Intorduction

The disciplines “Introduction to taxation” and “Taxation” pursues the goal of helping the students in formation and development of the theoretical knowledge in the field of taxation.

The taxation problems are playing an important role within the market economy. Taxes, as obligatory and non-repayable payment, set by the legislation, constitute the main source of state revenues formation. The government uses tax rates and tax privileges to stimulate the development of certain industries, to influence the consumption structure, to encourage the investments in development of the national economy.

By using the taxation the government is able to implement purposefully the social programs and finance other needs of the country. Proceeding from this, it is determined the importance of studding the disciplines “Introduction to taxation” and “Taxation”, that provides the knowledge of basic notions about the taxation and taxation systems.

This set of lessons was elaborated in such a way that allows covering the theory of taxation, i.e. its economical content, functions, elements, principals of their levying and the classification of taxes as well as the taxes role in the conditions of marker economy, putting the accent on the particularities of the taxation system in the Republic of Moldova.

Lecture 1. Taxation-the Concept and the Science

1. Origins and historical development of taxes2. Economic content of taxes3. Functions of taxation4. The role of taxation in modern states5. Theories about state regulation of the taxation system

Part 1. Origins and Historical Development of Taxes

Taxes form an element of the social existence. Human society is heterogeneous for natural and physiological reasons. Already in antiquity this made people unite their efforts and wealth for the purpose of responding to natural disasters and external enemies, as well as in order to build common towns, to support the people not able to work and to provide for many other social needs. Taxes constitute an integral attribute of the state.

Taxes became a necessary element of the socio-economic relations at the formation of the state. The development and transformation of the state’s organisational forms were always associated with a modification of the taxation system. In the periods of slavery, states used taxes in the form of natural charges and duties (i.e. by collecting food, harvest items, etc., of personal obligations), but with the development of commodity-monetary relations, taxes took a monetary form. Primary taxes were initially applied directly on wealth through land and individual taxes. Secondary taxes appeared later, initially in the form of internal customs charges, and with the development of commodity-monetary relations, in the form of excises, which were paid by all the free individuals.

In Ancient Rome, during peace times there were no taxes, but in times of war, citizens were subjected to taxes applied in accordance to their wealth. The tax rate (or the census) was determined once in 5 years. In the IV-III centuries B.C. the Roman state was expanding, new towns-colonies were being conquered and the taxation system was changing as well. Community (local) taxes and duties were being introduced in the colonies. Rome was becoming an empire. The main source of income for the Roman provinces was the land tax; on average its rate constituted 1/10 of the revenue from the land area. Other taxation forms were also used, for example, the tax on fruit trees or vine plants. In addition, chargeable to taxation were real estate, live assets (horned cattle and slaves), and other valuables.

In addition to direct taxes, there were indirect ones, the most important of which were:

-Transactions taxes, usually at the rate of 1%-Special taxes on slave transactions of 4%, and-Taxes on the release of slaves at the rate of 5% of their market price.Already in the Roman Empire taxes played not only a fiscal role, but also

had the function of stimulating economic development. At that time taxes already had a monetary form, which forced the population to generate surplus production for sale. This promoted the expansion of commodity-monetary relations, an intensification of the division of labour and of the urbanisation process.

Many economic traditions of the Ancient Rome were adopted in the Byzantine Empire. In the early Byzantine period of up to the end of the VII century, the empire had 21 types of direct taxes, including:

Land taxes Individual duties Army maintenance taxes Taxes on the purchase of horses Recruit taxes, which released the person paying the tax from military

obligations Charges on the sale of merchandise (usually around 10-12.5%) Charges for issued state documentsThe Russian financial system started to develop a little later. The unification

of the Ancient Russian State began only at the end of the IX century. The main sources of income in the sovereign’s treasury were the tributes. In essence these constituted initially a sporadic, but later a more systematic direct tax. Indirect taxation existed in the form of sales and court charges. Transit dues called “mit” were collected for the transfer of goods through mountain gaps, shipment dues were charged for transporting goods over rivers, “hotel” dues were charged for the right to own warehouses and the “retail” tax was required for the right to organise market events.

The taxation system changed its form and improved under the influence of class conflicts. Its regressive character, conditioned by the preponderance of indirect taxes started to change in the 20th century in direct conformity with the transition to progressive income taxation. The taxation system of the 20 th century, as a result of the efforts made in the finance science and practice is distributing the taxation burden more uniformly than ever in the history of taxation.

In general, the taxation system is a complex and effective mechanism for the regulation of economic conditions; it is a flexible instrument, which influences the profitability of various ownership forms, and the effectiveness of national economies in the conditions of the current science development and of economic globalisation. However, the taxation policy of the state (which is defined as the manoeuvring of the rates and types of taxes) is subject to the lag effect, in contrast to the banking-monetary policy, which is caused by the fact that any change of the tax rate must take the form of a legal document.

Part 2. The Economic Content of TaxationTaxes are a defined as mandatory payments of the contributors to the

budget and to the extra-budgetary funds in the amount determined by law and within the stipulated deadlines. Taxes represent the monetary relations of the state with corporations and individuals regards to the redistribution of the national income and the mobilisation of financial resources to the budgetary and non-budgetary funds of the state. Taxes became a necessary element of the socio-economic relations at the moment of the state formation. The development and transformation of the organisational forms of the state were always associated with a modification of the taxation system, which depends on the development level of the state’s democratic forms.

The economic essence of the state was addressed for the first time in the work of D. Ricardo, who wrote “Taxes form the share of the produce and work of the country, which is transferred to the government, and ultimately they are always paid from the capital or income of the country.”

Russian economists also made a certain contribution to the development of the taxation theory. Among them, N. I. Turguenev mentioned the following: “Taxes

are the essence and the means for the achievement of the goal of society or the state, i.e. of the goal that people assume for society.” Sokolov wrote: “Taxes should be understood as the compulsory collection of funds charged by the state from corporations and individuals in order to provide for its costs, without offering the tax-payer a corresponding equivalent.” Which means that the state collects with the help of taxes means for the formation of a centralised state fund necessary for the fulfilment of the state functions.

Taxation theory constitutes a part of the finance science. Taxation plays a role in the process of redistribution of the new value, is involved in the process of reproduction, and constitutes a specific form of production relations. The source of taxation is the newly created value, i.e. the national income. The source of tax payments is the value added of the product and a fraction of the value of the necessary product.

Taxation, as a particular type of production relation, constitutes a specific economic category with stable internal features, development patterns and forms of manifestation. However, taxation is not just an economic but also a financial category. Taxation has general traits pertaining to all the financial relations, but at the same time, it has its own defining features and functions, which differentiate taxation from the entirety of financial relations.

Part 3. The Functions of TaxationThe functions of taxes are a manifestation of their essence; they are a

means to represent the characteristics of taxes. The functions of taxation illustrate its social purpose of the value-based distribution and redistribution of income. Each of the functions fulfilled by the taxation instrument is a manifestation of an internal feature, an indicator or trait or this economic category.

There are five main functions of taxes: fiscal, redistributory, regulating, controlling, and promoting.

1)The main function of taxation is the fiscal one. It is through fiscality that taxes play their role in the formation of the state budget necessary for the realisation of national and holistic state programmes. The fiscal function provides for the achievement of the main social goal of taxation—the formation of the state’s financial resources necessary for executing the role of the latter (defence, social, environmental protection, etc.)

2)The allocation function of taxation expresses their essence as a special centralised instrument of allocation relations and consists of the social income redistribution among various groups of citizens: from wealthy to deprived ones, which ultimately provides for the assurance of the social stability of the population.

3)The regulatory function of taxation was initiated as soon as the state started to take active part in the economic set-up of the society. This function is aimed at achieving specific goals of the taxation policy through the taxation mechanism. Taxation regulation entails three sub-functions:

a. The stimulating sub-function is aimed at the development of special socio-economic processes, and is implemented through a system of allowances, exemptions and preference arrangements. The legislation in force stipulates the stimulation of a number of taxpayer categories such as the owners of small enterprises, the agricultural producers, capital investors, or charities.

b. The destimulating sub-function inhibits some socio-economic processes through the conscious exaggeration of the taxation burden. As a rule, the effect of this sub-function is related to the introduction of excessive tax rates.

These are, for example, the protectionist measures of the state, aimed at supporting local producers through prohibitive import custom duties. It is important to keep in mind, nevertheless, that taxation relations, as any other relations, must replicate continuously. Taxes must be collected today, tomorrow and always. This is why the utilization of the destimulating sub-function should not lead to the weakening of the taxation basis, to suppression, or even to liquidation of the tax source. Such an exaggeration may result in a situation where there will be no income/processes to be taxed.

c. The replication (regeneration) function is explained as follows: by taxing the utilisation of natural resources, roads, mineral and primary resources, the state uses these proceeds in order to regenerate the exploited resources.

4)The controlling function of taxation—through taxation, the state controls the financial-economic activity of juridical and natural persons. This also contributes to controlling the sources of income and the directions of spending.

5)The incentive function stipulates special taxation arrangements for a certain group of citizens, who are social achievers (participants in wars, etc.). This function of taxation has a social facet.

Part 4. The Role of Taxes in Modern States

“The state, or, to be more exact, the government cannot do anything for its citizens if the citizens are not doing anything for the state,” mentioned the originator of the Russian finance science, N. I. Turguenev in his book “The Experience of the Taxation Theory.” Taxes have a central role in the system of state revenues. In all countries, taxes constitute 80-90% of the state budget. In conditions of market relations, taxation is the main instrument for the regulation of economic development. This imposes great constraints on the taxation mechanism, on the taxation system, which must also provide for the formation of the budget revenues needed for the achievement of the stipulated objectives. Taxes are an objective necessity since they are conditioned by the development needs of society. The need for taxation results from the functions and objectives of the state. The state does not have other acceptable methods to insure its revenue in market conditions.

The participants in the social production processes include economic agents, hired employees and the state. Their initial revenues are formed in the production sphere of goods and services and these constitute the value of the resulting GDP of the country. The GDP includes wages and salaries, social contributions, gross profits, consumption taxes, and other production taxes. Wages and salaries constitute the primary income of hired employees, gross profits make up the primary income of the economic agents and the remains form the revenue of the state. These are accumulated in the budget system and in extra-budgetary funds.

As a result of further redistribution, through the taxation of primary revenues, the secondary revenue of economic agents is formed; this includes the net income of enterprises, the net wages earned by hired employees, the budget of the state. As a result, the state collects from 29% (in the USA) up to 55% (in Sweden) of the GDP. Such a large divergence among countries depends on the number and volume of state functions. For example, in the USA the state does not finance health care and education, while Sweden has a wide-ranging social policy.

Usually, the optimal level of taxation is established at the stage of budget planning by taking into consideration the financial needs of the state and the

requirement to maintain an effective, functioning system of the economy. Taxation can be applied up to a limit. This ceiling is defined as a maximum taxation level, where a further increase in the taxation rate would lead to a drastic aggravation of economic and social contradictions. Such effects can take the form of open political conflicts caused by fiscal reform, insubordination to the fiscal authorities, tax evasion, capital outflows from the national economy across the border, or the relocation of the population to other regions for tax reasons. However, in extraordinary conditions the taxation ceiling can be raised significantly.

The role of taxation consists of the following: Due to the taxation instrument, the state has the opportunity to influence

economic development in accordance with its programmes Taxes must stimulate the development of entrepreneurship and small

business Each state should have a taxation climate favourable for foreign

investments Taxation affects changes in the structure and magnitude of the

population’s purchasing power.The influence of various technological progress stimulation methods through

the taxation system is variable and undefined. Fast-track depreciation reduces the taxation basis on the one hand but leads to technological progress on the other hand; deductions from the costs of scientific research and experimental construction works promote the development of progressive, scientific fields.

Part 5. Theories about the State Regulation of the Taxation System

Attempts to provide a theoretical grounding to the practice of taxation are reflected in taxation theories, the evolution of which took place together with the development of various directions in economic thought. The conceptual models of taxation systems changed in accordance with the political economy of the state.

For a long time, the classical taxation theory was of most importance. As a result, taxation was only granted the fiscal role of providing state revenues. A. Smith is considered to be the father of the scientific taxation theory. In his monograph “An Inquiry into the Nature and Causes of the Wealth of Nations” A. Smith gave a definition of the taxation system, indicating the main conditions for its formation and putting forward four main taxation principles: equity, determination, convenience and thrift of taxation administration. Smith’s work was developed later on by D. Ricardo, J. Mills, and W. Petty. All the theoretical deliberation and scientific debates of those years were focused on one singular aspect: that the execution of the taxation’s function—the provision of state revenues—is achieved on basis of the principles of equity and justice. Naturally, this theoretical approach to the nature and role of taxation changed in the course of many decades and centuries, when economic relations became more complex and the need for the intensification of the state’s regulatory role became more stringent. As a result, new taxation theories emerged; among them there were two directions of economic thought, which had the most significant influence on the taxation policy of the countries with a developed market economy: the Keynesian and the neo-classical ones.

The initiator of the Keynesian taxation theory was John Keynes, who exposed its main principles in his book “The General Theory of Employment, Interest and Money,” in which he advocated state interventions in the processes of

market economy regulation. According to Keynes, fast economic development must be based on a market expansion and an associated increase in consumption. As a result, state intervention is achieved at the level of effective demand. One of the main assumptions in Keynes’s theory is that economic growth is related to monetary savings only in conditions of full-employment. In the contrary case, large amounts of savings hinder economic development as they represent a passive form of income and are not invested in production; as a result the author suggested that surplus savings must be subtracted with the help of taxation. This is why the state must intervene with the purpose of subtracting income savings with the help of taxation in order to finance investments and cover state expenditures. Keynes argued that high level progressive taxation is necessary and that low tax rates lead to reduced state revenues and as a result contribute to economic instability. That is, according to Keynes taxes must play the most important role in the system of state regulation. High taxes stimulate economic activity; influence the stability of the economy and in the context of the economic system act as “integrated flexibility mechanisms.”

The neo-classical theory developed by J. Mutt, A. Laffere, and others is based on the assumption that the state is obligated to remove obstacles to free market competition because the market can and must regulate itself without external intervention; in addition, it can achieve economic equilibrium. Hence, this theory differs from the Keynesian one and assigns a rather passive role to state regulation of economic processes. According to this theory, taxation policy should be developed under the same assumptions: taxes must be as small as possible and corporations should be granted significant tax exemptions. Otherwise, a high tax burden would hinder economic activity and restraint the investment policies of corporations, which would lead to a downfall in the production funds renewal and in an economic recession. A restricted taxation policy would allow the market to provide independently for fast development and would lead to a significant expansion of the taxation basis.

Arthur Laffer contributed considerably to the neoclassical taxation theory. He established a quantitative relationship between progressive taxation and budget revenues, and developed the so-called “Laffer curve.” According to Laffer, an increase in the tax burden leads to an increase in state revenues only up to a level, where they start to decrease. The higher the tax rate, the higher the motivation for tax evasion. When the tax rate reaches a certain limit, entrepreneurship incentives are suppressed, the motivations for production expansion are reduced, taxable income decreases, and as a result, a part of the taxpayers will transfer from the legal to the shadow sector of the economy. Laffer considered that 30% of income is the maximum taxation rate that can be deducted for state budget purposes.

Taxation problems also constitute an important element of the neo-Keynesian theory. I. Fisher and N. Caldor considered necessary the division of taxation objects in accordance with consumption, by taxing the final cost of the consumed product and by taxing savings only as a % of the deposit. This led to the idea of a consumption tax, which is simultaneously a method for promoting savings and a tool for fighting inflation. The money assigned earlier for the purchase of consumer goods could now be used either for investments or for savings, which are transformed in capital investments with the help of the same budget policy—“the subtraction of the surplus savings.” Long-term savings in themselves serve as a factor for future economic growth. Caldor considered that the consumption tax

introduced through progressive rates with the use of exemptions and tax allowances for separate types of goods (for example, for objects of everyday use), is more just for people with low incomes than a fixed sales tax. In addition, in comparison to the income tax, the consumption tax does not cover savings that are necessary for future investments, thus stimulating their growth.

Scientific taxation theories played a positive role in the economic development and growth of many countries. With the help of the taxation policy based on some aspects of the neo-classical theory, the USA government managed in the 80s to overcome economic crisis situations. Nevertheless, one should not adopt taxation theory blindly, without relating it to the socio-economic situation of the specific state. Hence, tax reform has to be performed in conformity with the economic development goals at the given stage, by relating certain aspects of the taxation theory with the applications of economic and financial policy implementation. Otherwise, the taxation system will unavoidably have negative effects on the development of the economy.

Lecture 2. Taxation Elements

1. The Subject and Object of Taxation2. Taxation Allowances3. Tax Rates and Other Tax Elements.

Part 1. The Subject and Object of Taxation

The unifying basis of all taxes in the RM and other countries are the taxation

elements. One of the main elements, typical for the taxation instrument as a whole,

is the notion of payer, i.e., the notion of the taxation subject.

The taxation subject is the individual or company, fulfilling taxation obligations in accordance to the ownership of the taxation object. Every citizen of a state is a taxation subject. If the state has the right to deduct a part of the income, this relates to the obligation of each citizen to offer a part of his/her wealth to the state. In this context, one should not forget about the distinction between the taxpayer and the tax carrier. The former is the entity that initially pays the tax; the latter is the entity carrying the tax as a result of economic processes and transfers. This takes place primarily at the deduction of secondary taxes. For example in RM, taxation subjects are responsible for paying the VAT, yet the real carriers of the tax are the consumers.

The taxation object is the object or phenomenon, which, according to the law, is being taxed. Taxation objects can be classified in the following way: income (income tax), wealth (real estate, land), wealth transfers (inheritance and gift tax), consumption (excises and VAT), or the import and export of goods (customs duties). Income taxation is divided into the taxation of earned and unearned income. Earned income tax relates to salaries, fees of people engaged in freelance occupations, the income of individual juridical persons. Taxation of unearned but legal income refers to dividends, interest revenue, capital expansion, land and real estate rents. The taxation object materializes as a result of legal events (actions, events, conditions), which affect the obligation of the subject to pay the tax: the sale of goods, works and services; the transit of goods though a customs territory, ownership of wealth, the receipt of inheritance rights, the receipt of revenue in one or another form.

Part 2. Tax AllowancesA tax allowance is a full or partial reduction of the taxation burden in

correspondence with the legislation in force. In the international practice, the system of allowances and reliefs has been formed a long time ago. Individual income is taxed only after it reaches a certain level (which is the non-taxable income). Additional sums for the maintenance of each dependant, expenditures for the support of infants and elderly, for medical services that cost over a certain amount, for charitable donations and for education expenses are subtracted from the taxed income.

It is possible to develop a certain systematisation of tax allowances. These can be classified into permanent and temporary allowances. Temporary allowances are granted to adolescents, refugees, foreigners, and people without a permanent residence in the given state but who are there only temporarily. Permanent tax allowances are granted to people, who are fulfilling other obligations or who have earned special merits with the state.

Tax allowances provide for the financial-economic stimulation of the economic activity of the taxpayer through the reduction of the taxation burden obligations. Tax allowances form an important element of the taxation policy and entail social and economic goals. For example, in the sphere of international economic relations, tax allowances are widely used as an incentive for exporters and foreign investors. Tax allowances are usually implemented through the taxation obligation of the payer, but sometimes this is done through the extension of the payment deadline, which is also a reduction in the taxation obligation. Tax allowances include the following types:

1) The untaxed minimum2) Exempting from taxation certain elements of the object3) Exempting from the payment of taxes certain natural persons or

categories of payers4) The reduction of the tax rate5) Full tax relief, and others.

The tax amount can be reduced either partially or entirely, for a limited or unlimited period of time. The exemption from tax for a certain period of time is called a tax break. The process of appropriation removes certain objects from being covered by taxation. Appropriation can be relevant permanently or temporarily, for all taxpayers and for certain categories. Tax discounts are aimed at the reduction of the taxation basis. Depending on the influence on the results of taxation, discounts can be divided into limited discounts (the size of the discount is limited directly or indirectly) and unlimited discounts (the taxation basis can be reduced up to the full amount of the payer’s expenditure).

Tax credits are allowances aimed at the reduction of the tax amount and of the taxed sum. The tax credit takes the form of accounting for previously paid taxes and is used in order to avoid double taxation (a credit for foreign tax). In this case the size of the sum accounted for should not exceed the taxation sum payable in the Republic of Moldova.

Tax amnesty is the return of the paid tax sum, a part of it, or the exemption of the taxpayer from financial sanctions for a certain period of time.

Preferences are a special (preferential) type of allowance offered by one state to another on basis of reciprocity or unilaterally without impact on a third party. Most often this happens in the form of discounts or relief from customs duties. Preferential regimes are established by developed countries towards developing countries in the framework of the Global System of Preferences.

Part 3. Tax Rates and Other Elements of Taxation

The tax rate is the size of the tax set per unity levied. There are fixed and percentage rates. Percentage rates are classified can be proportional, progressive or regressive. It is important to emphasize the notion of base (main) rate, i.e. the rate that does not take into account the specific characteristics of the subject or the type of activity levied (ex. VAT 20%). There is also the reduced rate, which takes account of the specific traits of the payer and applies a reduced taxation burden, and the increased rate, which again takes into consideration the specific activity type that leads to income creation and applies an increased rate. Tax rates can also be classified as follows:

* Val ue added rates—expressed in percentages (income tax)* Specific rates—expressed in a monetary form in conformity with the physical features of the objects levied (ex. the land tax).

In terms of content, there are marginal, factual and economic rates. A marginal rate is indicated directly in the taxation legislation (ex. income tax for a company of 28%). The factual rate is defined as the relation between the paid tax amount and the total amount of income received. The comparison of economic rates most adequately represents the consequences of taxation.

The taxation basis is the part of the taxation object expressed in levied units, to which a tax rate is applied in correspondence with the law. For example, when income is taxed, not all of it will serve as the taxation basis, but only a part of it—the taxable income. In a number of cases the taxation basis is factually a part of the object levied, to which the tax rate is applied. But this is relevant only in the cases where the taxation object is directly conducive to and allows for a calculation measure. Thus, the taxable profit can be expressed directly in monetary units. In contrast, the majority of the taxation objects cannot be expressed directly in taxation units. In order to measure the object, it is necessary to first select some physical feature, i.e. to determine the measuring unit of taxation. For example, the taxation object for car owners is the car itself. Different countries have various parameters of levying: in France it is the power of the engine, in Holland—the weight of the car, in Germany—the volume of the operating cylinders of the engine. In these cases, the taxation basis cannot be determined as the part of the taxation object.

Tax payment deadlines are dates indicated in the law, when payments have to be made to the state or local budgets, as well as to extra-budgetary funds. Missing the deadline automatically leads to penalties, irrespective of the identity of the taxpayer who missed the deadline.

The source of tax payment is a resource used for paying the tax. The source is different from the object and does not always correspond to the latter. Irrespective of the taxation object, the source of the tax payment can only be the net income (profit) or the capital of the taxpayer. Thus, the object of the land tax is land ownership and the taxed item is the specific piece of land.

Lecture 3. Taxation Principles and Forms

1. Classical Taxation Principles

2. Modern Taxation Principles3. The Essence and Form of Taxation4. Taxation through Fixed and Proportional Rates5. Taxation through Progressive and Regressive Rates.

Part 1. Classical Taxation Principles

A number of principles that characterize taxation in general and the taxation system more specifically were set forth by A. Smith. These are:

1. The principle of justice , which promotes the universality of taxation and the evenness of tax distribution among citizens in correspondence with their revenues (“the subjects of the state must participate in the maintenance of the government in correspondence with the income that they make use of under the protection and with the help of the state”). This principle means that taxes must be deducted in conformity with the capacity of the payer, who is obligated to take part in financing a corresponding share of the state’s expenditures. In the international practice, there are two methods of implementing the justice and equality principle. The first method entails insuring the benefit of the taxpayer. According to this approach, taxes paid must correspond to the benefits received by the taxpayer from the services of the state, i.e. the taxpayer receives back a part of the tax paid through various transfers from the state budget covering compensations, the financing of education, health protection, etc. Hence, in this case the approach is connected to the structure of budget expenditures. The second approach depends on the capacity of the taxpayer to pay taxes. Each entity must pay its share in accordance with the capacity to pay. Usually these two approaches complement each other when a taxation system is elaborated; this leads to the creation of the best possible conditions for the implementation of this principle.

2. The principle of determination , which requires the exact determination of the sum payable, the payment method and deadline (“the tax, which each individual is obligated to pay, must be determined exactly.”) This implies that the main types of taxes and tax rates are fixed for a number of years. On the other hand, the taxation system must be flexible and should easily adapt to the dynamic socio-economic conditions.

3. The principle of convenience implies that the tax should be deducted in the manner and at the time most convenient to the payer. The system and procedure of tax payment should be comprehensible and convenient to the taxpayer.

4. The thrift principle implies the reduction of deductions from the tax amounts, in the rationalization of taxation. The sums collected through each individual tax should exceed the expenses for their collection and service (“each tax must be conceived and developed in such a way that it deducts from the pocket of the people as little as possible in addition to what it brings to the state treasury.”)

Part 2. Modern Taxation PrinciplesThe analysis of classical theories allows the formulation of principles that represent

the qualities and tendencies of the modern taxation system. They are:

1. The rational combination of direct and indirect taxes , which implies the utilization of various types of taxes, taking into consideration both the wealth and the income of the taxpayer. In periods of economic crisis it is better to have many sources of budget revenue with a relatively low rate and a large taxation basis then to have 1-2 types of income with high deduction rates.

2. The universalization of taxation which implies equivalent efficiency requirements to all payers and an equivalent approach to the deduction of the tax amount irrespective of the income source, type of activity, or economic sector. It is not acceptable to introduce additional taxes, increased and differentiated rates, or tax allowances for different types of ownership, organizational or juridical structure of the entity, citizenship of natural persons or other factors. In addition, taxes should not be established or applied on basis of political, economic, and ethnic factors, or other criteria of this type.

3. One-time taxation implies that one object can only be taxed once through one tax type for a specific period of time indicated in the law.

4. The scientific approach for the determination of the exact tax rate , which implies setting the deduction rate at a level that would allow the subject to have an income necessary for normal development. The magnitude of the tax burden should allow the normal functioning of the taxpayer after paying the tax amount. It is not acceptable to set the tax rates on basis of short-term interests of insuring state revenues and to the detriment of economic development or to the interests of the taxpayer.

5. Stability , or the endurance of taxation for a long period of time and the simplicity of deducting the payment. Tax rates should be determined by law and should not be revised frequently.

6. Differentiation of tax rates in accordance to the level of income, which should not develop into an inhibitive progression (i.e. a significant increase in tax rates), nor should it be transformed into an individualization of rates, which contradicts the basic principles of the market.

7. The application of a tax allowances system , which would lead to an actual stimulation of investments into entrepreneurship activities and would, at the same time, comply with the principle of social justice, including the insurance of a minimum living standard of the citizens. Allowances should not be established for certain payers only—they should be the same for everybody.

Part 3. The Essence and Form of TaxationTaxation is the entirety of economic (financial), organisational, and legal relations

formed on the basis of the objective redistribution process of value, preponderantly in monetary form, and represents a unilateral unequivalent compulsory deduction though power of a part of the individual or corporate income for the general use of the state.

Internationally, economies are divided as developed and developing. Taxation can also be developed or developing. However, a developed taxation system of a country cannot be transposed to other countries directly because taxation depends is basis-oriented and the economic basis varies from one country to the other.

Taxation should comply with the following requirements:1. Only factually created value should be included in the process of redistribution

2. The final goal of redistribution must be the maximum satisfaction of social needs

3. Redistribution should not only maintain but also increase the profitability of economic sectors

4. Redistribution should be implemented to the interests of all the participants in the economy and with the strict recognition of the equality between the various types of ownership with the purpose of creating a competitive economic environment.

There are three types of taxation: proportional, progressive, and regressive.

Part 4. Fixed Rate and Proportional TaxationTaxation rates can be represented in fixed sums or in percentages. In current

conditions, we usually face percentage rates. However, there are fixed sums rates (ex. excises or the land tax), but taking into consideration the rate inflation, this approach is not acceptable. This is the reason why such rates are related to the size of the minimum wage.

Percentage rates are divided into proportional, progressive and regressive rates. Proportional rates are equal for all the levied objects, i.e. the rate does not change in accordance with the object levied. Such a mechanism is used for VAT deduction. The advantages of this method are:

1) The larger the taxation basis, the lower the rate that needs to be established by the state for the collection of a certain tax.

2) A limited number of rates: it is well known that in the case of progressive taxation multiple rates for one level makes high income unbeneficial and reduces the incentives for income expansion.

3) The low rates applied through proportional taxation lead to a reduction in tax evasion.

Part 5. Progressive and Regressive Tax Rates

Progressive rates increase with the increase in the taxation object, in accordance with a tax rates ladder. Progressive taxation is related to the notion of discretionary, or free income. Discretionary income is defined as the difference between the total amount of income obtained by the payer and the untaxed minimum income. Progressive taxation is defined through an increase in the tax rate in conformity with simple and complex progression. With the simple progression method, an increase in income leads to an increased taxation rate of the entire income. With the complex progression method, a specific ladder taxation is applied, where the size of the rate is determined in accordance with the rate of income increase, yet the increased rate does not apply to the entire income, but only to the sum that exceeded a certain level (income tax for natural persons). Complex progression is opportune for payers with high incomes; this is why it became very popular.

A mixed taxation method is used in practice. This method implies using the progressive method for one part of the object and the proportional method for the rest of the object (ex. income tax in the RM).

Regressive taxation is the method where an increase in income (the taxation object) leads to a decrease in the taxation burden (this applies to indirect taxes).

Lecture 4. Tax Rate Establishment and Tax Collection

1. Tax Rate Establishment and Tax Collection Procedures

2. Tax Collection Methods. Tax Debt Payment Methods

Part 1. Tax Rate Establishment and Tax Collection ProceduresWhen introducing one or another type of tax, it is necessary to identify the taxpayer

of the given tax and the source to be levied (the cost or the profit). Then, the exact taxation object is determined (income, wealth, sale of merchandise etc., it should be remembered that one object cannot be taxed through multiple taxes or charges, except when indicated in the law) together with the calculation method of the tax. The tax rate depends on the sum that needs to be collected and the number payers. Next, the tax collection method is established.

The taxation basis and the method of its determination, as well as the tax rates and payment deadlines are determined for each tax or charge in the law on the given tax or charge.

Tax payment is the obligation of each taxpayer. The financial relations between the state and the taxpayer are reflected in the tax obligation. The tax obligation is the condition that obligates the taxpayer to pay the given tax or charge and grants the taxation authorities the right to demand the fulfilment of this obligation by the taxpayer.

The fulfilment of the tax obligation is achieved through paying the established tax or charge amount within the stipulated deadline. The fulfilment of the tax obligation is mandatory and is executed irrespective of other obligations that the taxpayer may be subject to. This obligation covers the entire wealth of the taxpayer. Full or partial tax evasion constitutes sufficient grounds for applying a punishment to the taxpayer, which usually takes the form of a fine.

The payment is executed in cash or through a bank account in the national currency. Surplus payments or subtractions can be directed for upcoming taxes payable. It is acceptable to exchange tax and state obligations between the state and a certain taxpayer. If the payment deadline is missed, a penalty is applied. The methods of payment are cash, bank transfers, or duty stamps.

If the taxpayer does not comply with the request of the taxation authority to pay the tax or charge amount, the taxation authority has the right to block the operations of the indebted person by freezing the bank accounts or by arresting the person’s property, and to unconditionally subtract the tax amount from the bank account funds or from the sale of the arrested property.

Part 2. Tax Collection Methods

There are three tax collection methods: cadastral, at the source (before the receipt of the income) and through self-assessment (at the declaration of the income).

The cadastre method implies the use of the cadastre. The cadastre is a register of all the typical objects (land, real estate) classified according to physical features and where the average profitability of the object is determined. Physical features include: for the land tax—the size of the land area, the

distance from transportation ways and markets; for the house tax—the number of windows, pipes, doors, the type of the building; for industry tax—the number of employees and machines. The average profitability of the object, which is based on physical features, may differ significantly from actual profitability; this constitutes the main disadvantage of this method. In RM this method is used for land tax.

Taxation at the source is calculated and deducted at the accounting unit of the company, which pays the income of the taxation subject. In this way is deducted the tax from wages and salaries. The tax is subtracted by an intermediary—the collector (tax agent) before the receipt of the tax by the subject, which excludes the possibility of tax evasion. Collection at the source is done for taxing income of employed personnel and for other relatively fixed incomes. The same method is used in other countries for the income of joint ventures. Tax collection at the source implies collection before the receipt of the income by its owner.

Tax collection upon self-assessment represents the deduction of a part of the income after its receipt and implies that the taxpayer submits to the taxation authorities a self-assessment, i.e. an official statement about the income received. Taxation authorities, taking into consideration the size of the taxation object and the taxation rates, verify the accuracy of tax calculations. This method is usually applied for the taxation of non-fixed revenues and for the cases when the taxpayer has multiple income sources. Self-assessment collection is convenient for the taxpayers because it creates conditions for tax evasion due to the weakness of the taxation apparatus and due to commercial confidentiality.

This method entails a number of variations: 1) in advance payments during the taxation period, when the state receives an approximate amount estimated on the basis of the income earned during the previous period or on basis of the tax paid; 2) payment by the taxpayer at the due date on basis of self-assessment at the time or after the presentation of the income self-assessment: the tax payer independently subtracts the tax amount and transfers it to the state; 3) additional payments determined by the tax authority required after the examination or verification of the submitted self-assessment.

Lecture 5. Types of Taxes

1. Principles of Tax Classification2. Characteristics of Direct Taxes

3. Characteristics of Indirect Taxes

Part 1. Principles of Tax ClassificationThe existing taxation system includes various types of taxes, which defer from one

another in form and content. In practice, tax classification is done according to various criteria:

II. In accordance with the collection method:1. Direct taxes which are determined directly for the income or wealth

(income tax, land, individual tax, real estate tax, and others)2. Indirect taxes which are applied to goods and services in the form of an

addition to the price or tariff (VAT, excises and the customs duty).III. In accordance with the taxation object1. Income tax (profit tax, income tax for natural persons)2. Taxes on wealth (individual tax, real estate tax, inheritance and gift tax)3. Consumption tax (VAT, excises, customs duties)IV. In accordance with the objectives set:1. Fiscal, aimed at the formation of the state budget2. Limiting (excises and customs duties)V. In accordance with the taxation subject—individual and corporate taxesVI. In accordance with the entity, which deducts the tax and disposes of it:1. State taxes, determined by state legislation, transferred into the state

budget and applied in the same way for the entire territory: income tax, VAT, excises, customs duties, individual tax and charges for the Road Fund.

2. Local taxes collected by the local authorities of the corresponding territory and transferred to the local budget: real estate tax, land tax, natural resources charges and local charges.

VII. In accordance to the purpose of utilization:1. General taxes are amalgamated and transferred to a single state account;

they are directed for general state programmes. General taxes encompass the majority of the taxes in any taxation system.

2. Special (purpose) taxes have a strictly defined purpose and are aimed for a certain type of expenditures (land tax, road tax, natural resources charges). As a rule, special extra-budgetary funds are created for the special purpose taxes and a special article for this type of tax is introduced in the budget law itself.

Part 2. Direct Tax CharacteristicsChronologically, the mechanisms for direct taxation appeared earlier tat those for

indirect taxation. The criterion for dividing taxes into direct and indirect ones is the possibility to transfer them to the consumer. This criterion is based on the assumption that the final payer of the direct tax is the owner of the taxed property or the earner of the taxed income, while the final payer of the indirect tax is the consumer of the good, to the price of which the tax is added. Direct taxes constitute the basis of the taxation system. Historically, having appeared later than the direct taxes, indirect taxation mechanisms are transformed into a more palpable channel for the provision of state budget revenues, i.e. for covering the expenses of the state.

Direct taxes are divided into real and individual ones. Real taxes are applied to the sale, purchase or ownership of wealth, and their deduction does not depend

on the individual financial capacity of the taxpayer (land tax, wealth tax, real estate tax). In contrast, individual taxes take into consideration the financial status of the taxpayer and his/her capacity to pay (profit tax, individual income tax, the tax for returns on capital).

There are two methods for distinguishing direct and indirect taxes:1. In correspondence with the payment indices: direct taxes are paid and

carried by the same entity, while indirect taxes are carried by one person and paid by another one.

2. On economic basis: direct taxes are subtracted from the production of valuables, i.e. from income or wealth, while indirect taxes are applied to the consumption of valuables.

Direct taxes are the most progressive form of taxation because their deduction takes into consideration the income and family situation of the taxpayer. When paying direct taxes, the payer can determine the exact tax amount, the tax rate, as well as the strictly applied deadlines. Yet, for indirect taxation, the buyers of various goods usually do not know exactly when and how much they are paying to the state through indirect taxes.

Direct taxes are divided into real and individual ones. Real taxes comprise the land, housing, and industrial tax. Real taxes were widely used in the period when land was the main form of wealth. This is when the land tax was introduced in Europe. Various methods were used for the calculation of this tax, including the number of ploughs, the area of the processed lands, and others. These criteria did not allow, however, an accurate determination of the purchase price of land. In this context, the most important development was the transition to taxing land profitability determined according to the cadastre (the land register that accounted for land fertility).

With time, buildings became an important taxation form; this is why the house tax was introduced. The size of this tax was determined on the basis of the following criteria: number and purpose of rooms, number of doors, and windows. However, these criteria could not insure the fairness of taxation, this is why the level of income and the family situation started to be taken into consideration.

In the second half of the 19th century, a transition to individual taxes started to happen. Individual taxes are income or wealth taxes collected at the source or on basis of a self-assessment. For the collection of individual taxes, objects are considered individually for each payer. This involves taking into consideration the size of the income, family situation and other factors. In the RM, direct taxes include the income tax, land tax, real estate tax, road charges and the state tax.

Part 3. Indirect Taxes Characteristics

The formation of the budget revenues entails the collection not only of direct, but also of indirect taxes. In developed countries the relative weight of indirect taxes is usually lower than that of direct ones, while in developing countries—the opposite occurs. Indirect taxes are applied to goods and services and take the form of an addition to its price or tariff. The payers of indirect taxes are the buyers or the consumers. All the citizens, independently of their

income pay indirect taxes because they consume goods and services necessary for survival and which are chargeable to indirect taxation.

Indirect taxes are the simplest to collect and are also difficult to evade by the taxpayer. These taxes are also attractive to the government for the reason that their receipt does not depend directly on the financial-economic activity of the taxation subject, and the fiscal effect is achieved even in conditions of production downfalls and unprofitable periods of enterprises.

At the same time, the state has to apply direct taxes as well such that taxation covers as many activities of the taxpayer as possible: processes that create the material and technical basis for economic activities, the wealth of enterprises, the work force, the resources used in production, and the income. This creates a rather stable inflow of tax payments and also increases the causality between the amount of taxes paid and the effectiveness of the taxpayer.

Indirect taxes are divided into excises, state fiscal monopoly, and customs duties. Excises can be either individual or universal. A good example of a universal excise is the VAT, which is used in the world taxation system since the end of the 60-ies. Individual excises are applied to certain types and groups of goods. Customs duties are applied in most countries only to imported goods. Usually, exporting goods is not taxed through a customs duty.

Fiscal monopoly taxes are applied for the state production of goods (ex. salt, matches, spirit).

Customs duties are classified into export, import and transit duties. In most countries import taxes constitute the largest part of customs duties.

In the RM, indirect taxes include the VAT, excises, and customs duties. Indirect taxes make up 55% of the total budget revenue. The largest part of indirect taxes is transferred into the state budget, while most of the direct taxes are transferred into the local budgets.The advantages of indirect taxes include the following:

1) They increase the state revenue as a result of an increase in the population number or in its wealth. This is most advantageous for the countries that face economic progress.

2) By influencing the consumption rate through increasing the price of one product or another, the state limits the consumption of products that are dangerous for health.

3) Taxes are received as a payment for the good, as they are added to the price.4) For the consumer, indirect taxes are convenient for the following reasons: Insignificance of the amounts paid Time convenience The lack of a constraining factor The lack of time requirements for making the payment Does not require the accumulation of a certain sum.The evolution of indirect taxes, according to many experts, is a general tendency

covering essential as well as luxury goods, or instead of taxing a large number of items it concentrated on a selected few.

Lecture 6. The Notion of a Taxation System. The Taxation System of the RM

1. The Concept of a Taxation system2. The Taxation Legislation3. The Taxation System of the Republic of Moldova4. The Taxation Apparatus

Part 1. The Concept of the Taxation SystemThe taxation system represents the totality of various types of taxes, the elaboration

and calculation of which relies on certain principles. The taxation systems of most countries developed throughout centuries under the influence of various economic, political, and social conditions. This is why it is natural that taxation systems of different countries vary in the types of taxes used, according to the structure of taxes, to their rates, methods of collection, fiscal authorities from various levels, according to the rate, magnitude and quantity of allowances offered, as well as other indices. Yet, all the countries follow some general principles, which allow the creation of optimal taxation systems.

Since the taxation system of the RM was built following the framework of developed countries, it is necessary to make a review of these countries’ taxation systems of. The existing taxation system of developed countries includes a large number of taxes and its structure depends on the organization of the state. In unitary states the taxation system includes two elements: state and local taxes. In federal governments the taxation system includes three elements: state (federal) taxes, taxes related to the federation subjects (regional taxes), and local taxes.

The main taxes, which result in the highest collections for the budget, are related to the state budget. They include the income tax, corporation profit tax, VAT, excises and customs duties.

The international experience has proven that the highest level of taxes is collected through the income tax (from 25 to 45% of the state budget). This tax is collected by using progressive rates, determined through the method of complex progression. There are two systems of applying the income tax:

1. The schedule system (or the English system). This system has been applied for a long period of time (1842-1973) in Great Britain and a number of other countries. This taxation system involves taxation at the source of income not on the entire amount but on parts of the income.

2. The global system, which represents an income tax, applied to the entire income of the taxpayer. Currently in western countries, a global taxation system is applied.

For the income tax there is an untaxed minimum, i.e. a part of the taxpayers’ income is not taxed. In most countries the income tax was introduced in the 20th century. In the beginning, a large number of citizens did not pay this tax because the untaxed minimum was set at a very high level. In the years of the World War II, however, income tax became universal. And also, right after the war, very high tax rates were established (in USA the maximum rate reached 91%). Then, in the beginning of the 80s, a taxation reform was introduced, which led to a significant decrease of the tax rates.

In the last few decades a continuous decrease in the share of the profit tax in the budget revenues can be noticed. This is related to the constant rise in tax allowances and to the decrease of profit tax rates. The main tax allowances applied to corporation profits are the fast track depreciation, charity expenditures deductions, scientific research expenditures and capital investments.

Among indirect taxes, VAT and excises are the most important. VAT is used in all countries of the EU, as well as in Norway, Israel and a few other countries.

VAT is not implemented in the USA. This tax constitutes 30 to 50% of all the indirect taxes. After the World War II, the share of customs duties decreased significantly due to the GATT and WTO.

Part 2. Taxation Legislation

Taxation legislation is the aggregation of all the legal financial documents including legislation acts, presidential decrees, government resolutions, Ministry of Finance letters, which regulate the taxations relations between enterprises and the population on the one hand and the state on the other hand in the process of creating the budget revenues. The taxation legislation of the Republic of Moldova consists of the National Constitution and other legislative acts approved in correspondence with the constitution. Normative acts approved by the government, Ministry of Finance, GNS on the basis of, and in compliance with the Taxation Code cannot contradict its provisions and surpass its frameworks. In case of divergence between the provisions of the Taxation Code and those of other taxation legislative acts regarding the granting of real allowances, the provisions of the Taxation Code are apply. If, for reasons of avoiding double taxation through international agreements to which the Republic of Moldova is a party, other provisions are stipulated, the rules of the international agreements apply.

The taxation legislation changes and adapts to market relations and new economic conditions. In order to promote the legal functioning of the taxation system, in 1992 the Law on the Basis of the Taxation System was adopted, and on 01.01.1998 the two first sections of the TC came into force. These are “General Provisions” and the “Income taxation” sections, while on 1.07.1998 the third section, dealing with the VAT entered into force. In 2000, another two sections were approved: section 4—“Excises” and section 6 “Real Estate Taxation.” Entry into force of these sections was assigned for the years 2001 and 2005 respectively. These laws entail the principles of the taxation system, its structure, rights, obligations and responsibilities of the taxpayers and taxation authorities, as well as logistical matters of tax collections and payment control.

Part 3. The Taxation System of the Republic of Moldova

The taxation system of the RM is the aggregation of taxes, principles, forms and methods of their determination, modifications and annulments as well as measures for insuring actual payment set forth in the Taxation Code. Taxes, duties and charges deducted in accordance with the TC and with other normative acts constitute a part of the national public budget. Taxes (duties) are mandatory, unrefundable payments unrelated to certain actions of the authorised body or person in favour or in connection to the taxpayer. Charges are the mandatory, unrefundable payments that are not taxes or duties.

In the RM there are national and local taxes, duties, and charges. The system of national taxes includes:

Income tax VAT

Excises Individual tax Customs duties Charges for the Road Fund

The local taxation system comprises:1. Real estate Tax2. Natural resources charges3. Spatial planning charges4. Charges for the right to organise local auctions and lotteries5. Hotel charges6. Advertisement placement charges7. Charges for the utilization of the local logo8. Charges for the establishment of retail units9. Market charges10. Car parking charges11. Resort charges12. Dog ownership charges13. Charges for the right to make television and film shoots14. Charges for the right to cross the border15. Charges for retail activity rights on the border zone16. Charges for the right to transport passengers17. Charges for the sanitary maintenance of the territory, for the utilization of

containers, for the disposal of solid household and industrial waste.

Part 4. The Taxation Apparatus

A special taxation apparatus deals with taxation and tax collection issues. In accordance with the law “On the state taxation service” from 1992, in the unitary State Taxation System are included:

The General State Taxation Inspectorate (GSTI) adjoining the Ministry of Finance

The territorial taxation inspectoratesThe main purpose of the taxation inspectorates of all levels is to verify the

compliance with the taxation legislation, the accuracy of calculations, the completeness and punctuality of tax and other payments to the budget.

The GSTI of the Ministry of Finance fulfils the following functions: Organises inspectorate subordinates in executing the work of verification the

compliance with the taxation legislation, the accuracy of calculations, the completeness and punctuality of tax and other payments to the budget.

Verifies the work of subordinates of taxation inspectorates, examines letters, declarations, and complaints and takes measures for increasing work effectiveness.

Organises awareness-building events and explains the legislation on taxation and other payments to the state budget and extra-budgetary funds.

Territorial taxation inspectorates fulfil the following functions:1. Insuring the completeness and punctuality of accounting by the payers of all

types of taxes and other payments

2. Executing the decisions of the local authorities regarding the calculations of the local charges and granting of tax allowances

3. Verifying the accuracy of calculations, the completeness and punctuality of tax and other payments to the budget.

4. Organizing the registration, evaluation and sale of goods that have been confiscated, were unidentified or have been inherited by the state

5. Explaining the legislation on taxation and other types of payments to the budget and extra-budgetary funds, examines letters, declarations and complaints of payers of all types of taxes and other payments.

Lecture 7. Tax burden

1. Notion „tax burden”2. Methods for determination of tax burden

1. Notion “tax burden”

Notion tax burden is used to express the taxation load in one country. The perspectives of economy development in many respects are determined by the maximum level of the tax proceeds and by the level of the tax burden, which is possible in the conditions of country’s economic policy currently in force, and taxation legislation.

Tax burden can be defined as the relation of general sum of the tax proceeds to the national output aggregate that shows which part of the products produced by the society is distributed by means of the budget. The level of aggregate tax burden is determined by the necessity of financing the state expenditures for the realization of its functions.

The optimum built taxation system has, on one hand, to provide with financial resources the state’s necessities, and on the other hand, not influence negatively the stimuli of taxpayer in entrepreneurial activities, but to encourage the taxpayer in finding the ways to increase the management effectiveness. That is why the tax burden is considered a very important indicator in evaluation of country’s taxation system. When the tax burden on the taxpayer increases (growing number of taxes and tax rates, annulation of tax preferences and tax privileges) the effectiveness of the taxation system rises at the beginning and it reaches its upper limit, but latter it starts sharply to come down. In this case the losses of the budgetary system become irreplaceable, because some of the taxpayers are losing everything or getting out of business, or the other part of the taxpayers find ways either legal or illegal to minimize the taxpaying.

Ungrounded increase of tax burden is the origin source of the shadow economy. But “Laffer’s curve” doesn’t provide the clear view of the admissible dimension of the bite of taxes into the country’s budget. This dimension can not be constant and sufficiently precise, its level depends on the taxpayers’ conditions in the specific country and on the economy’s conditions in this country in general. The world experience shows that withdrawal of 30-40% from the taxpayers’ income is that limit after which the reduction of savings starts which leads to reduction of investments into economy; when there is a withdrawal of 40-50% from the taxpayer’s income, entrepreneurial stimuli and initiative for extension are completely liquidated.

2. Methods for determination of tax burden

Tax burden can be determined either on the country’s level, or on the level of separate economic agent (industry).Tax burden of one country equals the sum of the collected taxes/GDPx100%

In the United States of America the tax burden constitutes 31,8%, in Sweden it is 55,5%, average of tax burden in European Union countries constitutes 40,8%, in Japan it is 28,6%, in Russian Federation it is 32,8%, in the Republic of Moldova it is 27,1%.The indicator “bite of taxes” is defined by the taxation system; showing the level of taxation pressure on average statistical taxpayer, not taking into consideration individual particularities of concrete taxpayer. At the same time, this indicator is necessary, because the government has to take into consideration this average indicator. There are many enterprises functioning in one country, which differ from each other not only by the domain of the

activity but also by other features, that inevitably will have an influence on the formation of the taxation basis and the amount of the taxes paid. It is the structure of production costs and conversion, different fund capacity, science intensiveness, the level of profitability.

When referring to tax burden indicator on macroeconomic level, there is no practically problem in determination of the amount of taxes, but the situation is different referring to the level of one enterprise. The main problem is whether the amount of taxes should include that part of payments maid by employees to the pension fund and income tax. In this case the enterprise on behalf of government is not the taxpayer but rather the tax collector, deducting the taxes from the salaries of its employees.

Tax burden of the enterprise can be determined by the separate indicators of enterprise’s activity.

1) Coefficient of tax burden on net sales = sum of indirect taxes/net sales x 100%

2) Coefficient of tax burden on income of enterprise = sum of income taxes/sum of income x 100%

3) Coefficient of tax burden on production costs = sum of taxes, included into production costs/production costs x 100%

Lecture 8. Tax evasion

1. Essence of tax evasion its reasons2. Methods of struggle against tax evasion

1. Essence of evasion from payment of taxes its reasons

In a counterbalance to tax burden amplification, entrepreneurs search for different ways to minimize the tax payment. Thus evasion from taxes is possible by using the legal methods, and also the illegal operations.

There are two methods of minimization the tax burden.1) Tax planning (avoidance of taxes) assumes use of legal methods of

taxation avoidance, organizing the activity so that the tax obligations would be minimal. The notion of tax loopholes are used more often to express the positions in the tax laws that allow the tax payer to reduce the tax burden or to avoid it completely (income displacement, using of tax privileges, etc.)

2) Tax evasion assumes the violation of the fiscal law and evasion from tax obligations by not paying the taxes, changing the tax accounts, presentation of false data, illegal usage of tax privileges and untimely tax paying.

There are different reasons for tax evasion.I. Economical А) Deterioration of the entrepreneurial situation and of the population in general,

especially during the economic crises;B) Excessive tax burden on the taxpayer, non- effective fiscal policy, which is

directed on the fiscal and not regulatory function of taxes;

C) Lack of legal opportunities for providing the competitiveness in some spheres of business.

II. Political. The level of tax discipline depends on the general situation in the country. It can be observed the sharp reduction of tax collection when the crisis of political power occurs, that is caused by the fact that the taxpayers don’t fulfill their tax obligations.

III. Legal:A) Inconsistence of many taxation laws with the laws enacted earlier;B) Unclear formulation gives possibility for their dual interpretation;

C) Often modification made and amendments into taxation legislation. IV. Organization: А) Lack of the interaction between fiscal, control and law-enforcement bodies;B) Insufficient development of international relations in direction of fighting the fiscal

breach of law. V. Morally-psychological:А) negative attitude toward the existent taxation system and officials;B) Risk absence for the committed crimes;В) for many people to steal from the government doesn’t mean to steal at all.

The tax evasion is significant social danger. First of all, the government receives fewer funds into budget, thus state programs financed by the government decrease. Secondly, non-payers got a better position in comparison to law-abiding tax payers from the point of view of the market competitiveness, and such actions can provoke the other economic subjects. Thirdly,when there is a widely developed fiscal crime which in result bring to budget deficit, the government can compensate this by introducing the new taxes, or by increasing the rates of existent taxes. That is why it is in the interests of the society and of every tax payer to obey the taxation law and to prevent its breach.

2. Methods of struggle against tax evasion

All the countries in the world are trying to prevent the breach of taxation law, by using different methods to fight the non tax payers, because the scale of tax evasion is growing practically in all parts of the world. There are different methods that are used to fight the tax evasion, among these are as follows:

1) Establishment of sanctions’ system for breach of taxation legislation, up to penal responsibility and deprivation of liberty for tax evasion or underdeclaration of;

2) General reduction of tax burden;3) Appling the international relations in the sphere of detection of taxation

laws violations; 4) Constant analyses of the present legislation with the purpose of detection

of the existing tax loopholes and their annihilation;5) Operative actions (changing of accounting invoices with fiscal invoices

VAT, changing of stamps, oncoming controls);6) Legislation development and its detailed decoding in the normative acts

pursuing the avoidance of unrestricted interpretation of taxation legislation.

Lecture 9. Double taxation

1. Essence of double taxation2. Methods of elimination the double taxation

1. Essence of double taxation

There are two types of double taxation: economical and juridical (international). Double economical taxation is related to the taxation of two and more taxes from one tax basis. As an example can be presented the situation when the profit of the corporation first is taxed and after being distributed among the stockholders and it is taxed again as dividend tax. Also the double taxation can occur when indirect taxes are levied, for instance, when the goods are levied excise tax, and after this VAT is imposed on the price of the goods, including excise.International double taxation is levying on one taxpayer in one or more countries for one object in the same period of time, which results in identical tax payment, and brings to coincidence of tax object, of tax subject and the period of tax payment. Countries can levy income taxes using the principal of residence, or territorial principal. Double taxation is possible when one country is using residence principal in levying taxes, and the other country is using territorial principal. The double taxation can also occur in the situation when both countries affirm that the taxpayer is their resident, or when each of the countries affirms that the profit was made on its territory. Double taxation restrains the economical activity of the entrepreneur, it influences the growth of prices for goods and services, it increases tax burden on juridical and physical subjects, and also it violates the principal of tax fairness.

2. Methods of elimination the double taxation

The measures that are used for prevention of double taxation can be unilateral measures that are related to the norms of internal taxation legislation and multilateral measures that are implemented using the international conventions and agreements.

Unilateral measures include the taxation tools that are foreseen by the national legislation:

1) Taxation set-off (credit) implies that the taxes paid abroad are set-off in internal tax obligations;

2) tax abatement, implies that the taxes paid abroad are deducted from the amount of profit to be taxed.

Multilateral measures implies singing of international conventions in order to avoid double taxation, in which is stipulated the order of levying of profits and assets. International conventions signed in order to avoid double taxation and prevention of tax evasion have as a goal to create such conditions that would exclude situation when juridical and physical subject would be double taxed. It is coordinated by the negotiating governments, directed to prevent the tax evasion and taxation discrimination in any form, and distribution of taxation rights among the negotiating countries. The Republic of Moldova has signed and ratified more then 20 conventions in order to avoid double taxation on profits and assets with the following соuntries: Poland, Belarusi, Romania, Ukraine, Russia, Hungary, Bulgaria, Germany, Japan, Turkey, China, Canada, etc.

Referring to the unilateral measures in the Republic of Moldova can be mentioned the declaration by the Tax Code of the taxpayer’s right to set-off

(credit) the investment tax and finance profit tax, paid in any other country, if such profit is levied in the Republic of Moldova.

Lecture 10. A General Overview of the Income Tax

1. A General Overview of the Income Tax2. Coverage Scope of the Income Tax3. Deductions Allowed for Taxation Purposes

Part 1. A General Overview of the Income Tax

In the RM the unitary income tax was introduced on 1.01.98 and replaced three taxes: the profit tax of enterprises, the individual income tax, and the profit tax of banks and other crediting institutions. In most countries of the world individual and corporate income tax vary; this is why the unification of these taxes is an innovation in the taxation practice.

The income tax subjects comprise juridical and natural persons receiving income from any sources on the territory of the RM during the taxation year, and juridical persons-residents, which receive investment and financial income from sources outside the RM. Since there are various interpretations of the terms individual and company in the taxation and civil legislation, we will explain some of them. According to the taxation legislation juridical persons are:

1. Any enterprises, institutions, and organizations involved in enterpreneurial activity with the exception of individual enterprises and farms.

2. Non-residents with an economic presence on the RM territory

According to the taxation legislation natural persons are the individual enterprises and farms. According to the taxation legislation, taxation subjects are the entities legally responsible for paying taxes.

The income tax object is the net income, including the allowances received from all sources by all juridical and natural persons minus the deductions and exemptions granted to the given entity by law.

The taxed income=net income (accounting for concesions)-deductions-exemptions.

For 2007 the income taxes are imposed as follwos:

A) For juridical persons they constitute 15% of taxable incomeB) For natural persons including farms and individual enterprises 7% of the annual taxable income not exceeding 16200 lei (1350 lei/month) 10% of the taxable income exceeding 16200 lei but below 21000 lei (1350-

1750 lei per month) 20% of the annual taxable income exceeding 21000 lei (1750 lei per

month).

Part 2. Coverage Scope of the Income Tax

The net income covered by the income tax includes all types of income:1. Income from enterpreneurial, professional or any type of such activity.2. Income of associations and investment funds3. Payment for the work executed and services provided, including salaries and

wages, benefits offered by the employer, fees, commission fees, bonuses and other such type of premiums;

4. Income from renting out wealth;5. Capital increases resulting from asset operations;6. Income received in the form of percentage interest rates;7. Royalties (income from providing the right to utilize non-material property);

8. Annuities (regular insurance payments, pensions and benefits with the exception of social security payments and benefits (pensions and compensations) received on basis of intergovernmental agreements);

9. State subsidies, premiums and prizes, not defined specifically as non-taxable in the law establishing these payments;

10. Dividends received from economic subjects non-residents;11. Allowances for temporary inability to work, received by natural persons from

the state social security fund and others.

Part 3. Deductions Allowed for Taxation Purposes

Deductions are defined as the sums deducted from the net income of the payer at the calculation of the taxable income. In conformity with the TC, for the purposes of determining the taxation basis, it is permitted to deduct from the net income the following items:

1. Regular and necessary expenses payed or bourne by the payer during the taxation year exclusively in the purposes of the enterpreneurial activity;

2. Expenses related to the business trips of employees, membership fees, company insurance payments, but only within the limits established by the Government;

3. Percentual disbursements if these are necessary outflows for the enterpreneurial activity and if the majority of the shareholders are not foreign citizens or exempt from taxation;

4. Accrued wear and tear for each type of property during the taxation year;5. Spendings related to the extraction of non-renewable natural resources;6. Amortization of each non-material property item (invention patents, author

rights, industrial drawings and blueprints with a limited life-time);7. Bad debts, which have lost value and are not expected to be payed duting

the taxation year.

It is not allowed to deduct the following outflows:

Sums payed for the purchase of land or property, which is subject to depreciation or of fixed assets with a lifetime longer than 1 year;

Compensations and rewards, percentage interest rates and losses, incurred in the interests of an official or related person;

Undocumented expenses above the limit established by the government; Personal and family expenses.

Lecture 11. Particular Aspects of Individual Income Taxation

1. Preferential Taxation Treatment for the Individial Income Tax2. Calculation Methods of the Income Tax Subtracted from Salaries

and Wages3. Income Tax Deductions from Payments Other than Salaries and

Wages4. Submission of Individual Income Tax Self-assessments

Part 1. Preferential Taxation Treatment for the Individial Income Tax

Each taxpayer (individual person, resident) in the year 2007 has the right to a personal tax exemption of 5400 lei per year—450 lei per month. The amount of the individual preferential exemption constitutes 10000 lei per year—833 lei per month for the following:

1. Persons who have contracted and experienced radiation-related illness caused by the accident at the Cernobil AES.

2. Disabeled persons, whose disability has been proven to be related to the accident at the Cernobil AES.

3. Parents and spouses of deceased and missing participants to the military operations for the protection of the territorial integrity and independence of the RM as well as to the military operations in the Republic of Afganistan.

4. Disabled persons, whose disability occurred during military operations for the protection of the territorial integrity and independence of the RM as well as to the military operations in the Republic of Afganistan.

5. Disabled natural persons, whose disability occurred during wars, disable from childhood, disabled of category I or II or retired individuals who are rehabilitated victims of political repressions.

Married individuals residents of the country, have the right to an additional discount in the sum of 5400 per year (450 lei per month), this allowance has the name of married couple’s allowance, which is applied if the spouse is not exempt from tax.

The taxpayer (the individual resident) has the right to an additional discount in the amount of 1440 lei per year (120 per month) for each dependent with the exception of disabled individuals, whose disability appeared in childhood, the discount for whom constitutes 5400 per year. In case the dependent has a number of custodians, the discount is offered to all the custodians. For tax discount purposes, a dependent must meet the following criteria:

Be a primary relation to the employee or the spouse of the employee either through ascending or descending relation (parents, children, adopters).

Live together with the taxpayer or separately, but the latter applies only in cases where the dependent is enrolled full-time in an institution of higher education for more than five months of the taxation year.

Is being maintained by the taxpayer Does not have an income higher than 5400 lei per year.

Part 2. Calculation Methods of the Income Tax Subtracted from Salaries and Wages

According to the legislation of the RM, the employer executing the payments of salaries and wages, including remunerations and allowances offered to the employee is obligated to retain and transfer income taxes to the budget, taking into account the exemptions that apply to each employee. Taxes are retained from any type of income: salaries and wages, rewards, salary bonuses, premiums, subsidies, fees, commission fees and other payments. The taxable income also includes allowances offered by the employer, such as:

1. Payments offered by the employer for the purpose of reimbursing personal expenses of the employees (this can include spendings for education, health care, or the maintenance of children in pre-school institutions);

2. The cancellation of the employee’s debts to the employer;3. Financial aid provided by the employer for housing expenses of the

employee, when the housing is provided by the employer;4. Expenses of the employer for providing the employee with the right to use

property for personal purposes;5. Contributions to pension funds, with the exception of contributions to

qualified non-governmental pension funds.

The net income of the employee does not include the following types of income:1. Insurance compensations obtained as a result of insurance contracts;2. Compensations received as a remuneration for health injuries, including

cases of disability incidents;3. Student allowances for high school, undergraduate and postgraduate

students, scholarships from charity organizations as well as one-time grants payed to young professionals offered jobs in rural areas according to the staff distribution;

4. Alimonies and child maintenance allowances;5. Leave allowances;6. Special compensations for the less privileged and socially vulnerable

social groups;7. Wealth received as a gift or through inheritance;8. Allowances received from charity organisations and others.

According to the RM legislation, the calculation of the income tax retained at the source and transferred to the budget is done according to the personal record book.

Part 3. Income Tax Deductions from Payments Other than Salaries and Wages

1) Dividend taxation . Residents of the RM pay dividents from the net profits remaining after income taxation and they do not retain any income taxes on the dividends at the source of payment. However, in the cases where the economic subject pays dividents to its shareholders residents of the RM from profits before taxes, he/she must retain from the dividend amount an income tax of 15%

2) Tax retention on percentage interest rates and royalties . Each payer of percentage interest rates and royalties must retain as income tax an amount equal to 15% of the percentage interest rates and royalties.

3) Tax retention from other payments . Each person (resident) involved in enterpreneurial activity, or institution, organization, public authority or public institution of the RM, which pays for services, retains as part of the tax 5% from the amount corresponding to the sum payable. Services include: rent, advertising services, audit, management, marketing and consulting, security

of individuals, property and services related to the installation, exploitation and repairs of computers.

Part 4. Individual Income Tax Self-assessments

The following categories must present an individual income tax self-assessment each year before March 31st:

1. Natural persons—residents with the obligation to pay taxes;2. Natural persons—residents receiving income from sources other than

salaries and wages exceeding the personal exemption of 5400 lei per year;3. Those who received a salary or wage above 21000 lei per year, with the

exception of juridical persons who received the income in the form of salary in one single workplace;

4. Those who received income either in the form of salary or in any other form and from any source, exceeding 21000 per year.

Lecture 12. Specific Characteristics of Income Taxes for Selected Categories of Juridical persons

1. Taxation of Separate Taxpayer Categories 2. Taxation of Associations and Investment Funds3. Taxation of Qualified Non-governmental Pension Funds4. Taxation of Economic Agents Non-Residents

Part 1. Taxation of Separate Taxpayer Categories

Since there are differences between the taxation arrangements for various types of economic agents, we will look into the peculiarities of the following taxpayer categories:

Public Authorities are exempt from income tax if they are financed by the state and local budget. The income earned by these bodies from secondary economic activities are covered by the income tax, however, and it is allowed to apply to them the discounts stipulated in the TC.

Non-commercial organisations. These include the following:1. Health care, education, science and cultural institutions;2. Associations of the blind, deaf, desabled and the enterprises established

for achieving the goals of these associations, social associations, religious, and charitable organisations;

3. Trade and labour unions, associations of veterans, employers, enterpreneurs and individual farmers;

4. Parties and other socio-political organisations.

Non-commercial organisations are expempt from taxes if they fulfill the following requirements:

1) They are registered according to the legislation2) The use all of their income for achieving their objectives3) They do not use any part of the property or income for the benefit of any one

member of the organisation or any one individual4) They do not support any political party, election block or candidate for a

public authority position, and are not using any part of the income or property for the financing of the above (this does not apply to item 4).

The legal status of diplomatic representatives of foreign states is regulated by the law of the RM on the status of Diplomatic Representative Offices of Foreign States in the RM. The diplomatic representative office and its staff are offered a preferential tax treatment and immunities for the purpose of fulfilling their duties. According to agreements with the governments of other countries and with the leaders of international organisations, the staffs of diplimatic representative offices and their consultants are exempt from paying taxes on the income received in the RM.

Part 2. Taxation of Associations and Investment Funds

An association is any organisation involved in enterpreneurial activity on basis of partnership and which is founded in conformity to the legislation. Usually, associations do not have more than 20 members-residents and meet the requirements of the proportional distribution of gains and losses between the owners of capital. Associations do not pay income taxes. This is related to the fact that each income component is distributed among the members of the associations. Each member of the association pays income tax separately, depending on the income earned during the given taxation year.

Income tax calculations for investment funds if are subject to special rules. Any investment fund has several types of income, which it is obligated to distribute to its shareholders; these are:

1. The dividends received from the economic subject whose shares belong fully or partially to the IF;

2. Capital increases of the IF gained as a result of operations on the stock market;

3. Percentage interest rates received as a result of investing the funds of the IF.

1. Dividends, capital increases and percentage interest rates are types of IF income that are accounted for in a separate income account. The payments made by the IF to its shareholders in accordance with the number of shares belonging to each shareholder of the fund are made from separate income accounts and are taxed when they reach the shareholder, i.e. as if they had been received by the shareholder without the participation of the fund.

Part 3. Taxation of Qualified Non-governmental Pension Funds

The creation of non-governmental pension funds allows for imporvements in the social insurance status of employees. However, the requirements that have to be met by qualified pension funds entail such strict limitations, that the creation of even a few such funds is problematic. Below are the conditions that non-governmental pension funds have to comply with:

1. The share of the employee in the capital or income of such a fund must be transferred immediately to a separate account and it is forbidden to remove funds from this account before the employee reaches the retirement age, dies or becomes desabled.

2. In case of the employee’s death, the funds remaining in his/her account are paid to the inheritors.

3. The assets and income of such a fund is kept in a separate account, in a financial institution.

4. The fund provides for a reasonable protection of the funds form being lent, from sale of assets and form similar operations.

5. The fund should be registered in accordance with the RM legislation.

The sum paid on behalf on an individual by his/her employer during the taxation year to a qualified non-governmental pension fund with the purpose of accumulation is subtracted from the net income of the individual, but only with the condition that this sum does not exceed 15% of the income earned by this individual during the taxation year.

The income of the qualified non-governmental pension fund is not taxable under the income tax, but any payments from the fund are included in the net income of the receiver.

Part 4. Taxation of Economic Agents Non-Residents

Any income received by a non-resident may be received either in the RM or outside its borders. Income sources in the RM include the following:

1) Percentage interest rates on loan obligations of the RM public authorities, an economic subject-resident or a resident association;

2) Dividends paid by a resident economic subject;3) Income fom work activity and services provided in the RM;4) Income from renting out in the RM real estate and movables;5) Income from the sale of real estate located in the RM;6) Income from the sale of movables (with the exception of stock of goods),

given that the buyer is a resident;7) Royalties and contributions on insurance and reinsurance contracts, which

have been signed in the RM.

The criterion for defining the income of the non-resident as received outside the borders of the RM is the impossibility to related the given income to the one received in the RM. The non-residents who receive taxable income in the RM are also granted deductions, which reduce the taxable income amount, but this only applies to the particular income. All revenues received by non-residents on the territory of the RM are taxed at the rate of 5%, whith the exception of royalties, taxed at the rate of 15% and insurance and reinsurance contracts—at the rate of 2%.

Lecture 13. The Determination of the Income Tax Amount for Entities Involved in Enterpreneurial Activity

1. The Determination of the Income Taxation Object 2. Norms and Regulations Used for Adjustable Expenditures3. Income Tax Self-assessments of the Entities Involved in Enterpreneurial

Activity

Part 1. The Determination of the Income Taxation Object

When determining the taxation object, the financial result on the entity involved in enterpreneurial activity, which is determined in conformity with the requirements of the National Accounting Standarts, is adjusted (increased or decreased) for some expenses and revenues, taking into consideration the provisions of the TC. In order to determine the sum of the taxable income, the financial results sum is increased by the adjusted amount for revenues and decreased by the adjusted amount for expenses.

The provisions used for revenue adjustments are the following:1) The result of capital assets operations are taxed at the rate of 50% of the

sum;2) Interest revenues on bank deposits and state bonds are not chargeable to

taxation until 01.01.2010.

Part 2. Norms and Regulations Used for Adjustable Expenditures

The RM legislation includes the following norms and regulations relevant for adjusting expenses for taxation purposes:

Expenses related to the business trips of employees . The structure and procedure of determining business trips expenses on the territory of the RM and of CIS countries is regulated by the resolution of the RM government, which stipulates that: A) transportation expenses for travel within the RM and in CIS countries are reimbursed according to supporting documents or to the minimum ticket cost; B) diurnal expenses are reimbursed in the amount of 35 lei for each day spent on a business trip within the territory of the RM, except for the departure and return days, when diurnal expenses are reimbursed at a rate of 50%; C) lodging expenses are established as 70 lei on the territory of the RM and 150 lei in Chisinau.

Representative exp enses . The maximum amount allowed for deductions as representative expenses constitute: 0.5% of the net income received from the sale of merchandise (inventory turnover); 1% of all the taxable income amount in accordance with the TC.

Expenses unsupported by documented evidence . It is allowed to subtract incurred and payed expenses related to the enterpreneurial activity and which cannot be supported by documented evidence in the amount of 0.1% of the taxable income.

Donations for charitable causes . It is allowed to subtract documented expenses for charitable causes in a sum that does not exceed 10% of the taxable income before accounting for the relevant exemptions stipulated in the TC.

Expenses for the maintenance, repair and reconstruction of fixed assets . If during a certain taxation year the expenses for the maintenance, repair and reconstruction of fixed assets does not exceed 10% from the cost base of the given property category, the subtraction of these expenses is allowed for that year; if however, such expenses exceed 10% of the cost base of the fixed assets, the surplus amount is defined as expenses for reconstruction and are classified into the fixed assets account.

The determination of depreciation for taxation purposes . The amount of the subtraction during the taxation year on one or another category of property is determined by applying to the cost base of one or another category of property (at the end of the taxation year) the following depreciation norms: I property category—5%, II category—8%, III category—10%, IV category—20%, and the V category—30%.

EXERCISE. The financial result of an enterprise for the year 2002 constituted 500,000 lei. Income tax retained at the payment source amounted to 10,000 lei, and the amount payed in installments was 120,000 lei. Determine the amount of the income tax payable to the budget given the following data about the revenues and expenses of the enterprise:

Indicators Amount indicated in the Financial Statement

Amount indicated for taxation purposes

Difference(3-2)

1. Capital assets operations results

10000 5000 -5000

2. % interest revenues from the Central Bank

2000 0 -2000

3. % interest revenues on bank deposits

3000 0 -3000

4. Dividends received from residents

5000 0 -5000

Total adjustment of revenues

-15000

1. Fixed Assets Depreciation

5000

2. Expenses for Fixed Assets repairs

-2000

3. Incurred expenses related to the Central Bank

-2000

Total adjustment of expenses

1000

Taxable income=500000+(-15000)-1000=484000Income tax=484000*15%=…………..Income tax payable to the budget=…………..-10000-120000=9000.

Part 3. Income Tax Self-Assessments of Entities Involved in Enterpreneurial Activity

According to article 83 of the Taxation Code, the follwing categories of entities involved in enterpreneurial activity are obligated to submit an income tax self-assessment:

1) Juridical persons residents, with the exception of public authorities and state institutions,

2) Enterprises-residents with the status of an individual—individual enterprises and farms,

3) Permanent representative offices of non-residents of the RM,4) Juridical persons non-residents obligated to pay income taxes.

The self-assessment must be submitted to the GNS at the place of registration (the endorsement of the fiscal code) not later than the 31 March of the year, following the taxation-reporting year. If the taxpayer termintates the activity during the taxation year, the person in charge is obligated to announce the taxation inspectorate within 5 days after the termination of activity about it, and, within 60 days, to submit an income tax self-assessment for the entire period of the reporting year, during which the company was involved in enterpreneurial activity.

The taxpayer, whose taxation obligations exceeded ……..lei during the taxation year is obligated to pay not later than on the 31.03, 30.06, 30.09 and 3.12 of the taxation year the sum equal to one fourth of the:

Sum calculated as the tax payable for that year; Tax payable for the previous year.

Lecture 14. Real Estate Tax

1. Specific Details of Juridical Persons’ Real Estate Taxation2. Specific Details of Natural Persons’ Taxation3. General Overview of the Land Tax4. Land Tax Calculations for Juridical and Natural Persons5. Real Estate Tax and Land Tax Allowances

Part 1. Specific Details of Company Real Estate Taxation

All juridical persons are payers of real estate taxes, irrespective of the ownership type, organisational or legal structure, which have in possession, ownership, or use assets located on the territory of the RM. Here, the taxation objects are the buildings and installations included in the fixed assets in accordance with the “Fixed Asset Classification Blueprint for the Economy of the RM” approved through resolution №40 from 16.09.1993 by the Statistics Department.

Buildings are constructions aimed for the creation of work or living conditions, for social and cultural sercives or for the storage of material valuables. Installations create conditions for the normal execution of production process, for the fulfilment of technical functions unrelated to a change in the object of work. Buildgings include blocks for production lines, for the management, departments, medical centers, resort houses, kindergartens, dormitories, and housing stocks on the balance of the enterprise. Installations include petrol and gas wells, bridges, roads, and paved areas of the enterprise, dikes, viaducts, water springs, and fences.

The average annual value of the taxable real estate objects is defined as the average chronological, sum of the remains for each month of the reporting period, in correspondence with the data. The residue for the beginning and end of the period are collected in half. The resulting sum is divided into the number of months in the period. In 2007, a universal tax rate of 0.1% from the cost of the real estate objects was imposed on all the juridical persons, with the exception of housing-construction and garage-construction cooperatives. Juridical persons calculate the annual taxation amount on real estate independently, and the sum is payed to the budget in equal quarterly installments, not later than the 20th of the month following the reporting quarter.

Period

Balance cost of thereal estate

at the beginningof the period, lei

Balance costof the real estate

at the end of the period, lei

January 233595 232450February 232450 231305March 369305 367903

The real estate tax for the year=(2333595/2 + 232450 + 369305 + 367903 /2 ) / 3*0.1=300.84 lei

300.84*0.25=75.21 lei, which is the real estate tax for the quarter.

Part 2. Specific Details of Natural Persons’ Taxation

The calculation of the real estate tax for natural persons is carried out in relation to the cost, area and location of the real estate. The taxation objects include:

Housing, registered with the right to ownership, including privatised items House possessions Apartments in Housing Association Constructions and installations on country house land Garages for the storage of personal vehicles

Objects, which are still work in progress, also constitute taxation objects.

Real estate taxation subjects are natural persons who own real estate, situtated on the territory of the RM. Both registered and unregistered property with the cadastre authorities is taxable according to the following procedure:

In the municipalitie Chisinau —0.02% of the real estate cost; From 100 to 200 m2 by 3 times From 200 m2 by 28 times

In the municipalitie Balti—0.3% of the real estate cost; In other municipalities and towns—0.2%; In rural areas—0.1%.

The stipulated rates are imposed on housing estates (main buildings), the general area of which does not exceed 100 m2. These rates are defined as base rates and are applied for the calculation of the real estate tax on housing blocks, with the main building of less than 100 m2. For buildings of over 100 m2, the base rates are increased as follows:

1. From 100 to 150 m2 by 1.5 times2. From 150 to 200 m2 by 2 times3. From 200 to 300 m2 by 10 times4. From 300 m2 by 15 times

Example: The total cost of the real estate property of a citizen residing in a village ammounts to 90,000 lei. The total area of the house constitutes 182 m2. The cost of the house constitutes 68,000 lei.

[(90000-68000)+(68000 / 182*100)]*0.1%=59.36 lei.68000 /182*50*0.1 %*1.5 times=28.02 lei68000 /182*32*0.1 %*2 times=23.91 leiTotal real estate tax amount: 59.36 + 28.02 + 23.91= 111.29 lei.

The real estate tax on natural persons is transferred to the budget on August 15 and October 15 of each year.

Part 3. General Overview of the Land Tax

In the RM, land is used against payment. The payers of the land tax are juridical and natural persons, who have been granted with the right of ownership, possession or use of a land area and who qualify as the owners of the land. The land tax objects are the land areas offered into the ownership, possession or use, irrespective of the use duration, purpose or location of the land area. For the land that belongs to the state and is rented out, the land tax is payed by the tennant, according to the rent contract. It is in the competency of local public authorities to issue documents, which prove the possession right of the land area, certificates proving the right to temporary use of land, as well as contracts for the rent of land in cases of rental arrangements. The cadastre register of the landowners contains the cadastre information about all the registered landowners. This register contains other information as well: the address of the user, the number of the issued document, the size of the land area, and its utilization purpose. The cadastre register contains qualitative and quantitative information about the land sections within the borders of the village, town or district. The rates of the land tax are established per unit of area in conformity with the category and location of the land.

Agricultural grounds are the land sections such as arable lands, sections covered by multiannual plants, hayfields, pastures, breeding nurseries, etc. used for agricultural plants. Agricultural grounds are taxed through two rates, which apply to hayfields and pastures and to all other agricultural grounds. These rates are set for 1 ha of land, either without an estimated cadastre value for 1 point-hectar of land, or with an estimated cadastre value. 1 point-hectar of land equals the sector, the area of which equals to 1 ha and the quality indicator is of 1 point. The areas of land located within inhabited regions are sections within their borders and in the possession of the local public authority.

Part 4. Land Tax Calculations for Natural and Juridical Persons

The sum of the land tax payable to the budget is determined through the multiplication of the land area with the cadastre value (only for the areas which had been assigned a cadastre value) and with the tax rate. For 2007, the following land tax rates were used:

1. For agricultural lands: For all land areas with the exception of hayfields and pastures: lands

assigned with a cadastre value—1.5 lei for 1 point-hectar, and for areas that had not been assigned a cadastre value—110 lei per ha.

For lands allocated for hayfields and pastures: those with a cadastre value—0.75 lei per point-hectar and those without a cadastre value—55 lei per ha.

2. For lands within inhabited regions:a)For lands occupied by housing blocks, gardens and garage cooperatives:In the Chisinau and Balti Municipalities—10 lei per 100 m2.

In the Cahul, Causeni, Edinet, Hincesti, Orhei, Soroca, Taraclia, and Ungheni municipalities—4 lei per 100 m2.

In towns—2 lei per 100 m2.In rural inhabited areas—1 leu per 100 m2.b)For lands occupied by industry, transportation, communications, agricultural

enterprises and lands with other special purposes:In the Chisinau and Balti municipalities—30 lei per 100 m2.In other municipalities, towns, and rural inhabited areas—10 lei per 100 m2.The land tax is payed to the budget in equal amounts and not later than on the 15 th

of august and 15th of October of the current year. The taxpayers who have paid the land tax for the current year before the 30 th of June have the right to a 15% discount from the sum of the payed tax.

Part 5. Real Estate Tax and Land Tax Allowances

The following entities are exempt from real estate taxation:1. Institutions financed from the budgets of any levels;2. Organisations and enterprises of associations for the blind, deaf, and the

disabled;3. Enterprises of penitenciary institutions;4. Objects of civil protection;5. Diplomatic representative offices on real estate granted on reciprocity grounds

and which do not entail rent payments;6. Religious organisations for the real estate aimed for conducting cult

ceremonies;7. Selected categories of natural persons:a. Persons who have reached the age of retirement;b. Desabled persons from category I and II, with a disability from childhood;c. Disabled persons of category III (participants to the military operations for the

protection of the territorial integrity and independence of the RM, participants to the military operation in Afganistan, participants to the liquidation of the accident consequences at the Cernobil APP). These categories of citizens (with the exception of desabled persons of category I and II with the disability from childhood) are exempt from tax in case they do not live together with a working family member.

d. Families of the deceased during the military operations for the protection of the territorial integrity and independence of the RM, the military operation in Afganistan, and the liquidation of the accident consequences at the Cernobil APP.

The following persons are exempt from real estate taxation:

1. Reserves, national parks, botanical gardens, lands belonging to the forestry and water funds not used for industrial activities;

2. Scientific organisations, research institutions with an agricultural or forestry focus and which use lands for scientific and educational purposes, fish farms for the water areas of the lakes;

3. Institutions of culture, art, cinematography, education, health care, and sports with the exception of resort institutions and monuments of nature, history and culture financed either from the state budget or by unions;

4. Enterprises, institutions, organisations, farms as well as natural persons who, for agricultural purposes, have received degraded land areas, have recultivated and restored them (the allowance is offered for the initial 5 years of utilization);

5. Areas of the state border;6. Land areas of general use situated at the border of inhabited regions;7. Cult institutions;8. Land areas allocated for the permanent use of common railways.

Lecture 15. Special Road Charges

The law on the Road Fund of the Republic of Moldova stipulates the followng formation sources for the the fund:

Deductions from the excises on automobile petrol and diesel; Charges for the transit of the RM roads by vehicles not registered on the

territory of the RM, applied to users, who do not have tax relations with the budget of the RM and who are using its territory for transit;

Charges for the utilization of roads from the owners of vehicles registered in the RM;

Permit release charges for the passage of vehicles exceeding volume and wheight load on the axle limitations as well as for executing works on the protection zone of roads;

Charges from juridical and natural persons for the issuance of licences for the execution of transportation works and of construction, repair and road maintenance works as well as for the international vehicle transit;

Fines for damaging roads, road installations and equipment set up adjacent to the road.

The charge from the owners of vehicles registered in the RM is retained not later than on the 31st of July, irrespective of the date of the technical revision, the rates are established in lei:

Motorcycles—36lei;Cars, in accordance with the engine volume:Up to 1500 cm3—54leiFrom 1501 to 2000 cm3—108leiFrom 2001 to 2500 cm3—360leiOver 2500 cm3—900lei

Minibuses and busses, in accordance with the number of seating places:

-up to 11 places—900-from 12 to 17 places—1080-from 18 to 24 places—1260-from 25 to 40 places—1440-over 25 places—1620

Lecture 16. The Value Added Tax

1. The Economic Essence of the VAT2. Deliveries Exempt from VAT3. VAT Administration (the Registration of the Subject and the Declation of

the VAT).

Part 1. The Economic Essence of the VAT

VAT is the indirect tax, which is included in the price of goods and services and is therefore played by the consumer. Starting from 01.07.1998, the VAT is calculated in conformity with section III of the TC. The TC stipulates that the VAT is a republican, state tax and represents a method of extracting for the budget a part of the cost of the taxable goods delivered and services provided on the territory of the RM, as well as a part of the cost of taxable goods and services imported into the RM.

The VAT objects are:1. Juridical and natural persons registered or who must register in

accordance with the requirements for the registration of taxation subjects.2. Juridical and natural persons who are importing goods, with the exception

of natural persons who are importing goods for personal use and consumption

3. Juridical and natural persons who are importing services defined as taxable deliveries, made by the indicated persons.

The taxation objects are the deliveries of goods and services by the taxation subjects; these result from economic activity on the territory of the RM or from goods and services imports into the RM, with the exception of the goods imported by natural persons for personal use and consumption.

The TC stipulates 4 types of VAT rates:

1) 20% of the taxable value of the taxable deliveries of standard goods;2) 0% for the following: goods and services to be exported, including all types of passenger and

freight transportation goods and services intended for the official use of diplomatic and other

similar representative offices in the RM, for the personal use and consumption fo the members of the diplomatic, administrative and technical personnel of the representative offices

goods and services of the international organisations in accrodance with agreements to which the RM is a party.

3) 8% for bread, pastry, milk and dairy products4) 5% for natural gas and for agricultural products.

VAT payable to the budget = VAT received from buyers for goods – VAT payed to the suppliers for primary materials and for imports.

Part 2. Deliveries exempted from VAT In accordance with the TC, VAT is not imposed on the following deliveries:1. Housing, land and land areas under housing blocks, their rent, and the right

to furnish and rent them out, with the exception of commission deals;2. Food and non-food goods for children (children food, adaptation milk

mixtures, homogenised juices, school textbooks, books for children)3. State property bought during the privatisation process;

4. Pre-school insitutions, clubs, resorts, and other objects of social, cultural, housing and community purposes, which are transferred for free to the public authorities;

5. Services, on which state dues are imposed;6. Confiscated property or items without an owner, which have been

transferred into the possession of the state;7. Health and elderly care services;8. Goods of own production of university and school cafeteria, hospitals, and

socio-cultural institutions;9. Financial services: the granting and transfer of loans, operations related to

the maintenance of deposit accounts, operations related to currency, cash, and bank notes management, share issuance, bonds, debentures and other securities, investment fund management services, insurance and reinsurance services, except for the services of insurance agents;

10. The post office services, including the delivery of pensions and compensations;

11. scientific works, financed from the budget;12. Ritual services;13. Services related to housing rental, hostel residences, and utility services

offered to the public;14. The services of the town public transport, as well as railway and river

transport;15. Import goods in case: they constitute aid for natural disasters situations,

military operations and as humanitarian aid, or if the goods are imported temporarily with the obligation to export during the period stipulated in the customs legislation, transit goods.

Part 3. VAT Administration (the Registration of the Subject and the Declation of the VAT)

The criterion for the mandatory registration is determined through the established limit of the total value of taxable deliveries within any 12 consecutive months. This limit is set at the level of 200,000 lei. This means that the economic subject who has been receiving a return exceeding the limit of 200,000 lei from taxable deliveries of goods and services within the last 12 months, must mandatorily register with the taxation authorities. It is notable that taxable deliveries include deliveries of goods and services taxed at the zero, or standard rate as well as the deliveries of import services.

In order to register, the economic subject must submit to the taxation authority a request for registration, written in accordance with the sample. This should be done in the month following the date when the value of deliveries exceeded the 200,000 limit. The subject is considered registered on the 1st

day of the month following the month, during which he was obligated to submit the official notification.

In case of termination of VAT taxable deliveries, the taxation subject is obligated to notify the state tax service about the termination. The latter must cancel the registration of the VAT payer. The cancellation of the VAT payer registration

enters into force on the date of the taxable deliveries termination by the subject.

The notification is satisfied if the following requirements are met:1) The taxation subject stops the execution of taxable deliveries. In this case,

it can still deliver the goods and services exempt from VAT.2) The taxation subject has delivered goods and services costing less than

200,000 lei within the last 12 months.

The VAT declaration is completed by the payer independently and is submitted to the taxation authorities monthly, before the end of the month following the last reporting month.

Lecture 17. Excises

1. General Overview of Excises2. Excises Calculation Procedure3. Allowances on Excises

Part 1. General Overview of Excises

Excises are the universal state taxes established for selected consumer goods and for gambling services. From 01.01.2001, excises are regulated by the fourth

section “Excises” of the Taxation Code of the RM (Law # 1053-XIV from 16.06.2000).

For excises, the taxation subjects are juridical and natural persons, who process or/and produce excise foods on the territory of the RM, or who import excise goods into its territory, as well as juridical persons involved in gambling services activities.

The taxation objects include: alcohol drinks, tobacco and tobacco products, petrol and diesel fuel, juelry, audio and video equipment, cars and licences for gambling services.

The excise rates are established in absolute amounts per measurement unit of the good, per value added of the market value of the good, or per value added of the gambling licence cost.

Excise goods such as vodka, liquers, cognac, and tobacco products that are sold, transported, or stored on the territory of the RM, or which are imported for sale on the RM territory, in addition to excise goods purchased from economic subject from Transnistria must be stamped with excise labels. The labelling is executed either during the production process before the excise products are imported, or—for the goods produced in the RM—at the moment of their unloading (transportation) from the excise room.

Part 2. Excises Calculation Procedure

The sum of the excise payable to the budget is determined on basis of the excise rates stipulated in section four of the TC, where the following excise rates are established:

Excise goodsMeasurement

UnitsExcise Rates

1. Coffee, processed and nprocessed, caffeinated and decaffeinated

Price in lei 10%

2. Red caviar Price in lei 20%3. Sturgeon black caviar Price in lei 25%4. Beer 1 litre 1.00 lei5. Champagne 1 litre 10%,

but not less than2.50lei

6. Classical sparkling wines 1 litre 10%, but not less than2.50lei

7. Natural sparkling wines 1 litre 10%, but not less than2.50lei

8. Ethil alcohol with a spirit concentration of 80% of the volume or higher, with the exception of medical spirit

1 litre of absolute

alcohol

0.09 lei / % volume / litre

9. Wisky, rom, spirit liquers and divines

1 litre of absolute

alcohol

*

10. Cigars 1000 items 1240 lei11. Cigarettes containing tobacco with filter

1000 items 8.70 lei

12. Cigarettes without filter 1000 items 3.70 lei13. Petrol 1 tonn 1200 lei14. Diesel fuel 1 tonn 1200 lei 15. Perfumes Price in lei 10%16. Juelry items Price in lei 10%

Part 3. Excise AllowancesExcises are not imposed:1) At the import of excise goods, sent as humanitarian aid or technical

assistance, offered by state, governmental or international organisations and of goods intended for the official use of diplomatic and other similar representative offices in the RM, for the personal use and consumption fo the members of the diplomatic, administrative and technical personnel of the representative offices as well as by their family members residing with them;

2) At the export of excise goods3) When excise goods are brought (sent) under temporary customs regimes,

if they are in transit, customs wearhouse, free customs wearhouse, or are destroyed or rejected in the interests of the state. When foreign excise goods are placed in a processing customs regime on the customs territory, the following procedure applies: at the entry, the goods are subjected to excises, which are reimbursed at the exit of the processed goods from the customs territory;

4) When foreign excise goods are placed in customs processing regime and under customs supervision

5) At the exit of domestic products placed under the customs regime of re-import or under processing outside the customs territory;

6) For natural persons importing: pure alcohol (1 litre), spirits (1 l), beer (5 l), cigarettes (200 items), cigars (50 items), vehicle fuel with the condition that it is located in one container of the vehicle, audio equipment and televisions—one item for each category.

At the removal from the customs territory of foreign excise goods, placed under the customs regime of re-exports, the sums payed at their entry on the customs territory are reimbursed.

The taxation subject is allowed to reckon the excises paid for intermediary excise goods, which have been used during the processing and/or production of other excise goods, but only with the condition that he/she holds documents

proving the payment of excises for the intermediary goods. The taxation subject, who exports excise goods, will receive the sum of the excises paid for the excise goods used for the processing and / or production of the exported goods within 10 days after the relevant documented evidence is submitted.

Lecture 18. Customs Duties

1. General Overview of Customs Duties2. Calculation Methods of the Customs Value of Goods3. Calculation Procedures of the Customs Duties4. Allowances on Customs Duties

Part 1. General Overview of Customs Duties

According to the law on customs tarrifs, a cusoms duty is defined as the mandatory payment subtracted by the customs authorities for the entry of goods on the customs territory of the RM or for the removal of goods from its territory. The customs tarrif is a catalog, which includes the nomenclature of goods brought to and removed from the customs territory of the RM, as well as the customs duties’ rates imposed on such goods.

There are the following types of customs duties:

1) Value added duties are calculated in percens from the customs value of the good (eg. for shampoo this rate is 6.5%).

2) Specific duties are calculated per unit in accordance with an established rate (liquers—1 Euro per 1 litre).

3) Combined duties combine the value added and specific rates (this type is not used in the RM at the moment).

4) Exceptional duties , which are divided into the following:a. Special duties , which have the purpose to protect the local

production and are imposed at the entry of foreign goods on the customs territory if they are in a quantity and under conditions, which cause or may cause significant material damage to the local producers;

b. Anti-dumping duties are used if the goods brought into the customs territory are priced at a lower rate than they are on the domestic market of the exporting country (the domestic price is taken at the moment of entry) in case this price can cause harm to the domestic producers;

c. Compesation duties are used if the production or export of the goods brought into the customs territory relied on direct or indirect subsidies, in case this already has or may have a negative impact on the interest of the local producers.

The rates of the customs duties and the list of goods to which these rates apply are established by the Parliament. These rates are universal and unchangeable, with the exception of the cases provided for in the legislation or in international agreements, to which the RM is a party.

Part 2. Methods for the Determination of the Customs Value of Goods

The customs value of the goods, which enter the customs territory, can be determined in accordance with

1) The price of the deal, the object of which is the particular merchandise;2) The price of a deal, the object of which is an identical merchandise;3) The price of a deal, the object of which is a homogenous merchandise;4) The unit price of the goods;5) The estimated value of the merchandise;6) The reserve method

Usually, the determination of the customs value of the goods is done in accordance with the price of the deal, the object of which is the particular merchandise. If this method cannot be used, other methods apply. In this case, each consecutive method is used if the previous method could not be applied.

Each method for determining the customs value of the merchandise has its specific features. For example, when appling the first method, the price of the deal includes the following components:

1. Expenses for the delivery of the merchandise to the airport or another place of entry of the merchandise on the customs territory;

2. Insurance costs;3. Transportation costs;4. Loading costs;5. Unloading and transfer costs;6. Commission fees;7. Brokerage fees;8. Container, package and packaging costs;9. Licence and other payments for the utilization of intellectual property rights.

Part 3. Calculation Procedures of Customs Duties

In addition to customs duties, which are calculated according to the value of the merchandise and the rate stipulated in the customs tarrif, the customs authorities retain charges for the execution of customs procedures. This entails the following types of customs procedures and charge rates:

1) Customs legalisation of the merchandize: € 5 for merchandise valued from € 50 to 1000; 0.25% of the customs value of the merchandise, not exceeding €900 for merchandise valued over €1000;

2) The customs legalization of the temporary import and export of property—€30;

3) The storage of merchandise in the customs wearhouses: in the first 10 days—€0.1 for each kg per day of storage; in the latter calendar days—€0.5 for each kg per day of storage.

4) Export of goods-0.5 per km of mileage

Also, the following customs duties rates apply:

1. Butter—15%2. Margerine—5%3. Orange juice—5%4. Fresh tomatoes: 1.01-31.03 - 10%; 1.04-30.04 - 15%; 1.05-31.10

- 20%; 1.11-20.12 - 10%; 21.12-31.12 - 15%.5. Beer—€1 per liter6. Perfume and eau de cologne-6.5%7. Unprocessed fur and leather KRS-0%8. Leather clothing-15%9. Cotton fabric-0%

Exercise: An amount of orrange juice in the sum of 235212 lei is imported. Determine all the taxes, duties and charges payable at the moment of crossing the border.

1) Customs duties = 235212 *5% = 11760,60 lei2) Customs charges = 235212 *0.25% = 588.03 lei3) VAT = (235212 + 11760,60 + 588.03) * 20% = 49512.13 lei.

Part 4. Allowances on Customs Duties

The following are exempt from paying customs Duties:

1. Vehicles used for the international transsportation of passengers, luggage and freight, as well as items for the vehicles’ technical support and maintenance, fuel and food necessary for the their operation in transit, or which had been purchased abroad for repair purposes.

2. Goods, which are imported or exported for the official use of foreign citizens in accordance with the legislation or international agreements, to which the RM is a party.

3. National and foreign currency, with the exception of coins and notes used for numismatic purposes, as well as secturities—in accordance with the legislation.

4. Merchandise imported or exported as humanitarian aid, with the condition that its purpose is proved through documented evidence.

5. Goods imported or exported as aid, provided free of charge (donations) or for charitable causes through state channels.

6. Merchandise, imported or exported temporarily under customs supervision, in conformity with the corresponding customs regimes.

7. Merchandise transiting the customs territory under customs supervision in transit regime to third countries.