Ability to Pay Principle
An economic principle that states that the amount of tax an individual pays should be dependent on the level of burden the tax will create relative to the wealth of the individual.
Arm’s Length Principle
The international standard which states that, where conditions between related enterprises are different from those between independent enterprises, profits which have accrued by reason of those conditions may be included in the profits of that enterprise & taxed accordingly
Beneficiary-pays Principle
This principle when applied to taxation states that the user or beneficiary of the good or service provided by the government should pay for that good or service. This principle suggests that the burden of taxes should be distributed among the tax payers in relation to the benefits enjoyed by them from government services or social goods. It implies that every citizen should pay tax in proportion to the utility he derives from the public goods & services. Thus, those who receive more benefits or utility from social goods should pay more than others.
Capital Flight
A phenomenon characterized by large outflows of assets and/or capital from a country due to certain economic events.
Cost-of-service Principle
This principle suggests that the cost incurred by the government in providing public goods to satisfy social needs should be regarded as the basis of taxation. Thus, tax is payable as per the cost of public goods enjoyed by the citizens. This means that the state is just like a producer of social goods & taxes are the prices for the same.
Consumption tax (e.g. VAT, GST)
Tax levied based on spending on goods & services. Consumption taxes are indirect taxes. Common examples of consumption taxes include Value Added Tax (VAT), Goods & Services Tax (GST), Sales Tax & Excise Taxes.
Direct tax
Taxes levied directly on an individual’s wealth, profits and/or income. These include Personal Income Tax, Corporate Income Tax & Property Taxes, among others.
Elasticity
If a producer or consumer is inelastic, it will demand the same quantity no matter what the price. Demand remains the same even if the price changes. If a producer or consumer is elastic, the producer or consumer is very sensitive to price. Demand may change if the price changes. The elasticity will determine the proportion of tax incidence between producers & consumers of a good. In the case of cigarettes, demand is inelastic because cigarettes are addictive. The burden then falls mainly on the consumers, as that represents the inelastic side of the market. If consumers may change their demand but sellers cannot change their supply (for example, the location of their hotels), then the tax burden is on the seller as the seller needs to incentivise the buyer to purchase from them. Buyers could have their vacation elsewhere, so it is not in the seller’s interest to pass the tax burden onto the buyer. The more elastic the demand curve, the easier it is for consumers to reduce quantity instead of paying higher prices. The more elastic the supply curve, the easier it is for sellers to reduce the quantity sold instead of taking lower prices.
Effective Tax Rate
An average rate of tax payable by an organization or a person.
Equal Sacrifice Principle
States that everyone should give up the same amount of utility when paying income taxes.
Excise Tax
An excise tax is a legislated tax on specific goods or services at purchase such as fuel, tobacco, alcohol, & sugary drinks. They are primarily taxes that must be paid by businesses, usually increasing prices for consumers indirectly. Excise taxes are primarily a business tax, separate from other taxes a business must pay, like income taxes. Excise taxes are often called ‘sin’ taxes due to the fact that they are often placed on goods with a high social cost. Excise taxes are usually ‘hidden’ as they are added without consumers being entirely aware of them.
Horizontal equity
Horizontal equity conforms to the concept that people with a similar ability to pay taxes should pay the same or similar amounts.
Incentive (of tax)
An aspect of a country’s tax code designed to encourage a particular economic activity by reducing tax for an economic agent in the country. Tax incentives come in various forms, including but not limited to reductions in rates for specific tax types, or tax holidays whereby a business can operate for a defined period of time without paying the specified tax. Tax incentives can have both positive & negative impacts on an economy
Incidence (of tax)
A term used to refer to the division of the tax burden between buyers & sellers. Tax incidence falls mostly upon the group that responds least to price (the group that has the most inelastic price-quantity curve). The tax incidence depends on the relative price elasticity of supply & demand. When supply is more elastic than demand, consumers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the tax burden. Tax incidence falls mostly upon the group that responds least to price (the group that has the most inelastic price-quantity curve).
Indirect tax
Taxes that are collected through intermediaries & later transferred to the tax authority. An example of indirect taxes is consumption tax, where the tax is added to the price of the product or service & collected by the vendor/provider.
Nexus
Whether a business owes sales taxes to a particular government depends on the way that government defines nexus. A nexus is generally defined as a physical presence, but this “presence” is not limited to having an office or a warehouse. Nexus is the connection between the taxing authority & an entity that must collect or pay the tax.
Marginal tax rate
The tax percentage on the highest [unit of currency] earned.
Multiple taxation
A situation in which multiple taxes are levied on the same income of a person or business. This can happen when the same income is subject to taxation by both local & central government.
Marginal Utility
The amount of additional utility provided by an additional unit of an economic good or service, for example a unit of currency.
Policy Space
The ability of national policymakers to use policy instruments for reaching their national goals.
Principle of Economic Allegiance
Principle that requires that individuals and corporations pay taxes where they conduct their economic activities.
Progressive taxation
A tax in which the tax rate rises as the taxable amount increases, & is based on the ability-to-pay principle. The purpose of a progressive tax system is to increase the tax burden to those most able to pay. A good example is the graduated Pay As You Earn (PAYE) rate of tax.
Proportionate Principle
A proportional tax is an income tax system that levies the same percentage tax to everyone regardless of income. A proportional tax is the same for low, middle, & high-income taxpayers. Proportional taxes are sometimes referred to as flat taxe
Regressive taxation
A tax imposed in such a manner that the tax rate goes down as the amount subject to taxation goes up, which is a complete opposite of progressive taxation. Some flat-rated taxes, such as the VAT, might be regressive in practice when they are applied uniformly & effectively charge a larger percentage of income from low-income earners than from high-income earners. A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.
Residence country
The investor’s country of residence. The residence country is also sometimes referred to as the capital-exporting country.
Revenue (of Government)
Government revenue or National revenue is money received by a government from taxes & non-tax sources to enable it to undertake government expenditures.
Sales Tax
Retail sales taxes are only charged to the end user of a good or service.
Source country
The country that hosts the inward investment. The source country is also sometimes referred to as the capital-importing country.
Special Economic Zone (SEZ)
A special economic zone (SEZ) is an area in a country that is subject to different economic regulations than other regions within the same country. The SEZ economic regulations tend to be conducive to—and attract—foreign direct investment (FDI).
Sudden Stops
The abrupt reduction of capital flows into a nation’s economy. They can be triggered by foreign investors or domestic residents.
Tax
A compulsory contribution to state revenue levied on different economic agents (such as businesses & individuals) by the government, for example on their income or added to the cost of some goods, services & transactions. While fees and/or levies usually refer to a situation where they are paid in direct exchange for a service, taxes are typically paid to the general state or local budget.
Tax Avoidance
Tax avoidance is the use of legal methods to reduce the amount of income tax that an individual or business owes.
Tax Base
The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority.
Tax Dodging
A catch-all non-legal term to refer to activities related to reducing one’s tax liability either legally or illegally.
Tax Evasion
Tax evasion is an illegal practice where a person or entity intentionally does not pay due taxes.
Tax Gap
The difference between what tax should be paid & what is actually paid.
Taxing Rights
The rights a country has to tax a certain entity.
Tax (or fiscal) Neutrality
A concept that states that fiscal decisions (taxing, spending, or borrowing) of a government can or should avoid distorting economic decisions by businesses, workers, & consumers. The idea of a fiscally neutral policy is one in which demand is neither stimulated nor diminished by taxation (or government spending).
VAT (Value Added Tax)
A VAT is a consumption tax placed on a product at every point where value is added in the supply chain, from production to the point of sale. For example, the three stages show points of value addition. 1) A baker buying wheat from a farmer will pay VAT on the purchase. 2) The supermarket, when buying the baked loaf will pay VAT. 3) The customer buying the loaf from the supermarket will also pay VAT. It is therefore collected at each stage in the supply chain, in contrast to a sales tax, which is only assessed & paid by the consumer at the very end of the supply chain. VAT is based on taxpayers’ consumption rather than income. VAT applies equally to every purchase.
