Faculty of Economics and Political SciencesCairo University

Tax regimes in Egypt & European countries

Dr. Mohamed Zaky

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Important concepts and definitions

Marginal, average and effective tax rates

USA -2008

Difference between marginal and average tax rate Tax Bracket

Level of income tax of a given individual, as indicated by the amount of taxes paid on final dollar of taxable income

Most countries employ progressive taxation

Taxable income Tax bracket0 and 8,025 10%

8,025 and 32,550 15%

32,550 and 78,850 25%

78,850 and 164,550 28%

164,550 and 357,700 33%

357,700 and above 35%

Important concepts and definitions

Marginal, average and effective tax rates

The rate of tax applied to the last dollar added to your taxable income. E.g. if you are making $90,000 per year then your 90,000th dollar will be taxed at the 28% tax rate. Your 90,001th will be also taxed with the 28% rate until your taxable income reaches $164,550.

The average rate of taxation that applies to our income. Mathematically, it’s our total tax liability divided by total income in any given year.

It is calculated by dividing the total income taxes paid by your total income. It is less than the marginal rate.

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Important concepts and definitions

Tax incidence & Tax burden

Tax Burden is The amount of income, property or sales tax levied on an individual or business. It varies depending on a number of factors including income level, jurisdiction, and current tax rates.

Tax incidence is the study of who bears the economic burden of a tax. Broadly put, it is the positive analysis of the impact of taxes on the distribution of welfare within a society. Tax incidence is related to the price elasticity of supply and demand. When supply is more elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply, producers will bear the cost of the tax.

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Important concepts and definitions

Tax incidence & Tax burden

The percent of income paid as tax rises as the income amount rises

Progressive tax

Regressive tax

Proportional tax

The percent of income paid as tax decreases as the income amount rises

The percent of income paid as tax stays the same as the income amount rises

Important concepts and definitions

Tax non-compliance

Refuse to pay a tax for conscientious reasons like not willing to support the government or some of its activities.

VSTax avoidance Tax evasion

Reducing taxes by legal means The criminal non-payment of tax liabilities.

Tax protestors Tax resisters

Attempt not to pay tax believing that they have discovered different interpretations of the law that stipulates its inapplicability

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Important concepts and definitions

Tax non-compliance

• No General Anti-Avoidance Rule (GAAR) in UK, but certain provisions of the tax legislation (known as "anti-avoidance" provisions) apply to prevent tax avoidance.

• The UK authorities use the term tax mitigation to refer to acceptable tax planning, minimizing tax liabilities in ways expressly endorsed by Parliament.

• In the United States, thieves are required to report their stolen money as income when they file for taxes, but they usually do not do so, because doing so would serve as a confession of theft. For this reason, suspected thieves are sometimes charged with tax evasion when there is insufficient evidence to try them for theft.

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Important concepts and definitions

Tax credit & Tax deduction

• The definition of a Tax Credit is an item that reduces your actual tax. It differs from a tax deduction that reduces only your taxable income.

• A tax credit is generally much more valuable than a deduction. The tax credit reduces the actual amount of tax that must be paid.

• A deduction, on the other hand, only reduces the taxable income. Therefore, the tax deduction is subject to the variation in the progressive tax rate. A tax credit does not depend on the tax rate and so it is of equal value to a taxpayer regardless of his income level.

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Important concepts and definitions

Withholding tax:

Tax on income imposed at source, i.e. a third party is charged with the task of deducting the tax from certain kinds of payments and remitting that amount to the government.

Withholding taxes are found in practically all tax systems and are widely used in respect of dividends, interest, royalties and similar tax payments.

The rates of withholding tax are frequently reduced by tax treaties.

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Tax rates in Europe 2009Personal income tax Corporate tax VAT

Rate % of GDP Rate % of GDP Rate % of GDP

Eastern European countriesBelgium 53.7 12.2 34 2.5 21 7.0Bulgaria 10 2.9 10 2.5 20 9.0Czech Republic 15 3.6 20 3.6 19 7.1Latvia 23 4.1 15 1.6 21 6.0Lithuania 15 7.7 20 1.8 19 7.4Poland 32 4.6 19 2.3 22 7.4Portugal 42 5.7 26.5 2.9 20 7.1Slovenia 41 5.9 21 1.8 20 8.4Slovakia 19 2.4 19 2.5 19 6.7EuropeUnited Kingdom 40 10.4 28 2.8 15 5.8Spain 43 7 30 2.3 16 4.1Italy 44.9 11.7 31.4 2.4 20 5.7Greece 40 5.1 25 2.4 19 6.4Netherlands 52 8.6 25.5 2.1 19 7Germany 47.5 9.7 29.8 0.7 19 7.4France 45.8 7.5 34.4 1.3 19.6 6.8Finland 49.1 13.4 26 2 22 8.8Egypt 20 1.3 20 6.3 10 5.6

Source: Eurostat

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Tax reform in EuropeCountry experiences

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SpainPersonal income taxCorporate income taxValue-added tax

43%30%16%

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Spain

Simplification, reduction of tax scale to 4 brackets (24 %, 28 %, 37 % and 43%) - 2007.

Personal income tax

Savings including capital gains, are taxed at a progressive system of 19% on the first €6000, and 21% on 2010 income above.

Introducing tax credits like the additional tax credit of €400 to working and self-employed taxpayers to support household purchasing power.

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Spain

Reducing tax rate from 35 % to 32.5 % in 2007 and to 30 % in 2008.

Corporate income tax

Special tax regime for small and medium sized enterprises (SMEs):Increasing the annual turnover threshold to be included within the

scope of the special regime. Increasing the taxable amount taxed at the reduced tax rate.Free depreciation is granted for all companies up to 2015 Expanding the R&D tax credit to companies with more than 25% of their

research activity in another EU Member State or member of the EEA

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Spain

Value added tax

Special VAT consolidation regime applicable to corporate groups. Possibility of claiming immediate VAT refunds. Increasing the tax rates for tobacco and hydrocarbons in June 2009 and once

more tobacco tax rates were raised again in December 2010

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GreecePersonal income taxCorporate income taxValue-added tax

40%25%19%

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Greece

Personal income tax

Increasing the progressivity of the PIT. Abolition of tax exemptions. The tax-free threshold amounts to € 12000, and is directly linked to taxpayers’

expenditures. Individuals are subject only to a national income tax, as there are no local

income taxes.

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Greece

Corporate income tax

Cutting the corporate tax rate over the last few years since 2001. Additional tax of 3 % is levied on gross income derived from immovable

property. This additional tax cannot exceed the tax calculated on the company's income.

Increasing the withholding tax to 25 % starting from 2012 on profits distributed by corporations, limited liability companies and cooperatives

No group taxation in Greece, i.e. all entities are taxed separately.

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Greece

Value-added tax

Increasing the VAT rates since 2010 – both standard and reduced rates.

Levying an excise duty on mineral oils, gasoline, tobacco, alcohol, beer and wine.

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PolandPersonal income taxCorporate income taxValue-added tax

32%19%22%

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Poland

Personal income tax

Reducing PIT rates four times since 1995. Applying two tax rates since 2009 i.e. 18% and 32%. Broadening tax base by abolishing a number of tax deductions, perceived as

distorting consumption, savings and investment decisions, and by including fringe benefits and benefits in kind within taxable income.

Granting a tax credit for contributions to the obligatory health insurance scheme.

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Poland

Corporate income tax

Gradual reduction of the CIT rate from its 40 % peak in mid-1990s to the current 19 % in force since 2004.

Broadening the CIT tax base by limiting or abolishing various incentive schemes, investment credits and property-related tax shelters.

Applying the notion of a tax group. Depreciation for tax purposes has been brought more closely in line with

economic depreciation and the number of depreciation schedules has been drastically reduced