BASICS OF TAXATION: elementary Course


A. V. Aronov
V. A. Kashin
V. V. Pankov

BASICS
OF TAXATION


        Elementary Course


Edited by Prof. Victor V. Pankov

ACADEMUS
Publishing

Academus Publishing 2018

Academus Publishing, Inc.


ACADEMUS
Publishing

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Peer reviewed by
Prof. Dr. L. Tchaikovskaya
Prof. Dr. V. Panskov




© Publisher, Academus Publishing, Inc., 2018
The right of A. V. Aronov, V. A. Kashin, V. V. Pankov is identified as the authors of this work.



ISBN 10: 1-4946-0009-9
ISBN 13: 978-1-4946-0009-9


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            Contents







Introduction ......................................................... 5

PART
1
Theoretical Basics of Taxation ....................................... 7
1.1.  Historical Origin of Taxes ..................................... 9
1.2.  Commodity, Money, Credit, and Financial Relations ............. 13
1.3.  Concepts and Definitions ...................................... 18
1.4.  Elements of Tax ............................................... 20

PART
2
Main Types of Taxes ................................................. 27
2.1.  Classification of Taxes ....................................... 29
2.2.  Property Taxes ................................................ 32
2.3.  Income Taxes .................................................. 35
2.4.  Deals Taxes ................................................... 41
2.5.  Special Tax Regimes ........................................... 44
2.6.  Systemic Taxes ................................................ 46

PART
3
Tax Administration ..................................................49
3.1.  Tax Relations and Tax Administration .......................... 51
3.2.  Taxpayers’ Rights and Obligations ............................. 54
3.3.  Rights and Obligations of Tax Authorities ..................... 58
3.4.  Specific Features of Tax Authorities’ Structure and Functions . 63

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PART
4
Tax Jurisdiction of the State and International Tax Relations ......... 67
4.1.  Tax Jurisdiction ................................................ 69
4.2.  Tax Residents and Nonresidents .................................. 71
4.3.  Tax Liabilities of Foreign Entities ............................. 73
4.4.  International Tax Relations ..................................... 77

Conclusion. Is Unified Tax Feasible? ...................................81

            Introduction








Historically, taxes have developed from the simplest most uniform forms to more and more diverse and sophisticated types as people’s economic activities types and forms have also diversified and become more complicated. Tax systems of all countries progressed in this way.
    The current tax system is complicated and diverse. Many types of taxes and special regimes are applied, and tax accounting on some types of taxes is extremely difficult; determination and use of regulative and fostering functions of various tax types is not coordinated.
    A shift from separate taxes to tax systems (that is, from specific taxes to systemic taxes) is the most notable trend in the modern taxation field. Similar taxes are grouped and unified rules, taxation, and reporting regimes, etc. are applied to the group, potentially leading to a unified system-forming tax.
    To develop such a tax system, scientific studies in finance and taxation theory, tax bodies’ practical experience, and the introduction of new information technologies are available.
    The use of advanced information technology systems is widespread nowadays. Such systems bring significant change to national tax systems and the international tax environment. Consequently, advanced countries formulate demands for new legislation and elaborate laws adapted to informatization of social life. New technologies, tools, and data significantly improve the effectiveness of tax process, and support taxpayers to meet their tax obligations.
    A comprehensive overview of modern taxation and the primary ways and methods of tax administration are presented in this textbook. Along with the basics of general theory and practice of taxes and taxation, general information on taxes and their types are provided in the first two parts of the textbook. The third part deals with the problems

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of tax administration, and effective work regarding various types of taxes. Essential information on international tax relations and agreements to reduce (or eliminate) the effect of international double taxation is given in the fourth part.

         Part




                1




         Theoretical Basics of Taxation

    1.1.  Historical Origin of Taxes
    1.2.  Commodity, Money, Credit, and Financial Relations
    1.3.  Concepts and Definitions
    1.4.  Elements of Tax

        1.1. Historical Origin of Taxes

Historically, modern taxes stem from early initial forms of taxation in the states of the ancient east, and from European taxes, collected by clerical authorities in the Catholic countries and by municipalities in free (Protestant) cities.
    Economically, the essence of taxes consists of replacing some private forms of consumption with public ones. In a legal sense, taxes are the instrument used to transform some part of personal property into public property. Consequently, taxes evolve along with people’s common, social demands, which creates various forms of communities — clan, tribe, principality, kingdom, empire, etc.
    Administering of justice and waging wars were the first people’s social needs. Neither of these were regular activities; thus, occasional fees were enough to support these needs. Fees in natural or monetary form were collected by judges directly from participants in civil property lawsuits; or from persons found guilty of criminal offenses. In “Rus Truth” [Russkaya Pravda], the law code by Prince Yaroslav Mudry [the Wise], the full list of judicial duties is presented. Those duties were collected and deposited to the princely treasury as a fee for consideration on crimes.
    Waging war was at first a public duty of all the men able to bear arms. Later, professional fighting teams were established and special fees were set during the periods of preparation for war and war itself, whether offensive and defensive.
    Aggressive wars were often financed via loans; those were returned to creditors out of seized property or at the expense of tribute from conquered people. As the saying goes, if a nation doesn’t want to feed its own army, it will soon feed an alien one.
    Conducting religious ceremonies was the first regular social need. Initially, sacrifices, i.e. monetary and natural duties, were connected with periodic religious ceremonies; then duties’ frequency was adjus

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ted with economic processes (successful hunting, harvest, cattle issue, etc.).
    In the countries of the ancient east (Egypt, Babylon, China, India, and others) governmental and church powers were inseparable, as the head of state was considered to have a divine origin. Taxes there were collected by special governmental officials. In the other countries where governmental power was not centralized, taxes were collected by priests or monasteries directly.
    So, primary regular taxes were hallowed by their divine origin, as reflected in ancient religious sources. Thus, in Moses’ Pentateuch we read: “And all the tithe of the land, whether of the seed of the land, or of the fruit of the tree, is the LORD’S: it is holy unto the LORD.”
    In Europe, tax collection was an exclusive privilege of the Christian Church for a long time. Saint Thomas Aquinas considered the collection of taxes by princes and counts in their feudal estates to be a sinful occupation, a specific type of “robbery.” German religious writer Ludwig von Seckendorf wrote at the end of the seventeenth century that with the help of “glorious Christian virtues” the “former situation should be redeemed when nobody knew about taxes.”
    Consequently, priests, and later monasteries, turned into the first collectors of regular taxes. During the Reformation period, the struggle against the Catholic Church was also the struggle against taxes collected by the Church. In time, regular taxes began to arise in cities to provide for the needs of municipal self-government bodies and the municipal economy.
    During the period of feudalism, excise duties (taxes on consumption) and trade duties dominated. Along with the development of capitalism, land taxes obtained an important place in taxation strategies as an instrument to supplant feudal nobility. When regular armies arose, new taxes came into usual practice, such as taxes on financial capital, on profits, and on citizens’ individual income.
    Monetary taxes did not emerge all at once, but rather evolved sequentially. Historically, natural duties arose first, and eventually, they took the form of natural taxes. In medieval Europe, counts and princes didn’t pay taxes to the king, yet they were obliged to accept the king and his entourage as lodgers at their estates, and to provide a well-equipped regiment for the army in case of war. Evident

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ly, such requirements were an object of outrage, and for this reason they were gradually unified and formalized—at first, by size (e.g., two weeks of lodging per year became a kind of standard; the number of armed soldiers was also limited, for example, to ten horsemen and twenty infantrymen). Then, these duties were transformed into contributions of universal monetary goods, such as grain, cattle, silver, and gold.
    Nowadays, monetary taxes are the primary form in place; taxes are collected from individuals and organizations. These reflect a specific compulsion-based form of monetary fiscal relationship between the governmental power and the people. Hence, monetary taxes are a specific, distinct type of individuals’ material property duty.
    Taxes are a part of the cumulative public material product, which is concentrated by the government. Along with development of production processes and the evolution of government’s role and functions, taxes have also changed both in quantity and quality.
    Qualitatively, forms of taxes have been modified from harvest taxation (a tithe, or one tenth of annual product) to trade turnover taxation (trade taxes and municipal, bridge, border levies, etc.) to today's income taxes (taxes on corporate profits and on personal income above the living wage minimum). Consequently, the tax system has also transformed, meaning the number of taxes and their types and forms have changed as well.
    Quantitatively, the government’s share in the cumulative public product of its citizens and corporations is calculated as an average share of taxes in national income. This share has largely increased from 10 percent (tithe) to 15-25 percent (with the accent on turnover taxation, i.e. indirect taxes) and to the current 35-50 percent.
    At the same time, the so-called psychological limit of taxation was set; A. Laffer defined it as one-third of personal income. Taxpayers are ready to pay whatever the government needs when taxation is lower than this level, but if taxation becomes higher, taxpayers tend to optimize (lower) their tax payments. If they succeed in lowering tax payments via various tax-avoiding schemes, legal or illegal, they intensify tax avoidance greatly; in this case, all the governmental “compensation measures” and attempts to raise tax rates are in vain, and can even lead to lowering of tax revenues.

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    And if taxpayers don’t manage to lower their tax payments, they tend to leave the country or to shrink their production and other activities under taxation.
    While the relationships between the government and taxpayers are evolving and even worsening, tax administration is also changing and becomes more complicated. It has developed from a control on production volume (directly, through harvest accounting [tithe tax], or indirectly, through land property accounting [land tax]) to a control on economic turnover (sales taxes and turnover taxes), and further, to a control on corporate and personal incomes.