Lecture 10. A General Overview of the Income Tax 1. 2. 3.

A General Overview of the Income Tax Coverage Scope of the Income Tax Deductions Allowed for Taxation Purposes Part 1. A General Overview of the Income Tax In the RM the unitary income tax was introduced on 1.01.98 and replaced three taxes: the profit tax of enterprises, the individual income tax, and the profit tax of banks and other crediting institutions. In most countries of the world individual and corporate income tax vary; this is why the unification of these taxes is an innovation in the taxation practice. The income tax subjects comprise juridical and natural persons receiving income from any sources on the territory of the RM during the taxation year, and juridical personsresidents, which receive investment and financial income from sources outside the RM. Since there are various interpretations of the terms individual and company in the taxation and civil legislation, we will explain some of them. According to the taxation legislation juridical persons are: 1. Any enterprises, institutions, and organizations involved in enterpreneurial activity with the exception of individual enterprises and farms. 2. Non-residents with an economic presence on the RM territory According to the taxation legislation natural persons are the individual enterprises and farms. According to the taxation legislation, taxation subjects are the entities legally responsible for paying taxes. The income tax object is the net income, including the allowances received from all sources by all juridical and natural persons minus the deductions and exemptions granted to the given entity by law. The taxed income=net income (accounting for concesions)-deductions-exemptions. For 2009 the income taxes are imposed as follwos: A) B)

For juridical persons they constitute 0% of taxable income For natural persons including farms and individual enterprises 7% of the annual taxable income not exceeding 25200 lei 18% of the taxable income exceeding 25200 lei Part 2. Coverage Scope of the Income Tax

The net income covered by the income tax includes all types of income: 1. Income from enterpreneurial, professional or any type of such activity. 2. Income of associations and investment funds 3. Payment for the work executed and services provided, including salaries and wages, benefits offered by the employer, fees, commission fees, bonuses and other such type of premiums; 4. Income from renting out wealth; 5. Capital increases resulting from asset operations; 6. Income received in the form of percentage interest rates; 7. Royalties (income from providing the right to utilize non-material property);

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Annuities (regular insurance payments, pensions and benefits with the exception of social security payments and benefits (pensions and compensations) received on basis of intergovernmental agreements); 9. State subsidies, premiums and prizes, not defined specifically as non-taxable in the law establishing these payments; 10. Dividends received from economic subjects non-residents; 11. Allowances for temporary inability to work, received by natural persons from the state social security fund and others. Part 3. Deductions Allowed for Taxation Purposes Deductions are defined as the sums deducted from the net income of the payer at the calculation of the taxable income. In conformity with the TC, for the purposes of determining the taxation basis, it is permitted to deduct from the net income the following items: 1. Regular and necessary expenses payed or bourne by the payer during the taxation year exclusively in the purposes of the enterpreneurial activity; 2. Expenses related to the business trips of employees, membership fees, company insurance payments, but only within the limits established by the Government; 3. Percentual disbursements if these are necessary outflows for the enterpreneurial activity and if the majority of the shareholders are not foreign citizens or exempt from taxation; 4. Accrued wear and tear for each type of property during the taxation year; 5. Spendings related to the extraction of non-renewable natural resources; 6. Amortization of each non-material property item (invention patents, author rights, industrial drawings and blueprints with a limited life-time); 7. Bad debts, which have lost value and are not expected to be payed duting the taxation year. It is not allowed to deduct the following outflows:

Sums payed for the purchase of land or property, which is subject to depreciation or of fixed assets with a lifetime longer than 1 year; Compensations and rewards, percentage interest rates and losses, incurred in the interests of an official or related person; Undocumented expenses above the limit established by the government; Personal and family expenses.

Lecture 11. Particular Aspects of Individual Income Taxation Preferential Taxation Treatment for the Individial Income Tax Calculation Methods of the Income Tax Subtracted from Salaries and Wages Income Tax Deductions from Payments Other than Salaries and Wages Submission of Individual Income Tax Self-assessments Part 1. Preferential Taxation Treatment for the Individial Income Tax

1. 2. 3. 4.

Each taxpayer (individual person, resident) in the year 2009 has the right to a personal tax exemption of 7200 lei per year. The amount of the individual preferential exemption constitutes 12000 lei per yearPersons who have contracted and experienced radiationrelated illness caused by the accident at the Cernobil AES. 1. Disabeled persons, whose disability has been proven to be related to the accident at the Cernobil AES. 2. Parents and spouses of deceased and missing participants to the military operations for the protection of the territorial integrity and independence of the RM as well as to the military operations in the Republic of Afganistan. 3. Disabled persons, whose disability occurred during military operations for the protection of the territorial integrity and independence of the RM as well as to the military operations in the Republic of Afganistan. 4. Disabled natural persons, whose disability occurred during wars, disable from childhood, disabled of category I or II or retired individuals who are rehabilitated victims of political repressions. Married individuals residents of the country, have the right to an additional discount in the sum of 7200 per year, this allowance has the name of married couples allowance, which is applied if the spouse is not exempt from tax. The taxpayer (the individual resident) has the right to an additional discount in the amount of 1680 lei per year for each dependent with the exception of disabled individuals, whose disability appeared in childhood, the discount for whom constitutes 7200 per year. In case the dependent has a number of custodians, the discount is offered to all the custodians. For tax discount purposes, a dependent must meet the following criteria: Be a primary relation to the employee or the spouse of the employee either through ascending or descending relation (parents, children, adopters). Live together with the taxpayer or separately, but the latter applies only in cases where the dependent is enrolled full-time in an institution of higher education for more than five months of the taxation year. Is being maintained by the taxpayer Does not have an income higher than 7200 lei per year. Part 2. Calculation Methods of the Income Tax Subtracted from Salaries and Wages According to the legislation of the RM, the employer executing the payments of salaries and wages, including remunerations and allowances offered to the employee is obligated to retain and transfer income taxes to the budget, taking into account the exemptions that apply to each employee. Taxes are retained from any type of income: salaries and wages, rewards, salary bonuses, premiums, subsidies, fees, commission fees and other payments. The taxable income also includes allowances offered by the employer, such as:

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2. 3. 4. 5.

Payments offered by the employer for the purpose of reimbursing personal expenses of the employees (this can include spendings for education, health care, or the maintenance of children in pre-school institutions); The cancellation of the employees debts to the employer; Financial aid provided by the employer for housing expenses of the employee, when the housing is provided by the employer; Expenses of the employer for providing the employee with the right to use property for personal purposes; Contributions to pension funds, with the exception of contributions to qualified nongovernmental pension funds.

The net income of the employee does not include the following types of income: 1. Insurance compensations obtained as a result of insurance contracts; 2. Compensations received as a remuneration for health injuries, including cases of disability incidents; 3. Student allowances for high school, undergraduate and postgraduate students, scholarships from charity organizations as well as one-time grants payed to young professionals offered jobs in rural areas according to the staff distribution; 4. Alimonies and child maintenance allowances; 5. Leave allowances; 6. Special compensations for the less privileged and socially vulnerable social groups; 7. Wealth received as a gift or through inheritance; 8. Allowances received from charity organisations and others. According to the RM legislation, the calculation of the income tax retained at the source and transferred to the budget is done according to the personal record book.

Part 3. Income Tax Deductions from Payments Other than Salaries and Wages 1) Dividend taxation. Residents of the RM pay dividents from the net profits remaining after income taxation and they do not retain any income taxes on the dividends at the source of payment. However, in the cases where the economic subject pays dividents to its shareholders residents of the RM from profits before taxes, he/she must retain from the dividend amount an income tax of 15% Tax retention on percentage interest rates and royalties. Each payer of percentage interest rates and royalties must retain as income tax an amount equal to 15% of the percentage interest rates and royalties. Tax retention from other payments. Each person (resident) involved in enterpreneurial activity, or institution, organization, public authority or public institution of the RM, which pays for services, retains as part of the tax 5% from the amount corresponding to the sum payable. Services include: rent, advertising services, audit, management, marketing and consulting, security of individuals, property and services related to the installation, exploitation and repairs of computers. Part 4. Individual Income Tax Self-assessments Income taxes are transferred to the budget according to the place of residence of the economic subject, who made the tax retentions. In all the cases, the taxes retained at the source of payment must be transferred to the budget not later than on the 10th of the month following the month when the retention was made. The economic subject, who made the tax retention, is obligated to present to the territorial taxation inspectorate The Report

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3)

on the Income Tax Retained from Salaries and Wages and Payed to the Budget for the Taxation Period within 10 days after the end of the month when the retention was made or within 10 days after the termination of activity. The following categories must present an individual income tax self-assessment each year before March 31st: 1. Natural personsresidents with the obligation to pay taxes; 2. Natural personsresidents receiving income from sources other than salaries and wages exceeding the personal exemption of 8100 lei per year; 3. Those who received a salary or wage above 25200 lei per year, with the exception of physical persons who received the income in the form of salary in one single workplace; 4. Those who received income either in the form of salary or in any other form and from any source, exceeding 25200 per year.

Lecture 12. Specific Characteristics of Income Taxes for Selected Categories of Juridical persons 1. 2. 3. 4. Taxation of Separate Taxpayer Categories Taxation of Associations and Investment Funds Taxation of Qualified Non-governmental Pension Funds Taxation of Economic Agents Non-Residents Part 1. Taxation of Separate Taxpayer Categories Since there are differences between the taxation arrangements for various types of economic agents, we will look into the peculiarities of the following taxpayer categories: Public Authorities are exempt from income tax if they are financed by the state and local budget. The income earned by these bodies from secondary economic activities are covered by the income tax, however, and it is allowed to apply to them the discounts stipulated in the TC. Non-commercial organisations. These include the following: 1. Health care, education, science and cultural institutions; 2. Associations of the blind, deaf, desabled and the enterprises established for achieving the goals of these associations, social associations, religious, and charitable organisations; 3. Trade and labour unions, associations of veterans, employers, enterpreneurs and individual farmers; 4. Parties and other socio-political organisations. Non-commercial organisations are expempt from taxes if they fulfill the following requirements: 1) hey are registered according to the legislation 2) he use all of their income for achieving their objectives 3) hey do not use any part of the property or income for the benefit of any one member of the organisation or any one individual 4) hey do not support any political party, election block or candidate for a public authority position, and are not using any part of the income or property for the financing of the above (this does not apply to item 4). The legal status of diplomatic representatives of foreign states is regulated by the law of the RM on the status of Diplomatic Representative Offices of Foreign States in the RM. The diplomatic representative office and its staff are offered a preferential tax treatment and immunities for the purpose of fulfilling their duties. According to agreements with the governments of other countries and with the leaders of international organisations, the staffs of diplimatic representative offices and their consultants are exempt from paying taxes on the income received in the RM. Part 2. Taxation of Associations and Investment Funds

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An association is any organisation involved in enterpreneurial activity on basis of partnership and which is founded in conformity to the legislation. Usually, associations do not have more than 20 members-residents and meet the requirements of the proportional distribution of gains and losses between the owners of capital. Associations do not pay income taxes. This is related to the fact that each income component is distributed among the members of the associations. Each member of the association pays income tax separately, depending on the income earned during the given taxation year. Income tax calculations for investment funds if are subject to special rules. Any investment fund has several types of income, which it is obligated to distribute to its shareholders; these are: 1. The dividends received from the economic subject whose shares belong fully or partially to the IF; 2. Capital increases of the IF gained as a result of operations on the stock market; 3. Percentage interest rates received as a result of investing the funds of the IF. 1. Dividends, capital increases and percentage interest rates are types of IF income that are accounted for in a separate income account. The payments made by the IF to its shareholders in accordance with the number of shares belonging to each shareholder of the fund are made from separate income accounts and are taxed when they reach the shareholder, i.e. as if they had been received by the shareholder without the participation of the fund. Part 3. Taxation of Qualified Non-governmental Pension Funds The creation of non-governmental pension funds allows for imporvements in the social insurance status of employees. However, the requirements that have to be met by qualified pension funds entail such strict limitations, that the creation of even a few such funds is problematic. Below are the conditions that non-governmental pension funds have to comply with: 1. The share of the employee in the capital or income of such a fund must be transferred immediately to a separate account and it is forbidden to remove funds from this account before the employee reaches the retirement age, dies or becomes desabled. In case of the employees death, the funds remaining in his/her account are paid to the inheritors. The assets and income of such a fund is kept in a separate account, in a financial institution. The fund provides for a reasonable protection of the funds form being lent, from sale of assets and form similar operations. The fund should be registered in accordance with the RM legislation.

2. 3. 4. 5.

The sum paid on behalf on an individual by his/her employer during the taxation year to a qualified non-governmental pension fund with the purpose of accumulation is subtracted from the net income of the individual, but only with the condition that this sum does not exceed 15% of the income earned by this individual during the taxation year. The income of the qualified non-governmental pension fund is not taxable under the income tax, but any payments from the fund are included in the net income of the receiver. Part 4. Taxation of Economic Agents Non-Residents

Any income received by a non-resident may be received either in the RM or outside its borders. Income sources in the RM include the following: 1) 2) 3) 4) 5) 6) 7) Percentage interest rates on loan obligations of the RM public authorities, an economic subject-resident or a resident association; Dividends paid by a resident economic subject; Income fom work activity and services provided in the RM; Income from renting out in the RM real estate and movables; Income from the sale of real estate located in the RM; Income from the sale of movables (with the exception of stock of goods), given that the buyer is a resident; Royalties and contributions on insurance and reinsurance contracts, which have been signed in the RM.

The criterion for defining the income of the non-resident as received outside the borders of the RM is the impossibility to related the given income to the one received in the RM. The non-residents who receive taxable income in the RM are also granted deductions, which reduce the taxable income amount, but this only applies to the particular income. All revenues received by non-residents on the territory of the RM are taxed at the rate of 5%, whith the exception of royalties, taxed at the rate of 15% and insurance and reinsurance contractsat the rate of 2%.

Lecture 13. The Determination of the Income Tax Amount for Entities Involved in Enterpreneurial Activity 1. 2. 3. The Determination of the Income Taxation Object Norms and Regulations Used for Adjustable Expenditures Income Tax Self-assessments of the Entities Involved in Enterpreneurial Activity Part 1. The Determination of the Income Taxation Object When determining the taxation object, the financial result on the entity involved in enterpreneurial activity, which is determined in conformity with the requirements of the National Accounting Standarts, is adjusted (increased or decreased) for some expenses and revenues, taking into consideration the provisions of the TC. In order to determine the sum of the taxable income, the financial results sum is increased by the adjusted amount for revenues and decreased by the adjusted amount for expenses. The provisions used for revenue adjustments are the following: 1) The result of capital assets operations are taxed at the rate of 50% of the sum; 2) Interest revenues on bank deposits and state bonds are not chargeable to taxation until 01.01.2010. Part 2. Norms and Regulations Used for Adjustable Expenditures The RM legislation includes the following norms and regulations relevant for adjusting expenses for taxation purposes: Expenses related to the business trips of employees. The structure and procedure of determining business trips expenses on the territory of the RM and of CIS countries is

regulated by the resolution of the RM government, which stipulates that: A) transportation expenses for travel within the RM and in CIS countries are reimbursed according to supporting documents or to the minimum ticket cost; B) diurnal expenses are reimbursed in the amount of 35 lei for each day spent on a business trip within the territory of the RM, except for the departure and return days, when diurnal expenses are reimbursed at a rate of 50%; C) lodging expenses are established as 70 lei on the territory of the RM and 150 lei in Chisinau. Representative expenses. The maximum amount allowed for deductions as representative expenses constitute: 0.5% of the net income received from the sale of merchandise (inventory turnover); 1% of all the taxable income amount in accordance with the TC. Expenses unsupported by documented evidence. It is allowed to subtract incurred and payed expenses related to the enterpreneurial activity and which cannot be supported by documented evidence in the amount of 0.1% of the taxable income. Donations for charitable causes. It is allowed to subtract documented expenses for charitable causes in a sum that does not exceed 10% of the taxable income before accounting for the relevant exemptions stipulated in the TC. Expenses for the maintenance, repair and reconstruction of fixed assets. If during a certain taxation year the expenses for the maintenance, repair and reconstruction of fixed assets does not exceed 10% from the cost base of the given property category, the subtraction of these expenses is allowed for that year; if however, such expenses exceed 10% of the cost base of the fixed assets, the surplus amount is defined as expenses for reconstruction and are classified into the fixed assets account. The determination of depreciation for taxation purposes. The amount of the subtraction during the taxation year on one or another category of property is determined by applying to the cost base of one or another category of property (at the end of the taxation year) the following depreciation norms: I property category5%, II category 8%, III category10%, IV category20%, and the V category30%.

EXERCISE. The financial result of an enterprise for the year 2002 constituted 500,000 lei. Income tax retained at the payment source amounted to 10,000 lei, and the amount payed in installments was 120,000 lei. Determine the amount of the income tax payable to the budget given the following data about the revenues and expenses of the enterprise: Indicators Amount indicated in the Financial Statement 10000 2000 3000 5000 Amount Difference indicated (3-2) for taxation purposes 5000 -5000 0 0 0 -2000 -3000 -5000 -15000 5000 -2000 -2000

1. Capital assets operations results 2. % interest revenues from the Central Bank 3. % interest revenues on bank deposits 4. Dividends received from residents Total adjustment of revenues 1. Fixed Assets Depreciation 2. Expenses for Fixed Assets repairs 3. Incurred expenses

related to the Central Bank Total adjustment of expenses

1000

Part 3. Income Tax Self-Assessments of Entities Involved in Enterpreneurial Activity According to article 83 of the Taxation Code, the follwing categories of entities involved in enterpreneurial activity are obligated to submit an income tax self-assessment: 1) Juridical persons residents, with the exception of public authorities and state institutions, 2) Enterprises-residents with the status of an individualindividual enterprises and farms, 3) Permanent representative offices of non-residents of the RM, 4) Juridical persons non-residents obligated to pay income taxes. The self-assessment must be submitted to the GNS at the place of registration (the endorsement of the fiscal code) not later than the 31 March of the year, following the taxation-reporting year. If the taxpayer termintates the activity during the taxation year, the person in charge is obligated to announce the taxation inspectorate within 5 days after the termination of activity about it, and, within 60 days, to submit an income tax self-assessment for the entire period of the reporting year, during which the company was involved in enterpreneurial activity. The taxpayer, whose taxation obligations exceeded 400 lei during the taxation year is obligated to pay not later than on the 31.03, 30.06, 30.09 and 3.12 of the taxation year the sum equal to one fourth of the: Sum calculated as the tax payable for that year; Tax payable for the previous year.