Tax is defined by the Oxford English Dictionary as a “ part levied on individuals, belongings or concern for the support of authorities ” . It is a compulsory part of money, enforceable by jurisprudence, for public intents. Theoretically, an ideal revenue enhancement system should accomplish equity, neutrality, simpleness and efficiency. Practically, this may non be easy to accomplish due to viing involvement, revenue enhancement history, its international duties, constitutional restrictions and administrative capacity. However, it is an ideal system which all states can endeavor to accomplish amidst the challenges.
Tax equity is achieved by guaranting that people in the same fortunes should pay the same sum of revenue enhancement. Tax should be based on the individual ‘s ability to pay. Harmonizing to the article from US Federal Treasury, a just system is one that is able to let people of the same economic fortunes to pay the same revenue enhancement. And it should be progressive in nature such that people with high income should pay more revenue enhancement and people with low income should pay small or no revenue enhancement. The system should besides be able to observe any turning away of revenue enhancement either lawfully or illicitly so that everybody is accounted for in the payment of revenue enhancements.
Neutrality is achieved when revenue enhancement does non interfere with the investing determinations. The revenue enhancement system should non direct funding and investing determinations through its unseeable manus. It should let free market to apportion economic resources and be every bit impersonal as possible in economic determinations. This can be achieved, harmonizing to the US Federal Treasury, through a comprehensive definition of income for revenue enhancement intent.
Simplicity trades with the revenue enhancement system in its definition, computation, aggregation, certification, execution and enforcement. A taxpayer should be able to find his revenue enhancements, cipher how much he is apt to pay and be able to finish his payment with easiness. In James Alm ‘s article, a revenue enhancement system should supply an environment of voluntary conformity than enforced conformity. And it should non bring forth heavy administrative load on the section in the aggregation, execution and enforcement of revenue enhancement payment.
Classical System of Corporate Taxation
The classical system of corporate revenue enhancement is a system that views the company and the stockholders as separate nonexempt entity. The company is distinguishable from its stockholders such that the revenue enhancement intervention differs with respects to corporate net incomes and dividends. In conformity to the Hugh J Ault, the basic attack of the classical system provides for revenue enhancement at the corporate degree and at stockholder degree. This creates a state of affairs of dual revenue enhancement whereby revenue enhancements are collected one time on corporate net income through corporate revenue enhancement and second on dividends through single revenue enhancement.
This system of dual revenue enhancement contradicts the rule of economic neutrality as it revenue enhancements the net income and the dividends. This system interferes with investing and funding determinations as the corporate will be bias towards retaining the net incomes instead than administering dividends. If it retains this net income, it will merely be taxed one time. The classical system manipulates the determinations and distorts the efficient allotment of economic resources by deviating resources to avoid dual revenue enhancement. It intervenes in the economic determinations by making favourable environment for keeping of net incomes within the company and funding through debt than through equity. And it creates unfavourable environment for the distribution of dividends. This reduces the degree of investings through equity and hence the efficient allotment of resources.
Dividend Imputation System
The dividend imputation system aims at rectifying the deformations by the classical system of dual revenue enhancement – corporate and stockholders – by returning corporate revenue enhancements through the proviso of credits ( known as flanking credits ) associated with the dividend payments. ( Beginning: Bhavish Jugurnath, Mark Stewart and Robert Brook ) . Under this system, stockholder receives flanking recognition for the dividends that has been taxed at the corporate degree. This recognition is so used to cut down the income revenue enhancement of the stockholders. If the stockholder ‘s fringy revenue enhancement rate is higher than the corporate revenue enhancement on the dividends, the stockholder will merely necessitate to pay the difference in the revenue enhancement sum. If the stockholder ‘s fringy revenue enhancement rate is lower than the corporate revenue enhancement, the stockholder will be refunded on the difference which can be used to cut down the entire single revenue enhancement collectible. There are nevertheless many fluctuations of this system such as dividend tax write-off, split rate, and imputation. The fluctuations will subject dividend to be revenue enhancement either at corporate or stockholder degree and will non ensue in dual revenue enhancement.
The imputation system, nevertheless, benefits merely the domestic stockholders having local sourced dividends as they will be able to have the wing credits for their dividends and countervail it against their fringy revenue enhancement. Foreign stockholders will non be able to have the imputed credits from the domestic corporations and be able to utilize it in their state to countervail against their fringy income revenue enhancement overseas. The dividends paid will besides be subjected to keep backing revenue enhancement. Similarly under this system, domestic corporations are non exempted from revenue enhancement of dividends received from foreign beginnings even though these dividends may hold paid revenue enhancements in the foreign land. ( Beginning: Hugh J Ault ) Basically, the foreign stockholders or foreign corporations continue to be subjected to taxation twice, one time in the beginning state and another in the resident state. This system contradicts the rule on equity as revenue enhancement equity means that people in the same fortunes should pay the same sum of revenue enhancement regardless of the beginnings of income. If foreign dividends are given differing intervention and subjected to revenue enhancement, this consequence in an unjust place for people who receive the same sum of dividends from foreign beginning as compared to local beginning.
At the same clip, the calculation of the dividend assessed for revenue enhancement is complicated. The calculation by the taxpayer will necessitate him to hold full entree to the fiscal statement of the company before he is able to calculate the credits available for distribution of the dividends. The payment of dividends besides depends on the company to keep it flanking history so that there are sufficient dividends available for distribution which finally should bind with this history. This increases the administrative attempts and the conformity load for both the stockholder and the company. And this contradicts the rule of simpleness in computation, certification and payment of revenue enhancements.
Singapore Corporate Tax System
Singapore has moved from a full dividend imputation system to a one-tier corporate revenue enhancement system. The new system consequence in revenue enhancement being levied merely at corporate degree and full freedom of dividends paid to stockholders. In add-on, the flanking histories are removed and credits will no longer be given to stockholders. Based on the Economic Review Committee study, the remotion of the imputation system is to take the built-in drawback of the imputation system such as the maintaining of the flanking histories for dividend payments, adaptability of the imputation system to planetary more sophistical concern minutess and in conclusion the complications of implementing new corporate revenue enhancement policies with the imputation system.
The new system simplifies the revenue enhancement computation by taking the flanking histories and revenue enhancement consequently on the net incomes at corporate degree. Dividends paid to stockholders are to the full exempted from any signifier of revenue enhancement. The system simplifies the computation and revenue enhancement by taking the flanking histories and besides provides the flexibleness for companies to administer their dividends more freely without care of flanking histories.
The new system continues to necessitate revenue enhancement for foreign dividends received in Singapore. However, revenue enhancement freedom is available for these dividends. The foreign dividends will merely necessitate to pay revenue enhancement based on the difference of the revenue enhancement rate between Singapore and the foreign state. If Singapore has a higher revenue enhancement rate of 20 % and the foreign state has a lower revenue enhancement rate of 17 % , so the dividends will merely be subjected to revenue enhancement of 3 % .
To promote investing, Singapore has besides implemented a Group Relief strategy for companies. Under the imputation system each company of the same group is treated as a separate legal entity. The losingss of the company can non be used to countervail the net incomes of the other company in the same group. Under the new one- grade system, the group alleviation strategy can be efficaciously implemented such that companies in the same group can countervail their losingss against more profitable companies.
From the classical system to imputation dividend to one grade, the revenue enhancement systems have evolved to run into the altering demands and demands of the states and the planetary concern environment. The revenue enhancement systems provide the basic revenue enhancement theoretical account but will necessitate complementary alterations such as proviso of alleviation, tax write-offs and freedom to run into the demands of the state. Each state will happen virtues in classical, imputation or one-tier depending on their demands, policies and challenges. An ideal revenue enhancement system may non be easy to accomplish in footings of equity, neutrality and simpleness but the system that is able to run into the demands of the state and the complex concern minutess is a sufficiently successful system.