possibilities to establish a stable business environment with the adequate competition. Moreover, the overall economic efficiency of the country would also rise (based on the observation made for Saudi Arabia above). Residents not involved in entrepreneurship would also achieve a higher quality in terms of their standard of living.

Advantages and Disadvantages of Adopting the Model

As reported by the Oxford Business Group (2017), the benefits of the Saudi taxation system are significant. Most importantly, this type of tax system allows residents to plan their taxes and budgets accordingly due to the high stability of the economic system. Additionally, tax-free citizens are allowed to achieve much higher profits, increasing the standard of living overall. Although this is not the primary goal of establishing such a system, it is difficult to deny that this aspect is significant.

The only disadvantage that this system may represent remains merely a potential problem. As noted by Ramady (2017),

As for expatriates, assuring them that part of their remittance taxes and fee charges are going towards their health and dependents schooling will go a long way in reducing the current level of uncertainties, as many are considering sending their dependents back home, thus reducing local consumption of goods and services, or seeking alternative methods of remittance transfers, all unintended consequences of the introduction of such taxes, fees, and charges. (para. 12)

Basically, there may be the possibility that a Saudi-like taxation system would require additional taxation for expatriates. However, while it remains only a possibility, it must not be considered a significant disadvantage.

Proposal

Proposed Tax Base

Basically, the tax base would be formed by various types of taxations imposed on businesses. The tax rate would then be determined by the kind of business. Smaller businesses and foreign organizations that do not operate within the territory of the United States directly would not be taxed. The tax base must mostly rely on companies that conduct their business in highly profitable sectors (natural resources, real estate, leasing, etc.).

Exempts from Taxation

Naturally, residents who are not involved in entrepreneurship will be exempt from taxation. Income levels will not be the determiner of whether a resident must be taxed. Moreover, various types of compensation may be established, especially for residents involved in civil service or services having increased health risks, etc.

IRS Tax Rate Calculation

The tax rate for different types of businesses would be calculated based on average net income. Additional fees would be applied depending on the sector in which a company carries out its business. Highly profitable businesses would receive a greater tax rate. Furthermore, since taxes in the United States are evaded so often, additional fees must be applied for companies identified as having avoided satisfying their tax obligation.

Primary Way of Achieving Equity

Equity would naturally be achieved for most types of businesses. Since the companies with much higher incomes will receive a greater taxation rate, smaller businesses may be able to provide services for increased profits. Additionally, a competitive environment for companies with higher incomes would be established by applying equal taxes to every company independent of their current efficiency or status. Moreover, standards of living would be relatively similar both for residents involved in business and those who do not run their businesses. Although it may be viewed as suppressing entrepreneurship, the overall increase in economic stability and improved quality of the economic system will provide every resident with the possibility of living in abundance as explicitly demonstrated in the example of Saudi Arabia.

Making Up Possible Shortfalls

To make up for potential shortfalls, the U.S. Department of the Treasury, through the IRS, may adhere to its fiscal and monetary policies by enabling temporary taxation for companies collaborating with organizations based in the territory of the country. Additionally, taxation rates for U.S. shareholders may be increased to further compensate for potential losses. Since these sources of tax income are shut down most of the time, in times when the economy is low, it would be of great help to recover from financial damage. Moreover, it would not require many resources spent by organizations to recover any potential damage, since entrepreneurs from the United States actively collaborate with partners abroad.

Conclusion

The highly stable and efficient taxation system implemented by Saudi Arabia has proven outstanding performance. Although its adoption may require a large amount of time and effort, potential results will most certainly outweigh the related challenges. With the enactment of this type of taxation, U.S. entrepreneurship and the economic state, in general, will experience significant growth. Moreover, greater levels of equity in competition and living standards will also allow a better environment to be established across the country. It is indeed possible for the United States to adopt this system; however, such a sweeping change would take significant time to achieve.

References

Alshahrani, S. A., & Alsadiq, A. J. (2014). Economic growth and government spending in Saudi Arabia: An empirical investigation. Web.

DeBacker, J., Heim, B. T., & Tran, A. (2015). Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States. Journal of Financial Economics, 117(1), 122-138.

Foremny, D., & Riedel, N. (2014). Business taxes and the electoral cycle. Journal of Public Economics, 115(1), 48-61.

Henrekson, M., & Sanandaji, T. (2014). Small business activity does not measure entrepreneurship. Proceedings of the National Academy of Sciences of the United States of America, 111(5), 1760-1765.

Oxford Business Group (2017). Tax system and tax regulations. Web.

Ramady, M. A. (2017). The pros and cons of expat remittance taxes in Saudi Arabia. Web.

Schoen, J. W. (2012). Heres where your federal income tax dollars go. Web.

Introduction

It could be hardly doubted that the modern taxation system is a significantly complicated subject. Many aspects of this system, such as vast differences in tax rates and tax treatment of corporate income in different countries, are continuously investigated and elaborated on (Arel-Bundock, 2017). Another important part of the question is numerous strategies of tax avoidance (which is also referred to as tax aggressiveness), which are employed by multinational corporations (McClure, Lanis, & Govendir, 2016). This paper aims to dwell upon several issues, including previously mentioned problems along with the use of the Double Irish and the Dutch Sandwich by Google, Googles negotiation with the Internal Revenue Service, and Microsofts use of Irish subsidiary to cut the companys U. S. taxes. Based on the investigation of the given questions, a conclusion will be made.

Differences in Tax Rates and Tax Treatment among the Countries

First of all, it is essential to discuss the question of why the taxation rates and treatment of corporate income vary so dramatically among different countries. In general, taxation of business income is always a contentious public policy issue since numerous parties are involved (Griffin & Pustay, 2015, p. 530).

The Use of Tax Havens by Multinational Corporations

It is possible to mention that the ability of multinational companies and corporations (MNCs) to lower their tax burdens is vastly based on the strategic use of transfer prices (Griffin & Pustay, 2015). Also, this ability is significantly facilitated by the existence of a tax haven, which is the term referred to a country that imposes little or no taxation of corporate income (Griffin & Pustay, 2015). Such states, instead, impose a small fee for a multinational corporation (concerning the income rate of an average MNC) to establish a fully owned subsidiary in a tax haven. Further, an MNC manipulates different types of payments, including transfer prices, dividends, interest, royalties, and capital gains, between its separate subsidiaries to lower the corporate income taxation (Griffin & Pustay, 2015, p. 526). As result, the tax rates of multinational companies which are using the tax haven scheme are significantly lower than those of the companies, operating in high-tax countries. It could be additionally mentioned that the globalization process has an immense impact on the development of corporate tax competition in numerous states and the growing rate of tax avoidance by MNCs (Farnsworth & Fooks, 2015).

Political Reasons for Tax Rates Differences

As it was mentioned in the previous section, there are vast differences in tax rates and tax treatment among different countries. Another reason for such variety that should be mentioned is different domestic policies, implemented by the governments. It is argued that, in the majority of cases, politicians are preoccupied with the creation of new workplaces and tax revenue, and they tend to change their countries tax codes if such actions stimulate the local economy (Griffin & Pustay, 2015). Therefore, corporate income taxes vastly depend on the political course of the state and its overall economic condition. For example, the federal corporate income tax rate is 35 percent in the United States, 16.5 percent in Canada, and only 12.5 percent in Ireland (Griffin & Pustay, 2015, p. 530). Additionally, tax havens, which were previously mentioned, do not impose any tax at all in the majority of cases. The aggregate of the enlisted reasons serves as a foundation for numerous opportunities and strategies which are used by multinational corporations to significantly lower their tax rates. The following section will discuss the implementation of the tax avoidance strategy by Google.

The Use of Double Irish and the Dutch Sandwich by Google

Since the general information about the reasons and opportunities for tax avoidance is given, it is essential to discuss the implementation of the strategy used by Google corporation to lower its corporate income taxes. This approach is vastly based on the use of the Irish taxation code, which is significantly different from the United States Code. For example, the effective rate on royalty income imposed by Ireland can be as low as zero (Griffin & Pustay, 2015, p. 530). Additionally, Ireland offers significantly vast tax credits for research and development along with the exceptions for the intellectual property revenue (Griffin & Pustay, 2015). These factors contribute to the emerging of Googles tax avoidance strategy, implemented primarily under the Irish code.

Further, it is possible to explain how Googles scheme of lowering its corporate income tax works. First of all, it is essential to mention the immense importance of the companys advance price agreement with the U. S. Internal Revenue Service. This agreement established the terms under which Google can transfer its intellectual properties to its foreign subsidiaries (Griffin & Pustay, 2015, p. 531). According to the agreement, Google licensed its intellectual property to its wholly-owned subsidiary, Google Ireland Holding, which is managed in Bermuda (making it a nonresident corporation, which is not governed by an Irish taxation law). It possesses an Irish resident enterprise, Google Ireland Limited (Griffin & Pustay, 2015). These two subsequently dependent companies are referred to as Double Irish. Further, Google Ireland Limited transfers its profits to another Google subsidiary, Google Netherlands Holdings (which is referred to as Dutch Sandwich), in the form of royalties (Griffin & Pustay, 2015). Google Netherlands Holdings then transfers almost all of the fees to Google Ireland Holdings, whose profits are not taxed due to its residence in the tax haven. Therefore, an immense part of Googles corporate income remains free from the tax code of the United States.

Microsofts Use of Its Irish Subsidiaries

Furthermore, it is possible to discuss how Microsoft corporation uses its subsidiaries in Ireland to lower its U. S. taxes along with the influence of such use on the Irish economy. The scheme which is employed by the corporation is relatively similar to Googles strategy of the Double Irish and the Dutch Sandwich (McClure et al., 2016). Microsoft established its subsidiary in Ireland, Round Island One Ltd., which localizes Microsoft products for European, African, and Middle-Eastern markets (Griffin & Pustay, 2015). Then Round Island One Ltd. licenses the localized products to its subsidiary, Flat Island Company, which is also located in Ireland. Earnings of the latter subsidiary are taxed at a 12.5 percent corporate income tax rate, which is a relatively low rate compared to the U. S. taxes (Griffin & Pustay, 2015). Round Island One Ltd. revenues are characterized as active income by the U. S. government, which allows Microsoft to take advantage of the IRCs deferral rule and to avoid U. S. taxation of that income (Griffin & Pustay, 2015, p. 531). Concerning the influence of these actions on the Irish economy, it should be noted that Ireland welcomes the establishment of foreign subsidiaries such as factories and service facilities since it stimulates local economic growth.

Conclusion

In conclusion, it is possible to state that there are numerous schemes of tax avoidance, including the use of tax havens and foreign countries different taxation laws. This paper analyzed the use of such strategies by Google (the Double Irish and the Dutch Sandwich scheme) and Microsofts subsidiaries. It is possible to state that the implementation of these tax avoidance methods significantly harms the U. S. economy.

References

Arel-Bundock, V. (2017). The unintended consequences of bilateralism: Treaty shopping and international tax policy. International Organization, 71(2), 349-371.

Farnsworth, K., & Fooks, G. (2015). Corporate taxation, corporate power, and corporate harm. The Howard Journal of Crime and Justice, 54(1), 25-41.

Griffin, R. W., & Pustay, M. W. (2015). International business: A managerial perspective (8th ed.). Pearson.

McClure, R., Lanis, R., & Govendir, B. (2016). Analysis of tax avoidance strategies of top foreign multinationals operating in Australia: An expose. Retrieved from cdn.getup.org.au/1507-Aggressive-Tax-Avoidance-By-Top-Foreign-Multinations.pdf

Personal Income Tax is the amount of money received by the government from a persons income. It deals with the taxation of the individuals total earnings and is charged progressively (Cordes 296). The person being taxed is in a business that either involves partnership, sole proprietorship, undivided estate or a non- juristic entity. However, the disadvantages of a personal income tax seem to have more weight compared to the advantages. In addition, there is a liability to a personal income tax and the responsible tax paying entity must compute, file and pay tax as per the rules of the state.

Arguments for Personal Income Tax

The Personal Income Tax uses progressive taxation and allows for a wealth distribution (OECD 38). It is directly proportional to income earned because a person earning 10000 US dollars is charged more than the one earning per 1000 US dollars. In addition, the system is more equitable compared to the consumption tax. For instance, it allows for reduced taxation on important goods like vehicles, giving low earners the privilege of low taxation. Furthermore, the tax method is important since the poor people make the majority of the society. It also helps in the regulation and control of the corporate and personal profits. For instance, tax policy makers prevent greedy corporations and unscrupulous individuals from earning illegally, by forcing them to account for their money.

The taxation method allows the government to enjoy a reliable income stream (OECD 38). For instance, in scenarios where there is 15% unemployment, 85% of the population give income to the government. The system allows the state to stabilize its income stream even during a depression. In addition, the taxation system supplements the expenditure tax in the superior infrastructure development.

Individual-based income taxation is easier compared to a situation where the individual decides about the kind of deductions to be processed (OECD 39). The pay slips used are few and easy to analyze, which is contrary to consumption tax where people have to save all the annual purchase receipts to quantify their tax. However, personal income tax is more flexible because it gives people an opportunity to claim tax return deductions such as child care expenses and property losses.

Arguments against Personal Income Tax

Personal income tax implementation is very complex, especially when used to regulate corporations and the wealthy people in the society (Shome 149). It also entails the use of several resources to put in place of a system that controls and monitors the entities. In addition, the government is forced to use vast resources to enforce the tax code in each line. For instance, in the USA, the IRS needs an approximate of ninety thousand tax accountants. The tax audit industry and the IRS may be of more value economically, if they were to handle other issues.

The accountants, in the personal income tax, consult wealthy and big corporations on how to address the loopholes in tax policies. In return, the entities that ought to be the major tax issuers, turn to be the opposite. For instance, the wealthy in the society can afford expensive tax consultations, but use the opportunity to deceitfully avoid and evade taxation. Consequences are that there are inequitable taxations because employees are charged more than their bosses in such scenarios.

The Personal income tax can lead to financial hardships among the low income earners in the society regardless of the amount deducted. The phrase lower deductions is relative and, therefore, might be a huge sum to some of the low-income earners. For instance, an individual who tries to make a living on a day-to-day basis, may find it difficult to have an average lifestyle, following any deductions on his or her income (Shome 149).

Personal Income Tax tampers with the citizens financial freedom since it dictates how the money should be used. It decides what to deduct despite the consent of the income owner, thus becoming a dictatorship model. In addition, it can be seen as a policy against the rich and favoring the poor in the society. The Personal Income Tax also reduces the moral of the citizens who might need to work hard with its progressive nature. It makes some of the citizens feel the act of paying taxes as burdensome and in the process become less productive. This leads to a fall in the economy due to fall in productivity. However, Laffer curve can be used to explain the trade-off between tax revenue and work (Shome 150). The people being paid through cash-at-hand method can evade taxation. Income taxation is, therefore, only effective when dealing with the formally employed.

In conclusion, if I were a legislature I would vote for the adoption of the income taxation in my state. The primary reason is that the state needs resources to be able to progress. Furthermore, income tax provides an opportunity for a stable revenue source. In addition, the fact that the public cannot decide on when to pay the amount, makes the source reliable.

Works Cited

Cordes, Joseph J. The Encyclopedia of Taxation & Tax Policy. Washington: Urban Institute Press, 2005. Print.

OECD. Fundamental Reform of Personal Income Tax. Paris: OECD, 2006. Print.

Shome, Parthasarathi. Tax Policy Handbook. , Washington: Tax Policy Division, Fiscal Affairs Department and IMF, 1995. Print.