Taxation Conspect

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Contents

Page

Introduction 3

Lecture 1. Taxation-the Concept and the Science 4

1. Origins and historical development of taxes

2. Economic content of taxes3. Functions of taxation

4. The role of taxation in modern states

5. Theories about state regulation of the taxation system

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67

8

9

Lecture 2. Taxation Elements 13

1. The Subject and Object of Taxation

2. Taxation Allowances

3. Tax Rates and Other Tax Elements

13

13

15

Lecture 3. Taxation Principles and Forms 17

1. Classical Taxation Principles

2. Modern Taxation Principles3. The Essence and Form of Taxation

4. Taxation through Fixed and Proportional Rates

5. Taxation through Progressive and Regressive Rates

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1819

20

20

Lecture 4. Tax Rate Establishment and Tax

Collection

22

1. Tax Rate Establishment and Tax Collection Procedures

2. Tax Collection Methods. Tax Debt Payment Methods

22

23

Lecture 5. Types of Taxes 25

1. Principles of Tax Classification

2. Characteristics of Direct Taxes

3. Characteristics of Indirect Taxes

25

26

27

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

System of the RM

29

1. The Concept of a Taxation system

2. The Taxation Legislation

3. The Taxation System of the Republic of Moldova

4. The Taxation Apparatus

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30

31

32

Lecture 7. Tax burden 341. Notion tax burden

2. Methods for determination of tax burden

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35

Lecture 8. Tax evasion 38

1. Essence of tax evasion its reasons

2. Methods of struggle against tax evasion

38

39

Lecture 9. Double taxation 41

1. Essence of double taxation

2. Methods of elimination the double taxation

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41

Lecture 10. A General Overview of the Income Tax

1.A General Overview of the Income Tax

2. Coverage Scope of the Income Tax

3. Deductions Allowed for Taxation Purposes

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Lecture 11. Particular Aspects of Individual Income Taxation

1. Preferential Taxation Treatment for the Individial Income Tax

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

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

4. Submission of Individual Income Tax Self-assessments

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 Funds

3. Taxation of Qualified Non-governmental Pension Funds

Taxation of Economic Agents Non-Residents

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 Expenditures

3. Income Tax Self-assessments of the Entities Involved in Enterpreneurial Activity

Lecture 14. Real Estate Tax

1. Specific Details of Juridical Persons Real Estate Taxation

2. Specific Details of Natural Persons Taxation

3. General Overview of the Land Tax

4. Land Tax Calculations for Juridical and Natural Persons

Real Estate Tax and Land Tax AllowancesLecture 15. Special Road Charges

Lecture 16. The Value Added Tax

1. The Economic Essence of the VAT

2. Deliveries Exempt from VAT

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

Lecture 17. Excises

1. General Overview of Excises

2. Excises Calculation Procedure

3. Allowances on Excises

Lecture 18. Customs Duties

1. General Overview of Customs Duties

2. Calculation Methods of the Customs Value of Goods

3. Calculation Procedures of the Customs Duties

4. Allowances on Customs Duties

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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 revenuesformation. 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.

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Lecture 1. Taxation-the Concept and the Science

1. Ori

gins and historical development of taxes

2. Ec

onomic content of taxes3. Fu

nctions of taxation

4. Th

e role of taxation in modern states

5. Th

eories 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 purposeof 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 states 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%)

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Charges for issued state documents

The 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 sovereigns 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 overrivers, 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 20 th

century in direct conformity with the transition to progressive income taxation. The taxation system of the

20th 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 ofthe 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 Taxation

Taxes 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

states 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 theformation 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 Taxation

The 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

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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 thefiscalone. 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 taxationthe formation of thestates financial resources necessary for executing the role of the latter (defence, social, environmental

protection, etc.)

2) The allocationfunction 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 destimulatingsub-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 controllingfunction of taxationthrough 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 andthe 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

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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% (inSweden) 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 populations 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 puttingforward four main taxation principles: equity, determination, convenience and thrift of taxation

administration. Smiths 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 taxations functionthe provision of state revenuesis 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 states 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 theKeynesian taxation theory was John Keynes, who exposed its main principles inhis 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,

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state intervention is achieved at the level of effective demand. One of the main assumptions in Keyness

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

policythe 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 ofeveryday 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.Questions:

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1. Wh

at are the oorigins and historical development of taxes?

2. De

fine the notion taxes? What is the economic essence of taxation?

3. Wh

at are the main functions of taxes? Shortly describe the essence of each function.4. Wh

at is the role of taxation in modern states?

5. Wh

at are the main Ttheories about the State Regulation of the Taxation System?

Tests:

1. The father of the scientific taxation theory is considered:

a) J. Mills,

b) W. Petty,

c) A. Smith,

d) D. Ricardo

2. Which of the following is not considered the main function of taxation?

a) Fiscal

b) Allocation

c) Regulatory

d) Stimulating

e) Incentive

3. Choose the correct variant:

a) In all countries, taxes constitute 80-90% of the state budget.

b) In all countries, taxes constitute 40-50% of the state budget.

c) In all countries, taxes constitute 70-80% of the state budget.

d) In all countries, taxes constitute 20-30% of the state budget.

4. Who is the author of the following definition:

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?

a) Sokolov,

b) D. Ricardo,

c) Turguenev,

d) A. Smith

5. Who were the representatives of the neo-classical school?

a) J. Mutt, A. Laffere,

b) I. Fisher, N. Caldor,

c) D. Ricardo, J. Mills,

d) John Keynes

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Lecture 2. Taxation Elements

1. The Subject and Object of Taxation

2. Taxation Allowances

3. 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. Forexample 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 Allowances

A 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.Permanenttax 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 object

3) Exempting from the payment of taxes certain natural persons or categories of payers

4) The reduction of the tax rate

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5) 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 limiteddiscounts (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 payers 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 countriestowards 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 ratesexpressed in percentages (income tax)

* Specific ratesexpressed 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 basisis 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 itthe 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 taxableprofit 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 Hollandthe weight of the car, in Germanythe volume of the operating cylinders of the

engine. In these cases, the taxation basis cannot be determined as the part of the taxation object.

Taxpayment 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 paymentis 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 thetax 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.

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Questions:

1. What are the main taxation elements?

2. Define the notions taxation subject and taxation objects.

3. Give the definition of the notion tax allowances. How are the tax allowances classified?

4. What are the main types of tax allowances?5. Define the notion tax rate. How are the tax rates classified?

6. Define the notion taxation basis, payment deadlines and source of tax payment

Tests:

1. Which of the following is not considered the taxation element?

a) Taxation subject,

b) Tax allowances,

c) Taxation object,

d) Fiscal policy

2 Tax allowances include the following types:a) The untaxed minimum

b) Exempting from taxation certain elements of the object

c)

d)

e)

3. Missing the payment deadlines automatically leads to:

a) bonuses,

b) recompenses,

c) penalties,

d) rewards.

4. The taxation object for car owners is:

a) the driver,

b) the car itself,

c) the cars color

5. The taxation subject is:

a) income,

b) the individual or company,

c) wealth,d) events.

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Lecture 3. Taxation Principles and Forms

1. Classical Taxation Principles

2. Modern Taxation Principles

3. The Essence and Form of Taxation

4. 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 acorresponding share of the states 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 deductsfrom the pocket of the people as little as possible in addition to what it brings to the state treasury.)

Part 2. Modern Taxation Principles

The 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 anddifferentiated 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

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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 normaldevelopment. 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 socialjustice, including the insurance of a minimum living standard of the citizens. Allowances should not

be established for certain payers onlythey should be the same for everybody.

Part 3. The Essence and Form of Taxation

Taxation 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 Taxation

Taxation 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 forone 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.

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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 conformitywith 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).

Questions:

1. What are the classical principals of taxation? Shortly describe the essence of each principal.

2. What are the modern principals of taxation? Shortly describe the essence of each principal

3. What are the requirements which the taxation complies with?

4. How can be the taxation rates represented?

5. How are the percentage rates divided?

6. What are the advantages of using the proportional rates mechanism?

Tests:

1. The classical taxation principals where set forth by:

a)A. Smith,

b)John Keynes,

c)D. Ricardo,

d)J. Mills

2. The classical taxation principals are:

a) The principle of justice

b)

c) d) The thrift principle

3. The modern taxation principals are:

a) The rational combination of direct and indirect taxes

b) The universalization of taxation

c) One-time taxation

d)

e) .

f) .

g) .

4. Taxation should comply with the following requirements:

a) Only factually created value should be included in the process of redistribution

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b) The final goal of redistribution must be the maximum satisfaction of social needs

c)

d)

5. Taxation rates can be represented in fixed sums or in percentages. Percentage rates are divided into:

a)proportional rates

b)progressive ratesc)

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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 paymentis 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 ofthis 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 persons 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 theobject is determined. Physical features include: for the land taxthe size of the land area, the

distance from transportation ways and markets; for the house taxthe number of windows, pipes,

doors, the type of the building; for industry taxthe 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 intermediarythe 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 othercountries for the income of joint ventures. Tax collection at the source implies collection before the

receipt of the income by its owner.

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Tax collection uponself-assessmentrepresents 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 createsconditions 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.

Questions:

1. How is the tax rate established?

2. How is the fulfilment of the tax obligation achieved?

3. What are the main tax collection methods? Shortly describe each of the tax collection methods.

4. How is the tax payment executed?

5. Which of the tax collection methods is the most convenient for the taxpayer? Argument your

answer.

Tests:

1. The payment is executed:

a) only in cash

b) only through bank account

c) in cash and through bank account

d) your variant

2. 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

a) to block the operations of the indebted person by freezing the bank accounts,

b) to arrest the persons property

c)

3. Self-assessment collection is convenient for the taxpayers because:

a) the taxpayer is exempt from taxes,b) it creates conditions for tax evasion,

c) it is easy to perform,

d) it is used only for land tax

4. The main disadvantage of the cadastre method is:

a) that the average profitability of the object, may differ significantly from actual profitability,

b) that it creates conditions for tax evasion,

c) that it is used only for land tax,

d) that the one can make many mistakes in the cadastre register

5. Tax collection at the source implies collection:

a) before the receipt of the income by its owner,

b) after the receipt of the income by its owner,

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c) at the end of the year

d) at the beginning of every week

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Lecture 5. Types of Taxes

1. Principles of Tax Classification

2. Characteristics of Direct Taxes

3. Characteristics of Indirect Taxes

Part 1. Principles of Tax Classification

The 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 object

1. 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 budget

2. Limiting (excises and customs duties)

V. In accordance with the taxation subjectindividual and corporate taxes

VI. 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 Characteristics

Chronologically, the mechanisms for direct taxation appeared earlier tat those for indirect taxation. Thecriterion 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, thetax for returns on capital).

There are two methods for distinguishing direct and indirect taxes:

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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 theincome 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 countriesthe 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 inconditions 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).

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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.

Questions.

Lecture 5. Types of Taxes

1. Name the criteria in accordance to which the taxes are classified. Shortly describe types of taxes in

accordance with the collection method, the taxation object and the objectives set.

2. What is the difference between real and individual direct taxes?

3. How many methods are used to distinguish direct and indirect taxes? Shortly describe each of the

method used to distinguish direct and indirect taxes.

4. What are the main characteristics of indirect taxes?

5. What are the advantages of indirect taxes?

6. What do indirect taxes include in the Republic of Moldova? What is the budget revenue of indirect

taxes in the Republic of Moldova?

1. Tax classification is done according to various criteria:

a) In accordance with the collection methodb) ..

c) In accordance with the objectives set:

d) .

2. Indirect taxes in the Republic of Moldova make up:

a) 55% of the total budget revenue,

b) 70% of the total budget revenue,

c) 15% of the total budget revenue,

d) 85% of the total budget revenue.

3. For the consumer, indirect taxes are convenient for the following reasons:

a) Insignificance of the amounts paid

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b) Time convenience

c)

d)

e)

4. For distinguishing the direct and indirect taxes are used:

a) Four methods

b) Two methods

c) Three methods

d) Five methods

5. Direct taxes are devided into:

a) unreal and personal

b) unpersanal and individual

c) real and individual

d) real and unreal

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

1. The Concept of a Taxation system

2. The Taxation Legislation

3. The Taxation System of the Republic of Moldova

4. The Taxation Apparatus

Part 1. The Concept of the Taxation System

The 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 mostcountries 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

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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 ofMoldova 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 theirdetermination, 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

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The local taxation system comprises:

1. Real estate Tax

2. Natural resources charges

3. Spatial planning charges

4. Charges for the right to organise local auctions and lotteries

5. Hotel charges6. Advertisement placement charges

7. Charges for the utilization of the local logo

8. Charges for the establishment of retail units

9. Market charges

10. Car parking charges

11. Resort charges

12. Dog ownership charges

13. Charges for the right to make television and film shoots

14. Charges for the right to cross the border

15. Charges for retail activity rights on the border zone

16. 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 inspectorates

The 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 otherpayments.

Questions.

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1. Define the notion taxation system?

2. What are the systems of applying the income tax? Shortly describe each of them.

3. What does the taxation legislation in the Republic of Moldova consists of?

4. What are the main characteristics of the taxation system in the Republic of Moldova?

5. Define the notion taxation apparatus.6. What are the main functions of General State Taxation Inspectorate?

1. There are ... systems of applying the income tax:

a) four (English, global, German, Russian)

b) five (American, global, Russian, English, German)

c) two (English, global)*

d) one (global)

2. The system of national taxes in the Republic of Moldova includes:

a) income taxes

b) VAT

c) Excises

d)

e) .

f) .

3. The local taxation system in the Republic of Moldva comprises:

a) Real estate Tax

b) Natural resources charges

c) Spatial planning charges

d)

e) .

f) .

4. VAT constitutes . of all the indirect taxes:

a) 30-50%

b) 60-80%

c) 50-70%d) 10-30%

5. VAT is not used in:

a) Russia

b) USA

c) Norway

d) Israel

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Lecture 7. Tax burden

1. Notion tax burden2. 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 countrys 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 stateexpenditures for the realization of its functions.

The optimum built taxation system has, on one hand, to provide with financial resources the states

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

countrys 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 Laffers curve

doesnt provide the clear view of the admissible dimension of the bite of taxes into the countrys

budget. This dimension can not be constant and sufficiently precise, its level depends on the

taxpayers conditions in the specific country and on the economys 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 taxpayers 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 countrys 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, thatinevitably 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.

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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 ofits employees.

Tax burden of the enterprise can be determined by the separate indicators of enterprises 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%

Questions.

1. Define the notion tax burden?

2. What are the methods that are used for determination of tax burden on the countrys level?

3. What are the methods that are used for determination of tax burden on the enterprises level?

1. The world experience shows that withdrawal of from the taxpayers income is that limit after

which the reduction of savings starts which leads to reduction of investments into economy:

a) 50-60%

b) 40-50%

c) 30-40%

2. In the United States of America the tax bur

Documents

Taxation Conspect