297.E房地产企业经营活动的税务筹划探讨 外文原文.doc

Tax Planning in Business: Bangladesh Perspective Swapan Kumar Bala, FCMA Associate Professor Department of Accounting & Information Systems University of Dhaka, Dhaka Abstract: This paper highlights the tax planning issues in the context of business environment in Bangladesh. Given the complexity and the tax law ambiguity prevailing in Bangladesh, this paper encompasses the traditional tax planning devices along with a brief overview of tax planning strategies. The fiscal plans are referred to the related tax law provisions (mentioned in the appendices in a very organized manner), which are expected to be very useful for the existing and potential businessmen. Keywords: Tax compliance, Tax minimization Effective tax planning, Tax strategy, Tax incentives.1. IntroductionThe term tax planning in business consists of three main words: tax, planning, and business. Tax is “a contribution exacted by the state” Chambers English Dictionary (1992). “The term taxes is confined to compulsory, unrequited payments to general government” (OECD, 1988: 37; vide Wilkinson, 1992: 2). Planning is “the process of determining in advance the factors necessary to achieve a set of goals; designing an effective means of achieving some future goals (ends)” Kohlers Dictionary for Accountants (Cooper and Ijiri, 1984: 383). Business means “the carrying on of trade or commerce, involving the use of capital and having, as a major objective, income derived from sales of goods or services” Kohlers Dictionary for Accountants (Cooper and Ijiri, 1984: 78). According to section 2(14) of the Income Tax Ordinance (ITO), 1984, “business” includes any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture. Section, sub-section, rule, sub-rule, clause or proviso mentioned elsewhere in this paper without referring to any enactment shall be referred to the Income Tax Ordinance, 1984 (Ordinance No. XXXVI of 1984) and the Income Tax Rules, 1984 No. S.R.O. 39/L/85 dated 14.01.1985, vide sec. 185(4) of the Income Tax Ordinance, 1984. Thus, tax planning in business means dealing with the tax matters of a business entity with a view to maximizing the after-tax rate of return on investments after ensuring voluntary tax compliance. For this purpose, each business entity has to 1. ensure that it keeps proper records; 2. deduct tax at source where it is necessary; 3. pay advance tax in time, if applicable; 4. file returns in time; 5. comply with notices received from the tax authorities; 6. be aware of legal remedies where it does not have its rights under the law recognized. Tax function activities of a business entity are those activities which are concerned with fiscal issues. These functions are of two types: (1) tax compliance activities, and (2) tax planning activities. Tax compliance activities are those activities which include the functions or obligations according to the provisions of various fiscal statutes. Tax planning activities means dealing with the tax matters of a taxpayer with a view to maximizing the after-tax rate of return on investments after ensuring voluntary tax compliance. 2.Forms of business vs. tax payingA business entity may be of three types: sole-proprietorship, partnership firm and company. “Sole-proprietorship” has not been defined by the Income Tax Ordinance. Under section 2(32) of the ITO, “firm” has the same meaning as assigned to it in the Partnership Act, 1932 (IX of 1932). Under section 4 of the Partnership Act, 1932, “Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”. Under section 2(20) of the ITO, “company” means a company as defined in the Companies Act, 1913 (VII of 1913) or Companies Act, 1994 (Act No. 18 of 1994) Under section 2(1)(d) of the Companies Act 1994, “company” means a company formed and registered under this Act or an existing company. and includes (a) a body corporate established or constituted by or under any law for the time being in force; (b) any nationalised banking or other financial institution, insurance body and industrial or business enterprise; (bb) an association or combination of persons, called by whatever name, if any of such persons is a company as defined in the Companies Act, 1913 or Companies Act, 1994; (bbb) any association or body incorporated by or under the laws of a country outside Bangladesh; and; (c) any foreign association or body, not incorporated by or under any law, which the National Board of Revenue may, by general or special order, declare to be a company for the purposes of the Income Tax Ordinance. For preferential tax purpose, from assessment year (AY) 2002-2003 vide the Finance Act 2002 to the Finance Act 2006 companies are classified into following groups: (1) Company being bank, insurance or financial institution; (2) Other companies: (a) Company not publicly traded; and (b) Publicly traded company. From AY 2002-2003, as per the Explanation given in the relevant Schedule for income tax rates in the Finance Act, “publicly traded company” means a company which fulfills the following conditions: (a) The company is registered in Bangladesh under the Companies Act 1913 or 1994; (b) The company is enlisted with the Stock Exchange before the end of the concerned income year in which income tax assessment will be made. Taxpayers Status: Under the Income Tax Ordinance, 1984, a taxpayer has two types of status: personal status and residential status. A sole-proprietorship has no separate tax paying identity and individual owner running the sole-proprietorship will have “Individual” status of the owner and not of the business entity, but both partnership firm and company have distinct personal status “Firm” and “Company” respectively. Residential status may be resident defined u/s 2(55), ITO or non-resident defined u/s 2(42), ITO. Under section 17, resident assessee (taxpayer) has to pay income tax on total global income including foreign income, but non-resident taxpayer has to pay income tax only on his total domestic (Bangladeshi) income as determined u/s 18 (income deemed to accrue or arise in Bangladesh). Under section 2(55), an individual is to be a resident if his period of stay in Bangladesh is at least 182 days in the concerned income year, or at least 90 days in the concerned income year, and at least 365 days in the preceding 4 income years. A partnership firm is considered as resident, if the control and management of its affairs situated wholly or partly in Bangladesh in the concerned income year. A company will be a resident, if control and management of its affairs situated wholly in Bangladesh in the concerned income year. Otherwise, a taxpayer will be treated as non-resident u/s 2(42). Levels of Taxation: Question regarding whether the entity itself and/or the owner(s) of the entity is(are) taxable is explained on the basis of two concepts: pass-through entity (or flow-through entity) and non-pass-through entity: Pass-Through Entity: This entity is not taxable itself. The income of the entity will pass through the owners and is taxable after its accumulation with the owners other income. Sole-proprietorship is a pass-through entity. The owner of the entity is taxable for the entire income of the business entity (whether withdrawn or not) along with his/her other income. Non-Pass-Through Entities: This entity is taxable itself. The income of the entity may be distributed to the owners and is usually again taxable in the hands of owners after its accumulation with his/her other income. Partnership firm and company are non-pass-through entities. A partnership firm is taxable for its income in first instance as a non-pass-through entity. The partners of the firm shall include the share of total income of the firm in the income year to be computed u/s 43(3) and but to avoid double taxation, the share of income will be treated as tax-free income subject to “tax rebate at average tax rate (ATR)” if the firm has already paid tax on its income. But where any tax payable by any partner of a firm in respect of his share of income cannot be recovered from him, then DCT (Deputy Commissioner of Taxes) shall collect it from the firm . In case of discontinued business of a firm or if the firm is dissolved, the partners are jointly and severally liable to pay due tax, if any. A company is taxable for its total income always as a non-pass-through entity. The shareholders of the company are taxable for the income of the entity, only if distributed to them as dividend, which is subject to a source-tax. At the time of sale/transfer of shares, the shareholder may require to pay tax on capital gain arising from the sale or transfer. Thus, shareholder-level of tax(ts) usually includes tax on dividend distributed and tax on capital gain on sale/transfer of shares. However, capital gain on transfer of shares of a company established under the Companies Act 1994 is subject to a reduced rate of 10% S.R.O. No. 220-Ain/Aykar/2004 dated 13.07.2004, but the capital gain on transfer of stocks and shares of public companies listed with a stock exchange in Bangladesh is fully exempted. In case of a non-pass-through entity, there is at least double-level taxation. First, a tax is paid by the entity and then a second tax is paid by the owners of the entity (partners of a firm or shareholders of company). In case of firm which has duly paid its tax, double taxation is avoided by considering the share of firms income as tax-free and allowing a tax rebate thereon to the partners. But in case of a company, the company has to pay tax on its income at 30%, 40% or 45% and then the individual shareholders have to pay source-tax at 10%, which will be treated as advance income tax (AIT) and then considering the marginal tax rate of the concerned shareholders, tax rate on dividend may be up to 25% for high-income taxpayers. In case of a company investing in shares of another company, there will be triple taxation. The company of which shares have been purchased has to pay first-level tax on its income at 30%, 40% or 45%. Then the investing company has to pay second-level tax on distributed dividend at 15% and when it will distribute its income as dividend, its individual shareholder has to pay third-level tax (source-tax and possible extra tax). 3.Tax evasion,tax avoidance,and tax planningTax reduction strategies are often tainted with legality. Income tax statutes have provisions for charging tax on “any income, profits or gains, from whatever source derived” u/s 2(34)(a) and hence, according to the spirit of this provision, legality of the source may not be questioned if tax is duly paid. Suffice it to say, in the Income Tax Ordinance, there are several sections where investment out of undisclosed income can be legalized by paying tax at a stipulated rate not always on the invested amount and the tax rate is often very low e.g., specific tax rate at Taka 300 or Taka 500 or Taka 200 per square meter for investment in house property u/s 19B, 7.5% of the deed value in case of investment u/s 19BB, and 10% or 15% of the purchase value in case of investment in motor vehicle. Income by way of winnings from “card games and other games of any sort or from gambling or betting” referred to in section 19(13) is subject to source-tax of 20% (u/s 55) and this tax deducted at source is a “final discharge of tax liability” u/s 82C(4). However, given these moral issues, while dealing with any sort of strategy regarding tax, we must be aware about the distinctions among tax evasion, tax avoidance and tax planning.Tax Evasion Tax evasion has the objective of reduction of tax illegally. Sometimes, it is referred to as tax cheating” through acts of commission or omission. Deceit, concealment, and/or misrepresentation are common elements in most illegal tax plans (Sommerfeld et al., 1980: 28/1). As stated by Webley et al. (1991: 2-3), “Noncompliance is a more neutral term than evasion since it does not assume that an inaccurate tax return is necessarily the result of an intention to defraud the authorities and it recognizes that inaccuracy may actually result in overpayment of taxes. In evading tax one is knowingly breaking the law. This has social and psychological consequences such as stigma and guilt and involves confronting different costs since there is a risk of being caught and fined or sent to prison.” According to Lakhotia and Lakhotia (1998: 9), “The expression Tax evasion means illegally hiding income or concealing the particulars of income or concealing the particular source or sources of income or in manipulating the accounts so as to inflate the expenditure and other outgoings with a view to illegally reduce the burden of taxation. Hence, tax evasion is illegal and unethical.” Tax Avoidance Tax avoidance and tax evasion usually both have same objective of reduction of tax, but tax avoidance encompasses only legal means of achieving the objective. Justice Jagadisan J. has mentioned in the verdict of Aruna Group of Estate v. State of Madras (1965) case, “Avoidance of tax is not tax evasion and it carries no ignominy with it, for, it is sound law and, certainly, not bad morality, for anybody to so arrange his affairs as to reduce the brunt of taxation to a minimum.” (Palkhivala and Palkhivala 1976: 46). Avoidance involves every attempt by legal means to prevent or reduce tax liability which would otherwise be incurred, by taking advantage of some provision or lack of provision in the law it presupposes the existence of alternatives, one of which would result in less tax than the other (Report of the Royal Commission of Taxation 1966: 538; vide Webley et al. 1991: 2). Tax avoidance “is the art of dodging taxes without breaking the law. tax avoidance means of traveling within the framework of the law or acting as per the language of the law only in form, but murdering the very spirit of the law and thus acting against the intention of the law and defeating the purpose of the particular legal enactment” (Lakhotia and Lakhotia 1998: 10). Perhaps the most celebrated statement made in defense of tax avoidance came from the pen of Judge Learned Hand. In a dissenting opinion, in Commissioner v. Newman case, he once said: Over and over again courts have said that there is nothing sinister in so arranging ones affairs as to keep taxes as low as possible. Everybody does so, rich or poor, and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not volunta