In most tax jurisdictions, a business can deduct expenses which are solely for the business. For example, employee wages are deducted to arrive at taxable profits. But some expenses are not allowable against taxes, for example entertainment.
The words “wholly and exclusively for the purposes of the business” are often used to describe the expenses that are allowable. A recent article in The Guardian has a great example – the costumes worn by ABBA. Apparently Swedish law determined that any stage costumes could not be worn on the street. Can’t image myself in an ABBA costume walking down the street, so I think this would be a whole and exclusive business expense without much doubt.
You can read the full Guardian article here
You may have heard of bitcoin, the online “currency” causing quite a stir in recent times. Unlike many other online payment systems, bitcoin is outside the normal banking and currency systems – see more here about its history etc.
Being outside the normal banking and currency systems means the value of a bitcoin is difficult to determine. And, without going into too much detail here, speculators have caused the value of bitcoin to rise.
So now for the tax bit. An article from the Wall Street Journal last December noted some difficulties the IRS (and other tax authorities I’m sure) are facing. First, is a holding of bitcoin an asset which might be subject to capital gains taxes? It may be, but the first thing one needs to value an asset is a value ideally based on a market or cost basis. This might be tricky with bitcoin, given that it is not a real currency and the market is unregulated. Second, could gains or losses be treated as income? This is probably workable, as a gain or loss could be recorded on sale of bitcoins. But normally, marginal income taxes are higher than capital taxes. This would be fine for the tax authority I am sure, but holders of bitcoins might argue for the asset option – and so might their tax advisors. Only time will tell which option will be used.
It’s Budget time in Ireland. I found this poem on tax on the internet a while back. It’s a bit political I guess, and perhaps US oriented, but it worth read.
“Tax his land,
Tax his bed,
Tax the table
At which he’s fed.
Tax his work,
Tax his pay,
He works for peanuts
Tax his cow,
Tax his goat,
Tax his pants,
Tax his coat.
Tax his tobacco,
Tax his drink,
Tax him if he
Tries to think.
Tax his car,
Tax his gas,
Find other ways
To tax his ass.
Tax all he has
Then let him know
That you won’t be done
Till he has no dough.
When he screams and hollers;
Then tax him some more,
Tax him till
He’s good and sore.
Then tax his coffin,
Tax his grave,
Tax the sod in
Which he’s laid.
When he’s gone,
Do not relax,
It’s time to apply
The inheritance tax.
Accounts Receivable Tax
Airline surcharge tax
Airline Fuel Tax
Airport Maintenance Tax
Building Permit Tax
Corporate Income Tax
Goods and Services Tax (GST)
Driving Permit Tax
Environmental Tax (Fee)
Fishing License Tax
Food License Tax
Petrol Tax (too much per litre)
Gross Receipts Tax
Marriage License Tax
Personal Income Tax
Prescription Drug Tax
Real Estate Tax
Recreational Vehicle Tax
Retail Sales Tax
Service Charge Tax
Value Added Tax
Vehicle License Registration Tax
Vehicle Sales Tax
Workers Compensation Tax
Tax (VAT) on Tax.
And Now they want a blooming Carbon Tax!”
I wrote this post as a guest post for my fellow blogger Mark Holtzman (see accountinator.com)
Many of you are probably familiar with Ireland’s low rate of corporation tax – 12.5%. It has been the subject of many articles and much criticism over the years and in recent times – articles including companies such as Google and Facebook and terms such as “the Dutch sandwich”. So, for the benefit of anyone outside Ireland, let me try to explain a few things and give my opinion for what it is worth. By the way, I am no tax expert.
Ireland is a small island with little or no natural resources – except our scenery and Guinness perhaps. As a result, we have never had any serious indigenous manufacturing. Thus, at some point in the 1970’s a 10% corporate tax rate on manufacturing was introduced. All other businesses paid a higher rate, which I think was 33%. I remember learning tax in college and with this difference in rates, some companies stretched the definition of manufacturing. There was one case I recall which involved determining whether or not banana ripening was manufacturing. The courts ruled in was and since then, is the largest banana exporter in Europe. It’s true, and no banana republic jokes ! The outcome of this case resulted in a large infrastructure being developed in the country for banana ripening.
Now, our corporate tax rate is 12.5 % for all business. So we cannot say Ireland is a tax haven – as all companies are treated the same. But it is fair to say we are a low tax economy. Our European neighbours (Germany in particular) complain, and there are many reports on large US companies avoiding US taxes by being based in Ireland or using Ireland’s low tax rates to transfer profits through Ireland. So is this good or bad? Well, there is no correct answer to this, and of course the answer depends on your perspective. From my perspective as an Irish person and accountant, it is good – jobs are created, more taxes are brought in than if the rate were higher for example. The German government don’t seem to like our low tax rate – their rate is higher apparently – and there are rumblings to have a more common Europe wide tax rate.
But are low tax rates good? Perhaps they can be. Last year when our government was preparing its budget one economist showed that and 11% rate of value-added tax (like a sales tax) would yield the budget deficit. The current VAT rates are 23%, 13.5%, 9% and 0%. – depending on the type of good or service. If all this was replaced with a single 11% rate, an annual additional intake of €1.5 billion would occur assuming demand was stable. Another idea on low tax rates is that if the rate is lower, more people will pay – or put it another way, less will avoid it. In the 1980’s our income tax rate topped 60%. Small business in particular hid money in off-shore accounts. By the early 1990’s, the top rate had decreased to 48% (now 41%). The tax authorities had a tax amnesty, whereby heavy penalties and interest were waived on the off-shore monies. This, and the lower tax rate, brought many thousands of people into the tax net. And as the tax rate has stayed lower than previous times, these businesses have by and large stayed in the tax net and the black economy is less than previous.
A final point when comparing tax rates is what do we mean by tax. For example, all businesses in Ireland pay very expensive rates to the local council/municipal authority. In other countries, this is much less. For example, certain German states keep their local taxes low to attract investment. So before comparing headlines tax rates, we have to ask are we comparing apples with apples. As any management accounting student knows, we cannot compare figures which are not comparable as a basis for decision-making.
I hope you find these thoughts useful. I have included some links below which may be relevant.
- Editorial: Cut corporate taxes to bring business back (ocregister.com)
- Be Glad You’re Not Living in One of the Those Terrible High-Tax Countries (irishleftreview.org)
- U.S. Tax Rates Are Really Low (washingtonmonthly.com)
- Insight: In Europe’s tax race, it’s the base, not the rate, that counts (Reuters) (newsdaily.com)
Let me start this post by saying I am not a tax expert. But from my accounting studies, I do remember that one of the fundamental principles of any tax is that it should be fair. If you read my blog from time to time, you’ll know that I do try to encourage thinking about the costs and revenues of making decisions. This post combines this thinking about the costs/revenues associated with decisions and what mat/may not be a fair tax.
In July 2012, a story hit the German media about a baker in Saxony (Eastern Germany, bordering the Czech Republic and Bavaria) who was subject to a tax audit. You can read the story here (in German), but I’ll summarise it here. The baker donated his stale bread to charity – which was of course a morally good deed. But, the tax people seen this a different way. As the bread had been created from flout, water and so on, some value had been added and thus this implied value-added tax (VAT) was payable according to tax law. So the tax authorities duly assessed the baker for VAT owing.
This story has too points. First, the German tax authorities were legally probably correct – and most European countries would probably also be so. But, if such good deed cease because of a tax law being rigidly applied, how much extra does it cost the state to make good this charitable donation. I have no idea, but I would guess it probably would be better for the German (or any other) tax authority to ignore minor infringements of the law in such cases. The alternative might be to feed the local poor, which I think it is not too hard to conceive as being more costly than forgoing the VAT “due”.
During the summer, I was on holiday in Sud Tirol (it’s Italy, but the culture is more Austrian). We were led to our room, shown around and then asked how will we pay when we leave. The reason for the question was that a law introduced as part of Italy’s austerity measured prevents cash payments in excess of €1,000. Now, I never carry much cash, but I was thinking what an odd law. Is it to stop tax evasion? Apparently so. I read around a bit and found that Spain also has a similar law. And apparently the Italian’s actually wanted to implement the law with a lower amount.
Now, as an accountant I completely understand the issue of tax evasion, cash deals and the black economy. But where is this headed? When I done Business Studies in secondary school, I remember being thought the concept of legal tender. Pre the Euro, the Irish Punt notes were legal tender for settlement of any amount and apparently this may be still so (see here re Euro legal tender). If cash cannot be used at all, what happens when the banking systems fail? Don’t anybody tell me they can’t/won’t; see my post soon on Ulster Banks’ systems failures this summer. And if I were to get a bit political, are we perhaps in the future to trust the very banks that brought the world a financial crisis to manage all transactions. Yeah, I’m being a bit over the top perhaps, but I completely disagree with strict cash controls. There must be other ways to make businesses more tax compliant e.g. focused audits, serious penalties.
Many young Irish people (and other nations too of course) are making their way to Australia to seek employment and/or better their career prospects. The Australian economy seems to be booming based in its natural resources and its closeness to the Chinese markets – who consume huge quantities of these resources. This boom may be affected somewhat by the imposition of a carbon tax from 2012 on all firms emitting more than 25,000 tons of CO2 per annum. This will increase the output costs, which may affect consumer spending. To balance the affect, the Australian Prime Minister has promised some tax reductions. Read the full story here
Just a short post today, as I’m enjoying some holidays. We hear a lot about the relative amount of tax we pay (in Ireland) as a portion of our take-home pay. An article in the Economist of May 12 last puts Belgium at the top of the OECD countries in terms of how much of the total labour costs is taken in taxes and social insurance. It’s 55% in Belgium. Ireland is much lower at 29%. The UK stands at 33% and Germany at 55%. These figures are for single persons. Things change a little bit when you look at families, but not too much. This spreadsheet from the OECD’s website provides the full details. Take a look at “Tax Wedge overview” sheet in particular.
Okay, so none of us as either individuals or businesses like to pay taxes. But, without taxes a huge amount of what economists call ‘public goods’ probably wouldn’t happen. Can you imagine no public transport, health and so on! In the press you’ll often read about tax avoidance schemes operated by large businesses or wealthy individuals, and also about tax evasion? But what’s the difference.
Tax avoidance means using legitimate means to reduce tax payable. While we might think this is limited to big firms and the rich, we all can (and do) engage in tax avoidance at some point in our lives. For example, in Ireland, I can buy a low emissions diesel car which avoids tax in two ways 1) on the registration tax is low as it’s based on CO2 emissions, and 2) by paying less fuel duty each time I visit a service station. Or I could by something online from another country in the EU because it’s cheaper – in this case the VAT in Ireland is avoided. In businesses, large companies often organise themselves so that as much profits as possible are attributed to a low tax country. So tax avoidance is a conscious choice, within the law, to reduce tax payable by an individual or business. Tax evasion is a little different in that a person or business purposely conceals income or profits so as to not pay taxes. The easiest example of tax evasion is what is commonly known as the ‘black economy’. A recent article in the Irish Independent quoted research which estimated undeclared black economy activity in Ireland at 14% of GDP, which translates to around €1billion in VAT. The same research estimates black economic activity in Europe at €2trillion. Without doubt, any black economy activity adds to a countries woes in recessionary times.
The Sunday Times (London, 14th March, 2010) had an interesting piece on what to do about taxing financial institutions in the hope of getting some money for re-distribution to the less well off. Rowan Williams, the Archbishop of Canterbury, and Richard Curtis, the writer, comment on a proposed “Robin Hood” tax. The tax, which would be levied at 0.05% (that’s 50p/c per £/€1,000) on certain financial transactions could yield £250 billion (yes billon) per annum. Williams and Curtis, neither of whom are obvious financial or economic experts feel thus amount of money could go a long way towards improving social services (education, health, transport etc.) in a developed country like the UK. The also suggest some money could be given to developing countries. Given it’s an election year in the UK and how the UK taxpayer has, like other European taxpayers, bailed out the banks this sort of thing might become an issue on the doorsteps. Read the full article here
As the old saying goes, “only two things in life are certain, death and taxes”. In the current economic climate, many businesses are dying off, but the taxes associated with them don’t necessarily “die” so quick. Getting into debt with the tax authorities is never a good idea, but if your business is failing this may be inevitable. Over the years I have had some experience with tax authorities (mainly the Irish Revenue Commissioners), so here are some tips:
1. Contact the tax authorities as soon as possible. Informing them not only buys some time, but it may also begin a negotiation process.
2. Assess the taxes owed. Once you know what is owed, you’re in a better position to see how bad the problem is.
3. Assess all assets and liabilities of your business. If you are a sole trader or part of a partnership, assess all personal assets, liabilities and living expenses. Undoubtedly the tax authority will do this exercise so you might as well be one step ahead.
4. From 2 & 3, you should be able to start a negotiation process. As I said in 1 above, by contacting the tax authority early, you have a much better chance of doing some kind of deal.
5. If you can make a deal to pay a lower amount than you owe, or to pay by instalments, be sure to stick to the arrangement or inform the tax authority if you have problems.
While dealing with tax debts is not the nicest thing in the world, try to be honest and do a realistic deal where possible. Ignoring the problem makes it worse. And, particularly if you are a sole trader, ignoring a tax debt can affect any future business prospects.
Once you have set up your business, you will have to register for the collection and payment of various taxes. Here’s a very quick guide on what you need to watch out for.
If your business operates as sole trader or partnership, you will have to register for income tax. This is typically in addition to income tax you pay as an employee under the PAYE system. If your business is a limited company, you will need to register for corporation tax, which is a tax on the profits of a company
Value added tax (VAT)
VAT is a tax on goods and services. When the turnover of a business exceeds a certain amount (currently £70,000 in the UK), it is legally required to register. VAT is charged on sales and VAT on purchases can be deducted. Any surplus is paid to the tax authorities on a regular basis.
If you have employees, you need to register as an employer and collect PAYE and National Insurance from employees and also pay an employer’s National Insurance contribution. You should register when you have your first employee.
A good thing to do is look at the website of your tax authority. For example, HM Revenue & Customs provide simple guidelines for new businesses – see http://www.hmrc.gov.uk/businesses/iwtregister-a-new-business.shtml . Follow these guidelines and get your business registered sooner rather than later.