Business tax burden in the non-linear system

Tax burden affect economic performance by changing incentives for business formation in the non-linear system, expansion and operation. In the article the definition of tax burden as an integrated feature of the impact of taxation on the business entity. Authors specify the sources of spending between the tax rate and tax revenues, there is a nonlinear relationship. Raise the notion of tax schemes. On the basis of the studied materials the allocation of tax revenues between levels of budget was considered. Author's opinion is justified from the standpoint of complex nonlinear doctrine; the main functions of the tax burden at the micro level were defined. Authors describe in details the order of their finding, note the time lag for which it is advisable to determine the tax burden of an entity in the nonlinearity. The tax burden of the enterprise in a nonlinear system should not be. The State can and should regulate the rational development of small and medium-sized businesses in the tax load of the enterprise in a complex nonlinear system. Efficient design of a business tax system encourages activities with beneficial economic spillovers and imposes lighter burdens on those industries and activities that are most responsive to taxation. Tax reforms have the potential to improve economic efficiency by adjusting the level and design business burden in the non-linear system.

At the present stage the general course of the State Finance concept improvement in the World is to move to program-target principles of forming the State budget. Tax-budgetary system is complex non-linear system, including the interests of the vast majority of the State citizens. At the same time, every state tends to optimize the tax burden that, first of all, characterizes in balance of State interests in one hand, and tax-payers in another [1].

As we touch upon the issue of the business tax burden, so it is necessary to touch upon the concept of tax schemes. Tax schemes are specific methods and terms to reduce tax burden in particular situation. There are black and white tax schemes.

Black tax schemes are tax schemes that directly contradict tax legislation. Application of the black schemes is forbidden and leads to legal liability. While white tax schemes are not prohibited by law, sometimes are directly provided by it. Tax practitioners, owing specific knowledge, can always prove the validity of white tax schemes. There is an indicator - if the validity of the scheme is impossible to prove, so the scheme is black, and it is prohibited to apply it [2].

Author's opinion on white tax schemes is that they can be used in accordance with Kazakh legislation. So, the tax burden of the business entity, until now was only theoretical subject, but with the spread of tax planning on practice, the need for an informative measure instrument of the impact of tax on the financial position of a business entity appeared, and the views of many modern economists turned to the issue of studying the tax burden. All scientific approaches to this economic category can be divided into two groups.

The basis of the delimitation is the principle of the number of indicators included in the tax burden. Some economists consider the tax burden for a particular taxpayer as a share of its income, levied to the budget in the form of taxes and fees. In this case, a quantitative assessment of the tax burden is reduced to the calculation of one indicator. The indicator is universal, it is easy to calculate it, but it is significantly averaged and not informative enough. Economic scholars define the tax burden as a complex characteristic of the impact of taxation on business entity [3].

In this case, it is proposed to measure the tax burden not by one but by several indicators. The main point of the tax burden is most objectively defined as follows: tax burden is a set of complementary indicators that quantitatively and qualitatively characterize the effect of compulsory tax payments levied to the budget system of the Republic of Kazakhstan on the financial position of a business entity.

Separately taken indicators of the tax burden cannot constitute a full-scale picture of the effect of taxation on the financial condition of an economic entity. Only complex application of such indicators provides clear and reliable understanding of the tax burden in the enterprise. Obligatory tax payments are a set of taxes and fees, insurance fees to the Pension Fund of the Republic of Kazakhstan, the Social Insurance Fund and the Compulsory Health Insurance Fund (CHF), custom duties paid by the business entity, and fines and penalties related to these payments [4].

First of all, it should be taken into account that the 31 % increase in tax receipts in 2016 with the growth of nominal GDP by 13.8 % indicates a serious increase in the tax burden in the Republic of Kazakhstan.

Second: the load increase on a payroll is an objective fact. Even taking into account the adjustment of calculations for tax deductions, the tax burden on the payroll by 2020 will increase from 28.5 % to 40 %.

Payroll contributions are as follows:

  • IIT (Individual Income Tax) ~ 7 % (deductions for the minimum wage (estimated at 1.5 %), mandatory pension contributions (1.5 %);
  • Pension contributions - 15 % (+ 5 % from 2018);
  • Social tax and social contributions - 11 %;
  • Contributions to the Social Health Insurance Fund - 7 % (5 % employer + 2 % employee).

Third: the distribution of tax receipts between the levels of the budget (republican / local) is a matter of the budget policy rather than tax policy (Ministry of Finance of RK, 2015-2016).

The nominal increase in tax receipt to the state budget in January-July 2016 compared with the respective period of 2015 amounted to 875.1 billion tenge. The main attention should be paid to the three main items of budget revenues, namely, income tax, internal taxes on goods and services, as well as taxes on international trade, the cumulative increase of which amounted to about 83 % of the increase in state budget revenues for 7th month of 2016 (Table 1).

Table 1 The structure of tax revenue, (bln. tenge)

Name

7М2014

7М2015

7М2016

7М2016 to

7М2015 to

7М2015, %

7М2014, %

Tax revenues

2 713.9

2 329.8

3 204.9

37.6

-14.2

Income tax

978.5

922.3

1 171.0

27.0

-5.7

Social tax

234.2

256.6

295.0

15.0

9.6

Property tax

114.5

128.2

136.9

6.8

12.0

Domestic taxes on goods and services

764.8

607.2

1 074.5

77.0

-20.6

Taxes on trade and external transactions

602.5

390.5

506.4

29.7

-35.2

Mandatory payments

19.4

24.9

20.9

16.2

28.3

Other taxes

0.0

0.1

0.2

154.3

71.2

Note. Source: (Ministry of Finance of RK, 2015-2016) [4].

Thus, revenues on income tax increased by 248.7 billion tenge (+ 27.0 % y/y), internal taxes on goods and services - by 467.3 billion tenge (+ 77.0 % y/y), taxes on international trade and foreign operations - by 115.9 billion tenge (+ 29.7 % y/y). According to the State Revenue Committee, the nominal increase in income tax was mainly due to corporate tax (Table 2).

Table 2

The corporate income tax, wage population and profitability of enterprises, (bln. tenge)

Name

7М2014

7М2015

7М2016

7М2016 to 7М2015, %

7М2015 to 7М2014, %

Income tax

978.5

922.3

1 171.0

27.0

-5.7

Corporate income tax (non-oil sector)

667.0

525.4

770.8

46.7

-21.2

Individual income tax

311.5

343.7

400.2

16.4

10.3

Fund salaries (6 months)

2 473.8

2 646.6

2 852.6

7.8

7.0

Salaries of civil servants

797.9

862.8

1 031.7

19.6

8.1

Salaries for other sectors

1 676.0

1 783.8

1 820.9

2.1

6.4

Enterprises income (1kw)

8 071.5

7 043.3

8 414.5

19.5

-12.7

The profits of enterprises (1kw)

1 070.6

707.6

1 387.4

96.1

-33.9

Note. Source: (Ministry of Finance of RK, 2015-2016) [4].

In accordance with the data on the activities of the enterprises of the Committee on Statistics, the total profit of small, medium and large enterprises in the republic increased significantly in the 1st quarter of 2016 compared with the respective period of last year, which can explain the growth of corporate income tax. In turn,it is difficult for us to explain the almost two-fold increase in profits in the 1st quarter of 2016 compared to the 1st quarter of 2015. The revenues of enterprises increased by 19.5 %, and profits - by 96.1 %. Also, a large increase in the profitability of enterprises does not correspond to a sharp decline in economic growth and a large decrease in demand in it. Also, it is difficult for us to explain the growth of individual income tax. The difference between figures of the growth of taxes collected under the IIT (+ 16.4 % y/y) and the growth in total wages (+ 7.8 % y/y) produces a question. According to Table 3 to the weak growth of wages in the non-state sector against the background of growth in sales and profitability of enterprises also draws attention.

An alternative and possibly supplementary method of encouraging business activity would be to reduce business taxes and replace the lost revenue with other taxes, while strengthening measures to prevent personal income from being reclassified as tax-favored business income. But quite apart from the difficulty of preventing tax avoidance by reclassifying income, and the unattractiveness of any replacement taxes, such a course would run into another common constraint on democratic policymaking: the political importance of appearing to impose significant tax burdens on businesses [5]. Of course, the notion of actually imposing a tax burden on business is illusory, because the burdens of business taxes are in fact borne by combinations of individuals — business owners, domestic workers and consumers, and possibly foreigners — rather than by business entities per se. And as a method of raising tax revenue, many business taxes are extended considerably less efficient and equitable than other tax alternatives that are within the power of governments to enact. But some combination of the difficulty of the legislative compromise, prevailing uncertainty over who actually bears the burden of business taxes, and the powerful if misleading imagery of taxing large, affluent business organizations create a sufficiently compelling political imperatives for heavy and distortionary business entity taxation to persist in some countries, despite these taxes' economic consequences [6].

Available measures commonly suggest tax burden that exceed those of almost all and possibly all other countries. One challenge in ranking the relative tax burdens of different countries is that no single measure offers an entirely reliable or compelling metric by which to compare tax systems. The most easily accessible comparative guide is provided by statutory corporate tax rates [7]. Because countries differ in the extent to which subnational governments levy business taxes, it is important to incorporate subnational taxes when comparing them.

The Organization for Economic Cooperation and Development [8] reports the combined national and subnational average corporate tax rates for the 35 OECD member countries; Table 3 displays these 2017 tax rates from highest to lowest. The United States appears prominently at the top of the list, with an average 38.91 % tax rate; France is in a second distant at 34.43 %; Belgium is the third at 33.99 %; Germany is the fourth at 30.18 %; and the remaining 31 OECD countries have tax rates of 30 % or below, notably including Canada (26.7 %) and the United Kingdom (19 %).

Table 3

Statutory Corporate Income Tax Rates Combined for the OECD Countries, 2017

Country

Tax rate (%)

Country

Tax rate (%)

United States

France

Belgium

Germany

Australia

Mexico

Japan

Portugal Greece New Zealand Italy Luxembourg Canada Austria Chile Netherlands Spain

South Korea

38.91

34.43

33.99

30.18

30

30

29.97

29.5

29

28

27.81

27.08

26.7

25

25

25

25

24.2

Israel

Norway Denmark Sweden Switzerland

Slovakia Estonia Finland Iceland Turkey Czech Republic

Poland

Slovenia

United Kingdom

Latvia Ireland Hungary

24

24

22

22

21.15

21

20

20

20

20

19

19

19

19

15

12.5

9

Note. Source: OECD tax database (OECD, 2017) [9].

The United States has the highest corporate tax rate among countries with advanced economies, and, despite offering significant additional deductions, exclusions, and tax credits; it imposes the heaviest tax burdens. This paper offers a new measure of corporate tax burdens based on information in the tax expenditure budgets; this measure implies that the burden of U.S. corporate taxation in 2017 is equivalent to that of mass-produced by a corporate tax rate of between 31.7 and 34.8 %, without the additional deductions, exclusions, or tax credits. As judged by statutory corporate tax rates, the United States clearly has the highest business tax burden among the OECD countries in 2017. But there is an understandable concern that statutory tax rates fail to capture important aspects of tax systems, and thus are potentially misleading guides to comparative tax burdens [10].

Business tax systems differ in the degrees to which they feature favorable deductions, tax credits, exclusions, and other provisions designed to encourage specific business activities. These provisions serve to mitigate tax burdens, thereby subjecting businesses to effective levies that can be significantly lower than those suggested by the headline tax rates. Furthermore, savvy taxpayers commonly structure their firms and their business transactions to benefit from available tax deductions and credits.

Professor Baimuratov U.B. believes that the tax burden of the company in a non-linear system should not exist. The state can and must regulate the budget and tax system flexibly, indirectly, because the state is the owner of the budget resources generated by its citizens and it is responsible for the rational use of budget funds [11].

American economist Arthur Laffer suggested that between the tax rate and tax revenues there is nonlinear system, but more complex connection [12]. Non-linear dependence suggests that after a certain figure of the tax rate - t-optim. The general tax revenues begin to decline. At high tax rates, the reasons described earlier will be valid: economic agents either cease to operate at all or go to the shadow sector. With a tax rate of 100 %, there is no sense to make any effort, since all income will be taken out.

The author's opinion, the state must fulfill its social obligations and this requires linear steady budget revenues. At the same time, we believe that the tax burden has an inherent immanent property of bifurcation (fluctuations). No national economic system can completely eliminate this phenomenon. They can be smoothed, softened, but it is impossible to eradicate, since the control parameters do not regulate the behavior of the object of management from outside, but create the internal potential of its self-organization.

We note that it is appropriate to conduct the determination of the tax burden for the calendar year; at the same time only tax payments for the analyzed period are included in the calculation. Fines and penalties calculated on taxes and duties of the previous period are not taken into account of the current analyzed period [13].

The companies act as legal entities that carry out economic and business transactions on their own behalf. The scope of application of the tax burden in the financial analysis of the company is quite wide and performs the following functions (Fig.).

The functions of the burden on the micro level

  1. Used as a tax planning tool; with its help, the need for tax planning at the enterprise is determined, and also the results of carried out the tax planning are assessed;
  2. Using independent indicators of the tax burden, business entities determine the potential of tax optimization, i.e. identify inefficient, from the point of view of taxation of a group of operations that require tax optimization;
  3. The determination of the tax burden and the application of legal measures for its reduction give business entities a competitive advantage; additionally released funds are directed by business entities to the development of business and increase the competitiveness of their products;
  4. The calculation of the tax burden helps to assess the investment attractiveness of projects, both for business entities and for exterior investors. The decision to invest money to a large extent depends on the level of taxation, which means that a reliable and objective determination of the tax burden has great importance;
  5. Determining the tax burden on the company and comparing it with the industry tax burden is extremely important for the financial management of the company. Such ratio makes it possible to assess the quality of tax accounting and tax planning at the enterprise, as well as the level of professional training of the company's specialists, engaged in tax management;
  6. The tax burden can be also used by participants of the equity market in the formation of financial instruments. A comparison of the tax burden and the commercial value of shares of listed companies gives a notion on the efficiency of the company's business.

Note. Source: author's learning aid.

Figure. The functions of the burden on the micro level

The functions of the tax burden are very significant, but until now, insufficient attention has been paid to it. In practice, business entities aim to minimize their tax payments, without conducting full-fledged tax planning, and therefore, not determining the tax burden. One of the reasons for this situation is the absence of a non-bulky, understandable and reliable method for determining the tax burden on a production enterprise. In the economic literature there are many methods for calculating the tax burden. This issue was studied by U.B. Baimuratov, M.S. Erzhanov [1, 2] and others.

The load level is extremely uneven. By 2015, we defined that users of a special tax treatment (1.4 million entities) pay only 98 billion tenge. But if to look not from a fiscal point of view, but from a long-term perspective, from the standpoint of economic policy, then we certainly see that now, in the context of an economic downturn, the ultimate truth is employment. And only small and medium businesses can provide productive employment.

Now we have a third of the business that pays 98 billion tenge to the budget, but they have to pay much more, but we cannot even make an assumption how much, because they do not declare their income, they do not file the declaration. They simply indicate their amount – If I want, I indicate 100 thousand, If I want, I indicate 1 million tenge. That is, this is my own wish. In what mood I woke up today and what tax I want to pay today. If 1 million 400 thousand business entities have to pay 3 %, then we should see that they pay 3 %, and not 0.3 % [5].

Frequently there is a free transfer of property between friendly companies. The donated property for the receiving party is recognized as income, involving the obligation to pay CIT (Corporate Income Tax). In addition, such an operation involves the obligation to pay VAT (Value Added Tax) [4].

In order to exclude the obligation to pay CIT and VAT it is recommended to transfer this property as a contribution to the authorized capital. The tax law explicitly provides that the receipt of property as a contribution to the authorized capital is not considered as income, therefore, does not involve an obligation on CIT. At the same time, this operation is not recognized as a turnover on VAT [4].

For example, in Kazakhstan, organizations operating in the field of medicine, education, and science are exempted from corporate income tax (CIT) and value-added tax (VAT). In addition, organizations do not pay CIT and VAT in which the number of people with disabilities or the cost of remunerating their work exceeds 51 %.

Consequently, if the company's activities are related to these types, or if the occupation allows it to use the work of people with disabilities, it can rely on tax benefits.

We also cannot abstract from our institutional peculiarities related to the fact that we have a fairly high level of corruption burden on business. Of course, we are struggling with this, but this load exists, and it is stated by official bodies. Therefore, small and medium business entities, in addition to paying taxes, a quasitax burden, they also pay corruption rent.

Well-known economic expert Rakhim Oshakbayev: «We have a very high level of transaction costs in doing business. We see very often inaccessibility of information; we see difficulties with the implementation of export-import operations. And we cannot abstract from it. Therefore, when we are talking about the tax burden, we must consider everything together. And for a small business, as a matter of fact, the payment of corruption rent is a matter of life and death: if he does not pay it, then he goes out of business, which is why he also goes for tax evasion. This is not the only reason, of course; there is also opportunistic business behavior that needs to be fought» [14].

Business taxes affect incentives for business formation, expansion, and operation, which is why in the non-linear system poorly structured business taxes offer the prospect of improving resource allocation. Efficient business taxation minimizes the harmful consequences of taxation, albeit in a decidedly second-best fashion, because virtually any effort to collect tax revenue from the business sector distorts the economy. Conditional on raising any given the amount of business tax revenue, efficient business taxes align private incentives with social costs and benefits, adjust for market failures, and seek to impose the heaviest tax burdens on activities that are least responsive to taxation.

Efficiency-minded tax reform selects both the level and design of business taxes. The high current rates of business tax burden in the non-linear system imply that economic gains will be available in the non-linear system business taxes are reduced and other, more efficient taxes are used to advanced the lost revenue.

The distributional consequences of such a change would of course depend on the specific nature of any business tax reductions and on which other taxes were used to raise the needed revenue; but with a progressive individual income tax at its disposal, the government could make this combination of tax changes more or less progressive than current taxes.

In addition to adjusting the level of business tax burden in the non-linear system intended to improve economic efficiency would maintain and in some cases increase the differentiation of tax burdens across business activities, firms, and industries, notably by exempting the foreign business incomes tax burden in the non-linear system, but more generally by offering favorable tax treatment to highly responsive economic activity.

The calculation of the set of indicators of the tax burden allows you to get an idea of the current impact of taxation on the financial and economic activities of the enterprise and the structure of the tax burden [15]. According to the results of calculations, it is necessary to assess the impact of taxation on the enterprise and identify the possibilities for its optimization. Also, the data obtained on the level of the tax burden of the enterprise can be used for the purposes of intra-management. Therefore, at present, the search for an optimal tax system with the aim of stimulating production growth, as well as the development of small and mediumsized businesses in a complex non-linear system has primary importance.

 

References

  1. Baimuratov, U.B. (2005). Denhi i finansy: nelineinaia sistema [The money and finance: nonlinear system]. (Vol. 2). Almaty: BIS [in Kazakhstan].
  2. Erzhanov, M.S. & Erzhanova, A.M. (2014). Teoriia i praktika nalohovoho audita. Kontseptsiia, metodolohiia i metody [The tax audit theory and practice. The concept, methodology and techniques]. Almaty: Palmarium Academic Publishing [in Russian].
  3. Zholayeva, M.F., & Serikova, M.A. (2017). Nalohovyi audit: vidy i metodika provedeniia. Sovremennyi bukhhalterskii uchet: vektor razvitiia [The tax audit: types and technique. Modern accounting: vector of development]. Mezhdunarodnaiia nauchnaiia-prakticheskaiia konferentsiia molodykh uchenykh (17 noiabria 2017 h.) – International Scientific and Practical Conference of Young Scientists. (pp. 348–350). Stavropol [in Russian].
  4. EY global survey. (2014). VAT/GST electronic filing and data extraction. British: Ernst & Young Global Limited [in France].
  5. Komitet hosudarstvennykh dokhodov MinFin RK [State revenue Committee of RK. Ministry of Finance of RK]. (2015– 2016). Astana. kgd.gov.kz. Retrieved from www.http://kgd.gov.kz [in Russian].
  6. Mihir A. Desai, C. Fritz Foley & James R. Hines Jr. (2016). Trade Credit and Taxes. The MIT PressJournals, Volume. Review of Economics and Statistics.
  7. James, R. Hines, Jr. (2014). How Serious Is the Problem of Base Erosion and Profit Shifting? Volume. Canada: Tax Journal.
  8. Patel, Elena & John, McClelland. (2017). What Would a Cash-Flow Tax Look Like for U.S. Companies? Lessons from a Historical Panel. Washington: U.S., Washington: U.S. department of the treasury office of tax analysis.
  9. OECD. (2017). (Organization for Economic Co-operation and Development).The oecd classification of taxes and interpretative guide. in Paris: OECD. [in France].
  10. PWC and the World Bank. (2017). Paying Taxes. London and Washington. Retrieved from https://www.pwc.com/gx/en/paying-taxes/pdf/pwc-paying-taxes-2017.pd.
  11. Baimuratov, U. (2005). Finansy Kazahstana [Finance of Kazakhstan]. (Vol. 2). Almaty: Ekonomika [in Russian].
  12. Laffer, Arthur B. (1765, 2004). The Laffer Curve: Past, Present, and Future. America: The Heritage Foundation.
  13. Rao, Nirupama. (2016). Do Tax Credits Stimulate R&D Spending? The Effect of the R& D Tax Credit in Its First Decade. Journal of Public Economics, 140, 1–12.
  14. Oshakbaev, R. (2017). Uroven nalohovoi nahruzki kraine neravnomernyi [The level of the tax burden is extremely uneven]. kapital.kz. Retrieved from https://kapital.kz/finance/54263/rahim-oshakbaev-uroven-nalogovoj-nagruzki-krajne-neravnomernyj.html [in Russian].
  15. Kirova, E.A. (1998). Metodolohiia opredeleniia nalohovoi nahruzki na khoziaistvuiushchie subieekty [The methodology for determining tax burden on economic agents]. Finansy – Finance, 9, 32, 33 [in Russian].
Year: 2019
City: Karaganda
Category: Economy