Definition of a tax

What is a tax?An enforced contribution exacted pursuant to legislative authority in the exercise of the taxing power and imposed and collected for the purpose of raising revenue to be used for public or governmental purpose.

According to the definitionTax cover the following characteristics:

1- the payment to the governmental authority by law.

2- the payment is required pursuant to the legislative power to tax.

3- the purpose of requiring the payment is to provide revenue to be used for public or governmental purpose.

4- special benefits and services or privileges are not received as a result of making the payment.

The payment is not a fine or penalty that imposed under the powers of government.

Standards for evaluation tax

Equity . Certainly . Convenience . Economy

Equity:A tax should be based on the taxpayers ability to pay.The payment of a tax in proportion to the taxpayers

level of income results in equitable distribution of the cost of supporting the government.

Certainty:A taxpayer should know when and how a tax is to be

paid. And determine the amount of tax to be paid.If not, the taxpayer can ignore the payment ??

Standards for evaluation tax

Convenience:

A tax should be levied at the time it is most likely suitable for the taxpayer to make the payment (when receive income) and have the money available to pay the tax.

Economy:

A tax should have minimum compliance and administrative costs. To maximize revenue for government.*

Types of the US (federal) taxes

• Income taxes

• Employment taxes

• Social security taxes

• Unemployment taxes

• Sales taxes (VAT)

• Property taxes

• Excise taxes

• Wealth transfer taxes

Local taxes

Direct taxes (no ability to be avoided)

1- income taxes

2- property taxes

Indirect taxes (can be avoided in some cases)

1- excise taxes

2- sales taxes (the same with VAT 14.5%)

3- customs

VAT case for financial institutionThe total salaries for the Islamic bank = 40000$ and the net profit end year = 250000$ after vat

for salariesRequired:1- calculate the vat must be paid by the bank

monthly and at the end of year.2- calculate income tax assuming income tax

rate = 15%. And vat = 16%

AnswerAnswer

1- vat paid monthly = 40000* 16% = 6400Vat for salaries end year = 6400* 12= 76800

2- vat for net profit = 250000* 16% = 40000Vat for the year = 76800+40000= 116800- Net profit after vat for profit = 250000- 40000=

210000- Income tax = 210000*15%= 31500

Case for the relationship between VAT and PROFITCase for the relationship between VAT and PROFIT

Najeeb company LTD started trading without bookkeeping but all transaction with tax invoices entered to the statement of purchases and sales.

When examine the calculation we know that :1- total amount paid to VAT government office during the year

= 56002- no ending inventory 3- total amount of fixed assets purchased which entered to

statement of purchase and sale = 11600 and the depreciation rate 6%.

4- the base value for delayed purchase invoices for the next year =5000

5- during the current year paid the following expenses:15000 salaries. 300 interest. 200 others.

Required:Calculate the accrued income tax if income tax rate

=15%. And VAT rate 16%.

Notes:- The base value of delayed purchase invoices due

to current year but did not entered to statement.- Invoices of purchasing the fixed assets have been

entered to the statement of the year and that mean deducted. But these purchasing due several years.

- So depreciation for one year should be deducted, That means we should add the base value of purchasing fixed assets to the profit value.

- Expenses which did not pay VAT did not enter the statement and did not deducted. So we must deduct it.

answeranswerThe profit from the VAT statement=Payment * 100/165600 *100/16= 35000

Add the base value of purchasing the fixed assets= 11600/1.16= 10000Vat for fixed assets= 10000*16/100= 1600 to make sure of Vat

Deduct the base value of purchase invoices delayed to next year (5000)

Net profit before expenses not pay VAT 16% =40000

Deduct expenses not pay VAT as follow:

- Salaries (15000)- Interest (300)- Others (200)- Depreciation of fixed assets 10000*6%=(600)- Total of expenses 16100

Net profit = (40000- 16100) =23900Income tax = 23900* 15%= 3585

The relationship between VAT and other indirect taxesThe relationship between VAT and other indirect taxes

The most important step in calculation taxes by the following arrangement:

1- customs

2- the purchase tax (sales)

3 value added tax

The following case show the details.

A company will import raw material for trading with price 4000 and the customs 20% and purchase tax 60% and the vat 16%.

Required: calculate the price after taxes.

answeranswer

Statement Value TaxesThe price 4000

Customs 4000*20% 800 800

Price after customs 4800

Purchase tax

4800*60%

2880 2880

Price after purchase tax 7680

VAT

7680* 16%

1229 1229

Price after VAT 8909

Calculation of importing several goodsCalculation of importing several goods

Merchandise Cost Customs Added rate

Purchase tax

VAT Value after taxes

Soap 10000 13.6% 50% 10% 17%

Cars 90000 7% - 75% 17%

Milk 5000 75% 17%

Merchandise Cost Customs Added rate

Purchase tax

VAT Value after taxes

Soap 10000 13.6% 50% 10% 17% 21930

Cars 90000 7% - 75% 17% 197174

Milk 5000 75% 17% 10238

The difference between VAT and customsThe difference between VAT and customs

Standard VAT Custom & purchase tax

1 When imposed With all steps of production. sale. distribution

Imposed once when enter the goods for local area

2 Mechanism of collection

Collect from consumer then paid to government

First paid to government then collect from consumer

3 Tax classification Consider balance sheet account

Part of good cost (trading account) or income statement

4 Tax rate 14.5% It is according to good classification and & economic agreements and political situation

5 The ability of facing problems

difficult in applying Easy

6 Evasion Easy (Paris agreement) Difficult or no way

incomeincome

Income defined

(includes income from all resources)

Minus: excluded income

Equals: gross income

Minus: deduction and exemptions

Equals: taxable income

* tax rate (from tax law)

Equals: income tax

Minus: tax prepayments

Tax credit

Equals: tax (refund) due with return

casecase

Omar work in private company with monthly salary 2000 NIS. Calculate the income tax if you know that he is married and has 2 sons under 18 years old.

Note: The exchange rate for dollar 4 NIS.

Answer:

Annual income = 2000*12= 24000

24000/4 = 6000$

Exemptions

Resident 3000

Wife 500

Sons 1000=500*2

Total =4500

Taxable income =1500* 8% 120$ annually

Tax value per month = 120$/ 12 =10$

10$*4 = 40 NIS

Salary after income tax= 1960 NIS

casecase

Hassan work in private company with monthly salary 3000 NIS.

He lives in a rent home 200$ monthly.

He is married and have 5 sons.

Required:

Calculate the accrued income tax if you know that the exchange rate for dollar 4 NIS.

Answer:

Annual income = 3000*12/4= 9000$

Exemptions

Resident 3000

Wife 500

Sons 2500=500*5

Rent 2000

Total of exemptions =(8000)

Taxable income =1000* 8% 80$ annually

Tax value per month = 80$/ 12 =6.66$

6.66$*4 = 26.6 NIS

Salary after income tax= 2973.4 NIS

casecase

Mr. Marwan work as manager for a company with monthly salary 9000 NIS and have bonus addition career 1500 and bonus addition high cost of living 750 and bonus addition for travel 250

Required: calculate the income tax if you know that he is married and have 2 sons.

One of them study via Islamic university

the exchange rate for dollar 5 NIS Note: Marwan work in private company so bonus for travel included with income tax

Answer:

Base salary 9000

Bonus addition career 1500

bonus addition high cost of living 750

bonus addition for travel 250

Total salary 11500 *12/5= 27600$

Exemption:

Resident 3000

Wife 500

Sons 500= 500*1

Student (university) 2500

Total of exemption = 6500$

Taxable income 27600- 6500= 21100$10000*8%= 8006000*12%=7205100*16%= 816Annual income tax = 800+720+816=2336Monthly income tax= 2336/12=194.6$194.6*5=973 NISSalary after income tax = 11500-973=10527 NIS

casecaseMr. Jehad work in the Investment Bank with monthly base

salary 309$ and bonus addition high cost of living amounted 80% of base salary. and bonus addition for cash risk 25.7$ monthly.

If you know that his contribution of saving box with 5% of base salary. And social security contribution (pension) 32.02$. Mr. Jehad get 14 salaries yearly (banking system)

Required: calculate the income tax in case

1- single.

2- (married + 4) and gets additional income from part time work 200$ for 6 months annually.

Answer: case 1

Base salary 309$

+ addition high cost of living 247.2$ (309*80%)

+ addition for cash risk 25.7$

total monthly salary = 581.9$

Deduct nontaxable income

- saving box 15.45$

- social security contribution (pension) 32.02$

Total of nontaxable income = 47.47

Net income = 534.43

Annual net income =534.43*14= 7482.02$

Deduct the exemption

Resident 3000

Net taxable income 4482.02*8% = 358.56$

Monthly income tax 358.56 / 12 = 29.88$

Answer: case 2

Base salary 309$

+ addition high cost of living 247.2$ (309*80%)

+ addition for cash risk 25.7$

total monthly salary = 581.9$

Deduct nontaxable income

- saving box 15.45$

- social security contribution (pension) 32.02$

Total of nontaxable income = 47.47

Net income = 534.43

Annual net income =534.43*14= 7482.02$ + ( 200$*6)=8682.02

Deduct the exemption

Resident 3000

Wife 500

Sons 2000 (500*4)

Net taxable income 3182.02*8% = 254.56$

Monthly income tax 254.56 / 12 = 21.21$