TAX LAW

Introduction
to taxation

BBA – ESADE

1
 Understanding taxation

• What are taxes?

• Purpose of taxes
• Legal Principles for tax laws
• Classification of taxes

Content Legal framework

s of the • National tax laws

• International tax laws

lecture
• The Organization for Economic Co-operation and
Development (OECD)

Classification of taxes

Tax terminology

2
 1. Understanding taxation

 What are taxes? Financial charges imposed upon a taxpayer (individuals or legal entities) by the government
(whether local, regional or national) in order to finance government activities: public works and services.

Key points Payment required

Payment imposed and collected by government

Payment not directly tied to benefit received by the

taxpayer

3
 1. Understanding taxation

 Purpose of taxes:
• Raise revenue to fund public expenses
• Fund welfare
• Wealth redistributive function
• Modify or promote patterns of consumption or employment – taxes are a tool to shape economic policy. “Promote
social goals”.
 How are taxes collected?
• Directly: Taxpayer pay them directly to the tax authorities.
• Indirectly: an intermediary collects the tax and pays it to the relevant tax authorities (e.g. VAT).
 Which bodies collect taxes?
• the body that enacts the tax laws vs. the body that collects taxes and enforces tax laws.
 What happens if I reject to pay taxes?
• Penalties
• Surcharges
• Late payment interests

4
1. Understanding taxation

Key points Taxes allow the government to perform and provide services
that would not evolve naturally through a free market
mechanism.

Taxes are the primary source of revenue for most

governments.

Governments also use taxes to establish income equity and

modify consumption decisions.

5
 1. Understanding taxation

 Legal principles of tax policy:

• Fairness: taxation should be compatible with taxpayers’ conditions.

• Certainty: taxpayers are clearly informed about why and how taxes are levied.
• Convenience: ease of compliance for taxpayers.
• Efficiency: collection should not affect the allocation and use of resources in the economy (should not cost
more than the taxes themselves).
• Legality.
• Generality: broad application.
• Equity and economic capacity:
- Vertical equity: “capacity to pay” in terms of income and capital.
- Horizontal equity: all individuals are equal before the tax burden (“non-discriminatory tax burden”)

*Adam Smith: principles of good taxation. 6

2. Legal framework

National tax laws, domestic doctrine and jurisprudence.

International tax laws:

• EU Law: Regulations, Directives, Recommendations and Judgements of the European Court of

Justice
• Double tax treaties to avoid double taxation (Link to DTTs signed by Spain)
• Multilateral Convention to Implement Tax Treaty Related Measures

The Organization for Economic Co-operation and Development (OECD):

• Tax section at the OECD

• OECD Model Tax Convention and its commentaries.

7
 3. Classification of taxes

 Classification of taxes:
• Direct taxes: on income and capital.
• Indirect taxes: on consumption and use.

 Examples of taxes*: Personal Income tax

Corporate Income tax
Non Resident Income Tax
Wealth tax
Business Activity Tax
Inheritance and Gift tax
Sales tax
Tariff
Stamp duty
Transfer Tax *Taxes typically applying in OECD jurisdictions 8
 4. Tax terminology

http://www.oecd.org/ctp/glossaryoftaxterms.htm#T

Taxpayer
• Taxpayer is the individual or entity who is obliged to pay taxes.

Tax event
• Event whose occurrence implies that a tax is due, by means of Law. The Law defines
an event as taxable, so when the taxpayer performs this event, he or she will be
obliged to pay taxes.

Accrual of tax
• Moment in which the tax event takes place.

Taxable income
• Amount determined by tax laws that is subject to tax.
• It establishes the economic capacity of the taxpayer.
9
 4. Tax terminology

Taxable period

• Taxes are levied by reference to a period called “the taxable period”.

• For income taxes, generally is the tax year. On indirect taxes, generally when the
transaction on the event takes place.

= Non-taxable?
Exemption

• Certain person, item or transaction is not taxed because the law says so. It is an
exception.
• Exemptions are given for social, economic or other reasons

10
4. Tax terminology

Regressive tax: the tax rate

decreases as the amount
subject to taxation increases.

Flat tax: the tax rate is fixed,

regardless of income

Progressive tax: the tax rate

increases as the taxable base
amount increases.

total amount of taxes paid

Average tax rate or Effective tax rate: total tax base
11
 4. Tax terminology

Withholding Payment on account

• The payer of an item of income withholds or • The payment on account is a tax payment made by
deducts tax from the payment and pays that tax to the taxpayer (in its own name, as opposed to
the government. withholding taxes, which are made in the name of
• It is generally applied on dividend or interest the recipient of income) in order to pre-pay the final
income paid to non-resident recipients (i.e. a way to tax liability during the tax year.
secure the collection of taxes). • It is established to ensure financial capacity (and
ensure proper financing to the government
National withholding: on account of final tax. throughout the year) and promote tax transparency.
It will be offset against the final tax liability.
International withholding: final tax.

12
4. Tax terminology

Types of double taxation

Juridical / legal Economic

• when the same taxpayer is taxed twice on • when more than one person is taxed on
the same income by more than one state. the same item of income.

13
4. Tax terminology

Tax havens Deferral of taxes

• A country which imposes a low or no tax. • Delay of the accrual of the income: “It is
Generally used to avoid tax. taxed later”.
• Characteristics: No or only nominal taxes;
Lack of effective exchange of information;
Lack of transparency in the operation of
the legislative, legal or administrative
provisions.

14
 4. Tax terminology

• Tax planning involves tax reduction arrangements which are within the wording and spirit of the law.
Tax planning • A legitimate and compliant behavior.

• Arrangements that “push the limits” of acceptable tax planning, (almost) falling within the boundaries
of tax avoidance.
Aggressive tax
Level of aggressivity

• It can take various forms and its effects can include several tax advantages, such as double deductions
planning and very often double non-taxation.

• The legal reduction of a person’s tax liability (i.e. in line with “the letter of the law”, it is usually in
contradiction with the intent of the law it purports to follow (i.e. against “the spirit of the law”)”.
Tax avoidance • Abuse of law / Fraus legis.

• “The reduction of a person’s tax liability through an activity that is either illegal, fraudulent, or is
Tax evasion otherwise not in accordance with the tax law.
• Sham transaction / lack or economic substance.
• Tax evasion is a serious criminal offense.
15
 16

Taxes are
more than
just taxes