DEFINITION OF TAX AND DISTINCTION FROM OTHER CONCEPTS
Definition of tax
Several authors have tried to define tax with limited degrees of success. But taking into account different concepts, tax has various definitions.
Basing on the definition given by Gaston Jeze and quoted by many scholars, tax can be defined as “a necessary pecuniary service by private individuals by way of authority, nonreimbursable and without counterpart, for the cover of public expenses “. [1] Tax is also seen as a mandatory contribution intended to finance the budgetary expenditure of the State and certain public organizations, local government, public institutions or a mode of public burden-sharing founded on the adaptation to contributive faculties of the citizens. Tax has also been defined by French lexicographers as being the “contribution taken on incomes, transactions, products, etc., to ensure the function of the budget of the State or local government “.
Based on this definition, one can see tax as a financial resource for the State in order to provide the materials and human resources that will enable public institutions to meet the needs of the public interest. It should be understood as a mandatory contribution of citizens to the services provided by the State in the collective and national interest.
In summary, tax can be defined as a pecuniary contribution, of an obligatory and legal nature, carried out under the prerogatives of public power, which is non-reimbursable, without supporting documentation, in order to ensure the financing of public expenses.
Some of the elements have to be further explained as they constitute the key characteristics of tax.
Distinction between tax and other contributions of an obligatory nature
Two distinctions have to be made here. Tax has to be distinguished on the one hand from “administrative fees” (also known as “user fees”), and on the other from other kinds of charges in the way of more general taxation. The essential criteria of this double distinction are twofold: they reside in the idea of the counterpart and, at least for general taxation, in the nature of the profit organization.
Notion of “administrative” fees
Administrative fees can be defined as the sum required for using services offered by a public service or possibility of using a public work. It is a charge for the use of a product or service. There is a direct link between the charge paid and a public service rendered (e.g. driving license fees). A user fee does not necessarily cover the cost of the service received (though it may be based on this, it is not always the case in practice). Taxes differ from user fees in that paying them is not a matter of choice and what you pay is not directly linked to services you receive in return.
Underpinning the concept of administrative fees of the idea of a “rendered” service, of a “counterpart”. This element differentiates it from the tax. It results in several direct consequences Firstly, the administrative fees must be paid by the beneficiary of the service. Moreover, there is not an automatic financial equivalence between the amount of the administrative fees and the value of the rendered service. It is allowable (depending on the governing legislation) to have a tariff that can be fixed independently from the real cost of the services. It is not ultimately though the cost factor that differentiates administrative fees from taxes; it is the fact that the user of the service pays directly for the service that they receive.
The concept of para-fiscal fees
One definition of para-fiscal fees can be found in article 4 of the Ordinance n° 59-2 of 2 January 1959 of the organic law relating to finance law in France[2]. This defines para-fiscal fees “as being perceived in an economic or social interest to the legal entity of public law or private law other than the State, the local authorities and their public institutions”. Para-fiscal fees are the same as taxes, except that they are extra budgetary and not paid to the State itself3. In one example, the French Constitutional court held that the television fee imposed by the French Radio-Television (RTF) organisation was in the nature of a para-fiscal fee within the meaning of the budget law of 1959. Since the organic law required any para-fiscal fee to be approved annually by Parliament, the Constitutional Court found that this procedure must be followed by RTF, i.e. that it was illegal for this fee to be imposed administratively without parliamentary approval.
Even if we cannot find a definition of para-fiscal fees in Rwandan tax law, it does exist in practice. To illustrate that, we can take the example of the mandatory amount deduced on employment income in favour of the FARG (Funds for Assistance to Genocide Survivors). The para-fiscal fee does not comprise any direct and immediate counterpart for the debtor, or even sometimes any indirect counterpart. This element is fundamental: it makes it possible to locate the para-fiscal fees more closely to tax than royalties and even administrative fees. The subjugated person to the payment of the fee is at least in the position of virtual user of the service. The concept of a para-fiscal fee is independent of the idea of an equivalent service being rendered, which accentuates its obligatory character.
However, even if the para-fiscal fee is distinguished from tax in its legal nature, the parafiscal fee, in contrast to tax, is assigned to a specific service.
Moreover, the tax is necessarily levied on the profit of persons in public law (e.g. the State, a local authority, an administrative publicly-owned establishment).
PRINCIPAL CHARACTERS OF TAXATION
A pecuniary contribution
The concept “pecuniary” comes from the Latin word “pecunia” which means “money”. Pecuniary character can be examined from three points of view: the tax base, the payment procedure and the perspective of tax collection.
- The tax base is generally constituted by monetary elements. The tax is then taken on a certain sum of money or a value converted into monetary terms (when, for example, it is necessary to evaluate benefits in kind). Examples of this would be pay as you earn tax, corporate income tax, value-added tax (VAT), etc.
- With regard to the calculation of tax, the tax rate generally consists of a legally fixed arithmetic percentage applied to for example of the total amount of income, the value of benefits or added value (VAT).
- It is especially at the stage of tax recovery that the pecuniary character of tax assumes significance. The tax is normally paid in monetary terms (e.g. in the form of money, cheques, or a bank transfer).
A mandatory contribution given by way of authority
Whatever its mode of payment, the tax levy basically has the character of an obligatory contribution because it is carried out by way of authority by the tax administration on the basis of the prerogatives given to it in terms of public powers. Consequently, the taxpayer has neither the right to claim to withdraw him/herself from his/her liability of tax, nor can they fix freely or negotiate the amount of his/her contribution. His/her consent does not come into play in any form as far as the payment of the tax is concerned. If they try to resist the payment of tax due, the tax administration has the right to resort to constraint procedures to force them to satisfy their obligations. Tax is a unilaterally imposed contribution, or an obligation on the taxpayer.
The legal bond by which the taxpayer can be constrained by the State to pay the debt of tax rises directly from the law which regards them as a debtor. The consent of the taxpayer to make the payment is not required: the amount due is unilaterally determined and they are required to pay it.
A contribution under the terms of the prerogatives of public power
Tax is established and due under the terms of specific prerogatives given to the Government administration which have no equivalent in a private individual’s relations. The formula requires the delivery of a tax return, which is checked, the imposition of the tax is based on the actual profits involved. The tax authorities have the authority to check the returns and to evaluate itself the taxable amounts due in the event of any deficiency on the part of the taxpayer.
The powers that are given to the tax administration do not have an equivalent in private relations: they include the right to communicate with the taxpayer, the checking of accountancy, the close examination of personal tax situations combined with procedures such as the requesting of justifications regarding the origin of credits contained within bank accounts, the right to search professional buildings or even the residences of taxpayers along with the inspection of bank accounts, procedures of imposition without notice, powers of sanction, etc.
A non reimbursable contribution
Tax cannot be the subject of restitution on behalf of the public person who benefits from it. It will be noted especially that the tax is a non reimbursable contribution only if it was legally established. In the contrary case, the taxpayer can ask for, within a defined time period, the discharge or reduction of the tax claimed. The administration itself has the ability to agree a reduction, to confirm the tax due or even an increase the tax assessed.
A contribution without a determined counterpart
The absence of a given counterpart is one of the essential elements of tax. Thus, the payment of the tax is not a condition of access to public services. Tax is not the price directly paid by each taxpayer for the services which are rendered to them by various public bodies. Whether paying taxes or not, all citizens have access to public services. The absence of a given counterpart has another consequence, namely in that the conditions under which the tax proceeds are used cannot be disputed in a court of law in front of the tax judge.
Lastly, it is the case that tax, because it is taken without a determined counterpart, constitutes revenue without a special assignment. Instead the taxes collected are intended to provide sufficient resources to the general budget of the State rather than be used for specific purposes.
A contribution intended to finance the Government budget
The main objective of taxation is to generate sufficient revenue to finance public sector activities. It is important to note the fact that taxes are necessary both to finance desired levels of public spending and also to ensure that the burden of paying for such spending is fairly distributed.
This second criterion of tax has two elements:
- Tax is perceived exclusively as applying to the profit of moral persons of public law. Therefore, a moral person of private law cannot, in theory, be recipients of taxes. However in some cases certain types of activity may be carried out by institutions or companies of private law such as when in some countries Public Private Partnerships are entered into and in these circumstances there is an interface between persons of private law and the tax system.
- Tax always has as an aim the provision to the public administration (the State, publicly-owned institutions and local government) the financial resources which it needs to cover its public expenditure. It can also though have other aims of an economic or social nature.
Two other situations must however be distinguished according to whether the taxation rule is seen as assigning a goal of dissuasion or one of incentive. This distinction is not always easy to make.
Dissuasion is intended to divert taxpayers and encourage them not to intervene in a given field or not to continue an activity under certain conditions. It is possible to impose taxes to dissuade taxpayers from acting in a certain way. It therefore becomes a question of choice for the taxpayer: if they avoid the situation, then they will not have to pay taxes but if they carry on with their activities, then they will have to pay extra tax. Such situations often have a social element involved. In some countries for example, high taxes are imposed on cigarettes. It is not illegal to smoke but if the taxpayer carries on doing so, then they will be liable to pay extra tax. We can also find examples in France where legislation exists to impose extra taxes on films of a violent or sexually explicit nature.
Incentives measures on the other hand aim to encourage the taxpayer to take a part in a particular projector to adopt what is generally regarded as a ‘desirable’ form of behaviour.
They tend in all cases to encourage what is a positive attitude from the taxpayer. Again, the aim of this is often social, for example in some countries it is the case that annual taxes are imposed for owning cars, and in some cases the charge will be lower for smaller, environmentally-friendly cars than they are for less fuel-efficient models.
However, they can also have an economic motive. For example, in Rwanda among incentive measures which result effectively in a tax saving for the taxpayer, one can quote as one example the Article 18 of the Income Tax Law (ITL) which exempts from tax any revenues coming from agricultural and breeding activities that do not exceed 12.000.000 Rwf per fiscal year.
WHY DOES THE RWANDAN CONSTITUTION ALLOW THE GOVERNMENT TO LEVY TAXES?
Governments provide a variety of services to the people they serve. In order to pay for these services, the government levies taxes on the citizens and companies who benefit from these services. The government must also make payments on any loans received in previous years to finance past operations. Government also levies taxes to alter the behaviours of its citizens, and companies that do business in the country.
Tax supports common defence
One of the primary functions of national governments is to provide for the national defence of the country. To do this, countries normally have a standing army and other military services; this involves expenses for salaries, supplies, training and housing. This also includes expenses incurred on the research and development of new technologies and weapons. Reference to the Rwandan Budget Law demonstrates that national security, including the military and police, involves significant levels of expenditure in Rwanda.
Tax is intended to fund Government Programs
Governments provide a number of services to their citizens that are paid for with taxes. The exact composition of specific services will vary from government to government depending on the scope of the government, such as whether it is a local government or a national government, and its reach, by which we mean how much power the citizens believe their government should have. Typically however public expenditure in most countries will include spending on security forces, education services and health services. The government also has a role to protect corporations and their products through trade regulations and copyright laws. In order to uphold copyrights, the government must set up a court to hear the cases and determine damages. For this reason, tax will assist in paying judges and funding court expenditures. Such services also cover judicial activities in criminal as well as civil law cases.
Debt Payments
Most governments carry significant debt which they are required to pay interest on. This is a contemporary reality in most low income countries like Rwanda, though for higher income economies too debt repayment and associated interest payments is becoming increasingly problematic. Unexpected expenses such as wars or a recession will limit the tax revenue but not the need for services, so the government needs to borrow money to pay for them and the amount of that debt will increase significantly during times of economic downturn in most circumstances.
Tax and its effect on individuals
Taxation is an indirect way for governments to affect the behaviours of its citizens as well as bringing in money from them. Citizens must choose what to spend their limited supply of money on so by offering tax breaks or imposing tax increases on certain products the government can affect what people buy. For example, if the government wants to reduce the number of alcoholic drinks that are sold, it can impose extra taxes on these products. Or if it wants to increase the sale of milk products it offers a tax incentive for farmers for them to increase their productive capacity at cheap price.
Tax and its effect on Companies
Taxation policy can play a very important role in business creation and development policy. Through taxes, Government can affect the choices that individuals make but taxes can also be developed with the aim of affecting the way that corporations do business. For example, if the government wants to encourage employers to create more employment opportunities to those who are unemployed, it can propose a law that provides a tax break to companies encouraging the employment of more people. Similarly, if the government wanted to increase the production of food and livestock produced within its borders, it could pass a higher tax, or tariff, on any imported food to make it easier for food and animal products produced in the country to compete.
MAJOR PRINCIPLES OF TAX LAW
It is important not just to understand the details of tax law. It is crucial too to understand the principles on which it is based which in turn underpin the rules relating to the tax.
The principles underpinning the tax law take root directly or indirectly from the general principles of the law. Thus, the tax law is integrated, allowing for its specific nature, into the overall legal system and many particular branches of the law. In addition to this, it is recourse to the fundamental principles of the law which makes it possible to avoid possible excesses in the implementation of the rules of taxation.
There are many guiding principles of the tax law, which do not always forming a coherent unit; however distinctions can be made between the principles that have a constitutional basis and those which have the value of the general principles of law.
Principles with constitutional range
The principles with a constitutional basis arise from several provisions that appear in the text of the Constitution of the Republic of Rwanda, dated June 04, 2003, with later modifications.
The Principle of Legality
The principle of legality in tax matters provides the basis for the safeguarding of taxpayer’s rights because it means that the public authorities cannot act in an arbitrary fashion. This principle is enshrined in the constitutions of many countries. In the specific case of Rwanda, the Constitution, (in Article 81), makes the following explicit statement:
“No taxation can be imposed, modified or removed except by law “. In a similar way the second subparagraph states that:
“No exemption from or reduction of tax may be granted unless authorized by law “.
This means in effect that there should be taxation without an underpinning law on which to base it: upon this legal basis further details will be developed (such as bases, rates, sanctions) which also authorizes its collection. As one example, with regard to the taxes that are levied in Rwanda on behalf of the Treasury, several relevant laws exist such as Law n°16/2005 (18/08/2005) regarding Direct Income Tax and another which specifies the tax procedures (law n°25/2005,4/12/2005).
However the executive power (Government) also has a particular role to play in tax matters. Indeed, the principle of the legality of tax implies the intervention of the legislative power which has responsibility for the establishment of the operations which are essential to determine the tax base, its liquidation, its recovery, etc. Under the terms of its legal base, the executive arm also has power to intervene in tax matters. It is the role of the Government to determine the details of the tax application of any specific legal text. In exceptional cases, certain laws envisage simply fixing the key principles of taxation while giving the executive power the role to establish the necessary bylaws to govern the implementation of the Parliamentary law. In such cases, one might say that the legislative branch has delegated its tax powers to the executive organ (see the law on the Code of VAT and the Ministerial order on its recovery as an example).
The Principle of Equality
Article 16 of the Constitution of the Republic of Rwanda says: “All human beings are equal before the law. They shall enjoy, without any discrimination, equal protection of the law”. The principle of equality as far as tax is concerned has a role to play in the essential characteristics of the law and, in particular, defines that taxation must be applied impersonally to all individuals regardless of their status or background.
This principle results from that of the equality in all matters which is applied in determining how one can assume a public office. This principle of equality is seen as a fundamental principle of public law. Applied to tax law, it means that the same tax system must be applied without discrimination to all taxpayers who are in the same situation.
Admittedly in its principles and its basis, the principle of tax equality cannot be applied absolutely. In a theoretical sense, absolute equality would suggest that all taxpayers are subjected to the same tax, which condemns the particular taxes. However, one single tax level does not normally exist in practice, for reasons that are to do with well-known principles of tax justice. Common levels of contribution are set aside for other principles.
The idea of absolute equality is in practice normally replaced by reference to the ability to pay of individuals. Tax justice, which in this case forms the basis of equality, looks at the aggregate of the fiscal burdens (including social elements) of the taxpayer for a given period. Equality must look to integrate the range of taxes in play and the range in wealth distribution as well as the development over time of the ability of individuals to contribute. This leads to what is known as the progressive systems of taxation which looks not at absolute equality but more with an equality based on tax justice.
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. Progressive taxation is an illustration of the social considerations that are applied to tax policy as well as how it can be used to have a social impact. “Progressive” describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, with the tax burden higher on those who have more wealth to pay the taxes. It can be applied to individual taxes or to a tax system as a whole. Progressive taxes attempt to reduce the tax incidence of people with a lower ability-to-pay, as they shift the incidence increasingly to those with a higher ability-to-pay. They can therefore be seen as an example of a particular type of ‘tax justice’.
The term is frequently applied with reference to personal income taxes. Those with higher sources of income should be better able to pay taxes than those with lower levels. However it can also be used in sales taxes. For example, a sales tax on luxury goods or the exemption of basic necessities may be described as having progressive effects as it increases the tax burden for those purchasing luxury items whilst it reduces it on basic goods and services.
The opposite of a progressive tax is a regressive tax, where the relative tax rate or burden increases as an individual’s ability to pay it decreases. Sales taxes are often criticized because low income households must pay a greater share of their disposable income to a sales tax than wealthier households (everyone pays the same charge on a unit of goods regardless of their ability to pay. A ‘proportional tax’ lies somewhere in between, and exists where the tax rate is fixed as the amount subject to taxation increases.
The Principle of Freedom
The principle of tax freedom relates not only to personal freedom but also to the freedom of trade and industry. The essential principle of freedom is at the heart of a number of the procedures of tax law, even though in some cases it appears to go against personal or corporate freedom
Indeed, the variety of the taxes that exist means that the taxpayer, individual or corporate, often has a choice as to the actual taxation that they pay dependent on the particular course of action that they adopt. The question is consequently sometimes asked as to up to what point the taxpayer can by his personal choices and decisions choose a particular course of action that has an impact on the tax that they are required to pay.
The answer to this question revolves around the principle of the freedom of management and not-interference in management decision-making. This principle prevents the tax administration from affecting the decision taken by the manager. The taxpayer can choose to carry out the provision of goods or services that are taxable, or they may not, as they decide. Alongside the right to create or otherwise the taxable product, the freedom of management also gives the right to adopt the tax efficient solution to a given situation.
However, in tax law as in other branches of law, justice implies that personal freedom is limited when it constitutes itself a limitation of the freedom of others. As in other branches of law, the principle of freedom is recognized only insofar as it is used only in accordance with a legal objective. The general theory of the abuse of rights therefore has a significant place in tax law. It is not possible for example to prevent the access of the administration to the legal documents which give important evidence on the nature of a contract, or to make out that certain fictitious acts have been undertaken, nor indeed to undertake ac act the purpose of which is to fraudulently avoid a legitimate tax liability.
Principles with a non-constitutional basis
The Principle of Non-Retrospective Application
The principle of the non-retrospective application of the law is outlined in the constitutions of many countries and is also commonly found in the civil code of many jurisdictions (see for example article 2 of the Preliminary Title of the civil code[3]). According to this principle, it is forbidden to defer the effects of a law before the entry into force of the said law.
In general, a law comes into enforceable existence by its publication, which in Rwanda results from the insertion of the law into the Official Gazette. However, the legislator in theory has the ability to set itself the date of the entry into force of the provisions which it enacts. Therefore the entry into force of a law can be accelerated to precede his publication or, on the contrary, be delayed beyond its publication date.
For tax law as well as many other forms of law, the entry into force also utilises these various methods. However, once its entry into force is defined, the tax law applies immediately not only to future situations but also to those which currently exist. Therefore the tax law can affect the tax consequences of a former period and modify a posteriori the conditions of taxation. It is the consequence of the objective situation in which the taxpayer is, therefore modifiable at any moment by the law, and the permanence of the capacities of plate and liquidation of the tax department, as long as its competences are not struck of forfeiture.
Alongside the immediate application of the tax law which can regularly affect existing situations, the legislator also occasionally decides that a law will produce effects on activities that have taken place in the past. Jurisprudence and legal doctrines sometimes recognize the validity of certain exceptions to the rule of non- retrospective application, even though no decisions have been taken expressly by the legislator in this direction such may be the case for example when the law is interpretative, or when it moderates penalties.
Right To Defence
The right of a taxpayer to defend themselves applies in tax law as for all other categories of the law. Apart from jurisdictional activities, the principle is also applied regarding the administrative procedures of tax control, and constitutes a significant guarantee for the checked taxpayer. Any failures in processes on behalf of the administration are likely to result in the failure of any attempts to enforce tax rectification or imposition procedures. Any taxpayer whose returns are checked must have the opportunity to defend themselves whilst being assisted if they so wish with a counsel of their choice.
The Principle of Territoriality of Tax
The principle of territoriality of tax defines the geographical application of the tax law. In general, the geographical tax space and the sphere of competence reserved for the political bodies are the same and constitute the boundaries of tax sovereignty. However the power to tax can, in certain cases, be extended beyond the national borders or, conversely, not cover the whole territory or be limited by a supranational tax law. Such is the case under the terms of certain international tax conventions; in these instances, sovereignty can be affected by standards higher than the national law because they arise from a ratified treaty which has been approved by Parliament. Such is the case in particular treaties which set up ‘free zones’, which enjoy certain tax immunities because of wider economic considerations.
Certain difficulties can be created by this principle of the territoriality of tax. One is the challenges that can result from the impact of double taxation agreements whilst, on the other, that of tax avoidance can be a problem.
Double taxation exists when a taxable activity can give rise to two (or more) taxable events in different countries during the same fiscal year. If various states decide to subject the same taxpayer, for the same taxable event, to similar impositions this will create a situation where the taxpayer is charged twice for the same event – ‘double taxation’. Indeed as each state has control of taxation matters only within the geographical limits of its sovereignty, there is no international law in existence that prohibits double taxation. So when two national tax laws in different states are concurrent, they cannot be regarded as being in conflict and one state has no right to intervene in the tax affairs of another. It is only possible for each state to decide on the tax position only inside its own boundaries of sovereignty and the application of national laws on their own territory.
The only solution to the problem of double taxation in international law is the agreement of International Conventions, bilateral or multilateral. When these conventions are regularly ratified, they prevail above the national laws under the terms of the general principles of the law.
The problem of tax avoidance can be solved also in the same manner: by International Convention. But, in practice, tax avoidance is even more difficult to avoid that double taxation. It can be present at two different times in tax operations: either at the moment of the establishment of the tax base, or at the moment of tax recovery.
At the time of the establishment of the tax base, the taxpayer can try to locate his taxable income in a country where the tax charge is less heavy or may in some cases be zero. As for the moment of recovery, tax avoidance can be carried out when the taxpayer attempts to hide their income from the tax authority.
To combat this attempted evasion of tax, the country that is a potential victim of this act can endeavour to locate the provision of the taxable event in the taxpayer’s home country or can oblige the taxpayer to make a statement of the assets that they hold abroad. But, even if these efforts make it possible to reduce tax avoidance at the national level, it would nevertheless be more beneficial to implement an international regulation on the basis of administrative assistance between different states.
As for tax avoidance at the time of recovery, the best remedy would involve an administrative arrangement and/or legal intervention in the ‘country of refuge’ to which the tax creditor has, for tax purposes, effectively re-located. But in addition to the legal difficulties of techniques which could result from s these measures, such a solidarity would suppose a community of interest which, as regards tax avoidance, is often absent because very often the country of refuge profits rather from this tax evasion and its interests often diverge from those of the country which, in tax terms, loses out from the actions of the taxpayer.
Other principles applied in tax matters
Principles of a good tax system
The principles of a good, fair and efficient tax system are described by ‘Adam Smith’s canons of taxation’. A good tax is efficient
An efficient tax system raises the revenue needed at the lowest possible cost to the tax-payer.
Efficient taxes systems raise revenue without negative distortions such as reducing workincentives for individuals and investment incentives for companies. Some examples are given below.
- Indirect taxes can create a ‘deadweight loss’ or a loss in terms of economic efficiency. For example, taxes on restaurant meals and personal computers cause a deadweight loss of consumer surplus and discourage the purchasing of such items;
- Lump-sum taxes tend to be most efficient. Once they have been paid, there is no disincentive to earn extra income or achieve a higher profit since the tax liability does not increase with extra surpluses. Unfortunately lump-sum taxes do not discriminate between rich and poor tax-payers. A lump -sum tax would hit a low-income earner much more heavily than a high-income household.
A good tax system promotes Equity and the Benefit Principle
Taxes should be fair and based on people’s ability to pay (the principle of progressive taxation already discussed).
The benefits principle requires that people should pay taxes according to the benefit (utility) they derive from consuming government goods and services.
In many instances there is a trade-off to be made between equity and efficiency. For example a reduction in the marginal rate of tax for wealthy people can have some justification on the grounds that it stimulates greater work effort and higher labour productivity. However reducing taxes for higher income people creates a less progressive tax system and can increase the scale of inequality between rich and poor. Governments must be careful not to set higher tax rates at such a level that disincentive effects occur.
Equally the tax system can also create disincentives at the lower end of the income scale. c) Good tax is certain
The certainty principle is very important in tax affairs. Tax-payers should be able to anticipate the possible amount of their tax obligations and plan for payment of them in due course. For this reason, tax rates should be relatively stable from year to year and should not be subject to sudden fluctuations. This allows people to undertake their own financial planning knowing the basic tax liabilities they are likely face in the coming year.
Taxes should be just enough to generate the revenue required for provision of essential public services.
Broad Based
Taxes should be spread over as wide a section of the population as possible, or over a wide section of sectors of the economy, in order to minimize the individual tax burden.
Taxes should be coordinated to ensure tax neutrality and the overall objectives of good governance.
Convenience
Taxes should be enforced in a manner that facilitates voluntary compliance to the maximum extent possible. h) Neutrality
Taxes should not favour any one group or sector over another, and should not be designed to unfairly interfere with or influence individual decision-making (unless this is for social reasons as previously discussed). i) Predictability
The method of collection of taxes should facilitate the certainty and regularity of recovery.
Tax exemptions must only be for specific purposes (such as to encourage investment) and for a limited period.
Simplicity
Tax assessment and determination should be easy to understand by an average taxpayer.
The principle of an optimal tax
Optimal tax theory, also known as “optimal taxation”, is the study and implementation of how best to design a tax system by minimizing its distortion and inefficiency with the aim of increasing set revenues. A tax system is termed ‘neutral’ if it avoids distortion and inefficiency completely. All other things being equal, if a tax-payer must choose between two mutually exclusive economic projects that have the same pre-tax risk and returns, the one with the lower tax or with a tax exemption would be chosen by a rational investor or business person. To this extent economists argue that taxes generally distort behaviour.
CLASSIFICATION OF TAXES
The classification of taxes is not always an easy operation, but three criteria can be taken into account. The first criterion is based on the nature of the taxable product and/or the individual situation of the taxpayer. It is the choice between real tax and personal tax.
The second criterion is based on the economic option. Indeed, if the tax is always a contribution operated on measures of wealth, this wealth is always likely to have several economic forms. A choice must be made between income tax, capital tax and taxes on expenditure or consumption.
The last criterion is that based on the choice of the legal technique of imposition which is made by the tax authorities. This equates to a choice between direct tax and indirect tax.
Real tax and personal tax
This is one of the oldest distinctions in taxation. ‘Real tax’ can be defined as that which strikes an operation, a good or an amount of money based only in its nature, its money value or its quantity, without focusing on the person of the taxpayer.
Taxes based on goods can be contrasted with taxes formerly imposed on people, ‘capitation taxes’, established on a per capita basis which falls on the taxpayer directly.
This type of tax has practically disappeared in many modern tax systems. One of the last to be practised in France is the so-called “tax on idlers”, created by a law of June 16, 1948, which was a true poll-tax. This tax, with an amount of 50.000 old francs, was to apply to any adult person of the male sex who was less than 50 years old, who could not demonstrate in 1947 an occupation likely to provide for their existence. Various exemptions were envisaged, in particular with regard to students, on the condition that they were less than 30 years on December 31, 1947 and that they could justify a regular place at university. This French legislation even provided that the non-payment of the tax when due could result in imprisonment. However, this tax was much criticized and was ultimately withdrawn.
The person of the taxpayer is not now as a “taxable product”, although income tax can be regarded as an imposition on the person, insofar as it is based on income earned from work. However, rather than being based on the person, taxes are now only applied to incomes, activities, operations and goods.
The distinction of the real tax from personal tax always has great importance. One can even speak of significant developments in the field of personal tax in modern tax systems. However, personality of tax has a completely different significance.
The determination of ‘taxable product’ operates in several ways. When the taxable product is looked at without the person of the taxpayer being taken into account, it is known as reality: this is the case, for example, for the corporation tax or the VAT.
The tax is known as personal when it is arranged in order to ensure an adaptation of the fiscal burden to the individual situation of the taxpayer, especially as regards their marital status. That is much more explicit in France where the ‘personality’ of the tax answers the concern to carry out more justice. The system has logically results in retaining the whole of “capacities” of the taxpayer. The personal tax is thus generally a tax of total nature, in opposition to real taxes, which are particular. The taxes which lend themselves best to the application of the system of the personality are wealth tax and the general tax on the income. Various processes can be used to carry out the personality of income tax, either at the stage of the plate itself, in particular by the mechanisms of the exemption of certain incomes or the tax exemption of the vital minimum, or at the stage of the liquidation of the tax, in particular by the systems of the family quotient and progressive increase in taxation.
Taxes on capital income, income and expenditure
This classification is founded on the economic concepts of capital, income and expenditure. It is today the preferred approach for many academics, because it is the tax that makes it possible to best determine its effects with regard to, on the one hand, various interventions of the State as regards social, economic or financial matters and, on the other hand, the incidence of the tax, in particular from the point of view of tax justice.
The tax charged is assessed on wealth. Wealth, looked at in the broadest possible terms, can in tax terms be looked at from three perspectives.
Tax on capital income
Capital is wealth acquired or accumulated over a certain period, and is treated in tax terms as a source of income. This would include the inheritance of an individual for example in the form of a legacy left to them. A levy on the capital may be established as a tax on the whole of the amount, or, alternatively, in the form of a tax on certain elements of the capital only.
Income tax
Income, as described in an etymological analysis of the term, is the wealth which arrives from a source likely to recur over a period of time. Such incomes either from the existence of productive capital (land incomes, incomes of productive movable goods, etc.), or from the exercise of an activity (such as wages remunerating work, non-commercial benefit of the liberal professions, etc.). They can also represent a mixed character that is they can result from an activity carried on by means of a capital activity (industrial and commercial benefits, agricultural benefices, etc.). As far as am assessment of income is concerned, the tax department can use either the total amount of the incomes or merely the profits of a taxpayer.
Tax on expenditure
The existence of the wealth of an individual, instead of being based directly on their capital or income, can be revealed indirectly by the use that they make of their resources. Taxation on consumer expenditure can be imposed in two ways: firstly, by a tax on the total expenditure of the taxpayer by one that is based on particular items of expenditure. In one way, a system of taxes based on expenditure is much simpler than that of a tax based on income.
What are known as ‘turnover taxes’ currently constitute the typical example of taxes on expenditure. They can be divided into two categories:
- Cumulative taxes which are so named owing to the fact that they are applied to the price of the products each time that they change hands;
- Taxes on added value are designed to ensure that the same product is not the subject of multiple impositions of tax each time successive transactions involving a good or service are involved. Tax is only chargeable on the added value of the product arising from each stage in the production or selling process.
From the point of view of the analytical taxes or called indirect taxation represent one to the category of taxes on the expenditure. They relate, like the taxes on turnover, to the goods and the services which are the subject of exchanges. But whereas the VAT is a general tax which strikes the whole of the expenditure indistinctly, they are taxes known as “analytical”, because they burden with the products or the given service. (One makes a distinction between the expenditure of first need, the expenditure of luxury and the current consumer expenditure, like alcohol, tobacco…).
Direct taxes and indirect taxes
Basis of the distinction
Direct taxes are those which are placed on the goods or the incomes of a person. As their name indicates, indirect taxes are only linked to the taxpayer indirectly, and become payable at the time of the use of their resources or the expenditure which they makes. Indirect taxes are therefore based on acts of production, exchange or consumption.
But to make the distinction clearer, three criteria may be considered: the administrative criterion, the economic criterion and the tax criterion.
The administrative criterion
As far as the administrative criterion is concerned, a distinction may be noted on the mode of recovery. Direct taxes are recovered in a personal fashion, such as under the terms of a writ of execution established beforehand by the tax administration. Indirect taxes fall due at the time where the taxable operations are carried out, without the preliminary issue of a writ of execution; the tax debt is immediately created, and, in the majority of the cases, must be discharged at once, without the intervention of the tax administration.
The economic criterion
From an economic point of view, the direct taxes, which are recovered from the taxpayer (the real contributor) in theory, are supported definitively by the person who pays them. In contrast, the debtor of indirect taxes is generally only a legal debtor; he transfers the effective tax burden from a transaction on to other people, raising the amount from their selling prices.
The tax criterion
In order to distinguish direct and indirect taxes, the stability of the tax base can be considered. Direct taxes are those which impact on the elements of wealth in a durable or stable matter: they are defined by the stability of the tax base. Indirect taxes on the contrary are those which are more erratic and unpredictable in nature; they are identified by the non permanent character attached to their tax base.
TAX INCIDENCE
To determine the fairness of a tax regime, it is necessary to consider the economic incidence of taxation. It is important to make a difference between those who have the liability to pay a particular tax and those who suffer the economic incidence or burden of the tax.
Determining tax incidence depends on a good understanding of how various markets operate in a given economy, particularly the ability of different kinds of taxpayers to shift the cost of the tax to other economic actors. The person who bears taxes depends on the relative supply and demand elasticity of consumers and suppliers.
In many cases, the tax burdens falls on individuals in their role as consumers, producers and factor suppliers, not on companies or other institutions. For example, although the VAT law require firms to pay VAT to the government, in practice the real economic incidence of VAT falls on the consumer. Companies will be required by law to add on VAT to their selling prices.
In the same way, although computer equipment taxes are almost always collected at some point in the economic distribution chain (for example, at the point of import), the burden of the tax is ultimately borne by consumers. The tax is again included in the selling price. However in certain cases, it is not clear who actually bears the economic costs of taxation. For example, the economic incidence of property taxes may be borne either by the landlords or owners of capital (who also bear the legal incidence) or by the users or renters of the property, depending upon market conditions.
TAXABLE CAPACITY
Meaning
Taxable capacity shall be understood as that level of tax revenue which can be collected from the community by the Government without any undue constraint or use of excessive power by the latter. The amount of tax burden that the citizens of a country are able to bear is not rigidly fixed. It can increase or decrease with changes in the distribution of wealth, the size of the population, the method of taxation, etc. In other words, we can say that the limit of taxable capacity is a relative and not an absolute measure.
[1] François Gore and Bernard Jadaud, Droit fiscal des Entreprises, Paris, Dalloz, 1980, p. l,
[2] Cours de droit fiscal, notes de cours, on http://www.u-paris2.fr/html/cours_et_td_en_ligne/cours/DR0006.pdf 3 B. Michel, Introduction au droit fiscal et à la théorie de l’impôt, cited by Victor Thurony, op. cit., p. 48.
[3] Ministry for Justice, Codes and Laws of Rwanda, on
http://www.MOategeko.net/display_rubrique.php?Information_ID=20&Parent_ID=455&type=public&Langue_ ID=Fr#458.
