State fiscal policy: international experience
In this article we will try to do analysis of the state fiscal systems by examples of the various developed countries. Let’s consider the features and structural components of the different tax systems, in particular of the United Arab Emirates, United States of America and Singapore.
The UAE: state system of taxation
The tax legislation of the UAE has its own peculiarities and characteristics which differ from the traditional fiscal systems. Here the norms of the fiscal law exclude such concepts as value added tax, income tax and corporate tax on the gained incomes. The international experts and analysts believe that the Emirates have become a major business and financial center in the middle East, for a relatively short period of time, owing to the progressive system of taxation.
In addition, already for several years, the UAE holds the leading positions in the rating of the economic freedom of the international fund «The Heritage Foundation». In the category “the degree of the tax level and financial freedom”, the United Arab Emirates annually receive a 99.9 out of 100 points. First of all, these achievements show that in the UAE there is one of the most optimal tax climates for business. It is a rather loyal mode, which possess its own specificity.
The specifics of the fiscal policy of the United Arab Emirates is that it excludes some certain types of the obligatory payments to the budget. For example, the tax legislation does not provide the obligatory payment of the income tax for the natural persons. In other words, while in other countries there is a need to pay monthly taxes on the gained income (salary, honors and etc.), there is no such obligation in the UAE.
As to the corporate taxes in the UAE, contributions to the budget are compulsory only for the companies and institutions which are engaged in the banking and oil and gas sector of the economy. In the United Arab Emirates there is no Federal tax legislation, and each principality (Emirate) determines the legal framework independently. That is why the tax rate can vary in the different Emirates. For example, for the companies, which carry out their activity in the oil and gas industry in Dubai, the tax rate can reach 50%.
It is also worth to note that the rate of taxation in Dubai directly depends on the volume of the annual gained profits of the company. Calculation of the tax rates for the local companies which are liable to the taxation, is made according to the following scheme:
- 10% rate – the amount of profit from 1 to 2 million Dirham;
- 30% rate – the amount of profit from 2 to 4 million Dirham;
- 40% rate – the amount of profit from 4 to 5 million Dirham;
- 50% rate – the amount of profit more than 5 million Dirhams.
At the same time, as it was noted earlier, the most types of activities are fully exempted from taxation.
Taxation of the real estate
Relatively recently, the foreign citizens become allowed to acquire the real estate into the ownership in the UAE. For these purposes, the government of the United Arab Emirates has established the specialized areas, where such transactions are permissible. Regarding the tax payments when buying or selling the real estate, the following rules are applied:
- At the conclusion of a real estate transaction the one-time registration fee is paid, which amount 4% of the value of the sold property, the fee is paid jointly by both parties of the transaction (2% by buyer and 2% by seller);
- Income from the rental of the residential property is subject to 5% tax;
- For the objects of the commercial property, the tax rate of the income from lease amount is 10%.
Specialized economic zones
The specialized economic zones of the UAE are worthy of the special attention. In fact, these are the government's long-term projects which are designed to attract the direct investments into the national economy. In such zones the registration of the offshore companies, which carry out their economic and commercial activities outside the jurisdiction, and therefore are not liable to taxes. At the same time, the registration of the onshore companies, which can carry out, with some restrictions, their activity in the country, and also have the preferential tax treatment, and are also very popular.
Several key piints can be singled out among the main competitive advantages of the free economic zones, in particular:
- To register a company there is no need to involve the local partners or sponsors. The 100% foreign ownership of business is allowed;
- No restrictions on the withdrawal of the investment assets outside the jurisdiction, and on the distribution of the gained profits;
- Import and export privileges for the international companies;
- Complete elimination of the state quotas and trade barriers.
Simplified procedure of registration and incorporation makes it possible to register the company quicker and to obtain the appropriate business license.
More and more entrepreneurs and investors all around the world consider the United Arab Emirates as an ideal platform for creating the international business schemes and developing new markets. And the availability of the long-term investment projects gives the confidence in the future and opens up the new opportunities for business and investment activities.
USA: state taxation
Speaking about the tax system of the U.S., it should be noted that geographically the system covers 50 separate states, the district of Columbia and Washington – the capital of the state. Besides the United States of America include some additional jurisdictions, such as Samoa, Puerto Rico etc. But the tax system of the USA does not apply there.
Since the U.S. represents a model of the Federal state, the budgetary payments are levied at three levels here: the federal level, the state level and the municipal level of taxation. The main feature of the U.S. tax system is the possibility of establishing own tax payments at the level of the state (the only condition is the observance of the constitutional principles). For example, on the territory of the states the income tax is replaced by the sales tax and so on. The obligatory social contributions are made both by the employees and employers.
Collection of the budgetary payments is implemented by the Internal Revenue Service (IRS), which is a structural subdivision of the Ministry of Finance.
Types of taxes in the U.S.
According to the current legislation, the following tax payments are liable to the obligatory payment:
- corporate and income taxes;
- obligatory social contributions;
- property tax for the legal entities;
- taxes, which are aimed at the elimination of unemployment;
- property taxes for the heirs;
- excise tax;
- sales taxes;
- taxes, which are aimed at the environmental protection;
- customs duties;
- taxes on the mining, extraction and processing of the minerals and petroleum products.
This structure of the state tax system reflects the principle of multi-level collection of taxes. The fiscal system of the United States includes a variety of the features, which are based on the Anglo-Saxon legal system and the historical traditions of the state. It is important to note the social nature of the tax system of the United States. This approach made it possible to build one of the most developed world economies and to provide the local population with a high standard of living.
Singapore: the state fiscal policy
Singapore is recognized as the international business centre, which is ready to offer the preferential tax treatment and comfortable investment climate for development for the international business.
The fiscal policy of Singapore bases its system on the territorial taxation principle. On the condition that the company profit is not transferred to the jurisdiction of Singapore, and the administration of the company is located out of the country, all the profits derived from the foreign sources, are not liable to taxation.
Since 2003, a single-level fiscal system is used here. It means that all the dividends received by the shareholders and the founders are not taxed. At the same time, the state fiscal system eliminates such types of taxes, as the tax on gains of capital, taxes on bank interests and on the investment income.
In the Asian region, Singapore is a jurisdiction with the minimal rates of taxation. For clarity, the following information can be displayed:
- Thailand – 30% tax rate;
- Malaysia – 26% tax rate;
- Taiwan and China – 25% rate.
Singapore: types of the obligatory budget payments
Among the obligatory tax payments which are liable for payment in Singapore, the following types of the budget fees can be singled out:
- corporate taxes (17-18%);
- taxation of the goods and services (5-7%);
- taxation of the source (the interest rate depends on the origin of the income, on average from 10 to 20%);
- taxation of the income of the natural individuals (the interest rate depends on the level of the gained income from 0 to 20%);
- taxes on the involvement of the foreign labor force (practiced in some areas);
- taxation of the real property (residential premises – 4%, commercial premises – 10%);
- stamp duty (only in the respect of the documentation which is related to the securities and real estate).
The fiscal system of Singapore makes it possible to optimize the taxable base at the international level. To do it, the company must obtain the tax resident status, which allows to participate in the bilateral international agreements, which are aimed at the avoidance of the double taxation.
While conducting a comparative analysis of the tax systems of the advanced countries, it can be noted that, with all the diversity and specific distinctions of these fiscal systems, they have much in common. These are the fundamental principles which allow not only to build fruitful relationships with taxpayers, but also to cooperate effectively in the international political and economic arena. Among the main principles which are the basis of the effective fiscal system, several key principles can be singled out, in particular:
- state expenditures on the maintenance of the fiscal system should be minimal;
- the tax load and the tax burden should not affect the economic activity of the citizens of the country;
- the procedure of the exemption of the tax payments should be organized for the purpose of implementation of the various social programs (employment, policy, market conjuncture and etc.).
It is important to understand that the fiscal legislation of the state should work not only for the internal revenue services, but also ensure the legal protection and support of the taxpayers. The system should create not only the efficient scheme of collecting the budgetary payments, but also the protection of the taxpayers in the frameworks of the clear and efficient legal field.