1-1

Chapter One

TAX : Definition and

Types
 1-2

Taxation – Definition & Type

A tax is a payment by a party to
support the cost of the government.

A tax differs from a fine or penalty
imposed by a government because a tax
is not intended to deter or punish
unacceptable behavior.

Taxes are compulsory rather than
voluntary on the part of the payer.
 1-3

Taxation – Definition & Type

Tax differs from a fee because the payment

of the tax does not entitle the payer to a
specific good or service in return.
 1-4

Taxation – Definition & Type

Citizens receive any number of government

benefits for their tax dollars.

Nevertheless, the value of government
benefits received by any particular person is
not correlated to the tax that person must
pay.
 1-5

Taxation – Definition & Type

A tax payer is any person or organization

required by law to pay a tax to a
governmental authority.

The term person refers to both natural

persons (individuals) and corporations.
 1-6

Tax formula
• Tax revenue = rate x base
• Rate can be :
• flat (a single rate applies to the entire tax base)
• or graduated (multiple rates apply to specified portions
or brackets of the tax base)
• Base is :
• an item, occurrence, transaction, or activity to which a
tax is levied (expressed in monetary terms)
• Revenue is :
• the total tax collected by the gov’t and available for
use
• increased by increasing either the rate or base
 1-7

Taxation – Definition & Type

- Major Types of Taxes

- Governments levy many kinds of taxes.

The most important kinds include:
- property taxes,
- income taxes,
- and taxes on transactions
 1-8

Taxation – Definition & Type

- Major Types of Taxes

- Direct tax:
- Income tax decree no 144 dated June 1959
- Income tax on Holdings: decree law no 45 June
1983
- Income tax on off-shore companies: decree no
46 June 1983
- Tax in interest from financial income: Law 497
dated 30/1/2003
- Inheritance tax: decree 146 dated June 1959
- Built-up Property tax: 1962
 1-9

Taxation – Definition & Type

- Indirect tax:
- Value added taxes: Law 379 dated Dec
2001
- Stamp duty: Law 67 dated Aug 1967
- Excise tax: on some products
- Municipal fees: law 60/88 dated
 1-10

Taxation – Definition & Type

Property taxes:
- levied on the value of such property as
farms, houses, stores, factories, and
business equipment.
- The property tax first became important
in ancient times.
- Today, it ranks as the chief source of
income for many governments.
 1-11

Taxation – Definition & Type

- Property taxes are called direct taxes

because they are levied directly on the
people expected to pay them.
 1-12

Taxation – Definition & Type

- Property tax is a tax collected from the
owners of buildings, land, and other
taxable property, including business
equipment and inventory.

- Some governments also collect taxes

from the owners of such property as
stocks and bonds .
 1-13

Taxation – Definition & Type

Property taxes:
- The government of a community sets
an annual tax rate to determine each
property owner's tax bill.

- This rate is a percentage of the assessed

(estimated) value of the property.
 1-14

Taxation – Definition & Type

- In many cases, the assessed worth is
less than the property's market value.
- For example, a house might have a
market value of $100,000 but be
assessed at only $60,000.
- If the tax rate were 5 percent, the annual
property tax would be $3,000 instead of
$5,000 .
 1-15

Taxation – Definition & Type

- The major problem with property

taxation is that much property is not
assessed fairly and uniformly.

- Another drawback is that assessments

and rates change too slowly to keep up
with rising prices. In countries with high
rates of inflation, assessments have
often fallen far behind market values.
 1-16

Taxation – Definition & Type

- Some people oppose property taxes

because they believe property ownership
is a poor measurement of ability to pay.
- But others argue that property owners
are the people who benefit most from
community services, and so they should
pay more for these services.
- (In Lebanon parties who own a single
house pay no property tax according to
the Lebanese tax law).
 1-17

Taxation – Definition & Type

Property tax rates in Lebanon is levied on the
annual net rental income of the property :
Rate ANNUAL RENTAL INCOME
0% 0 6,000,000
4% 6,000,000 20,000,000
6% 20,000,000 40,000,000
8% 40,000,000 60,000,000
11% 60,000,000 100,000,000
14% More than 100,000,000
 1-18

Taxation – Definition & Type

Inheritance Tax

- paid on property passed on from a deceased

person to those who are to inherit it.
- The term may be applied to two different taxes:
- (1) a tax on the total property before it is
divided, and
- (2) a tax on each of the distributed portions after
they have been given to the heirs.
- Technically, these two taxes should be called
estate taxes and inheritance taxes, respectively
 1-19

Taxation – Definition & Type

Inheritance Tax

- Inheritance taxes are levied at

progressive rates depending on the
degree of kinship between the deceased
and the heir.
- The lowest rates apply to the deceased’s
children, higher rates apply to parents
and other close relatives, and the highest
rates apply to distant relatives and other
persons not related to the deceased
 1-20

Taxation – Definition & Type

Inheritance Tax

TAX BASE, LBP (US$) TAX RATE

Up to 30 million (US$20,000) 3% - 16%

30 million – 60 million (US$40,000) 5% - 21%

60 million – 100 million (US$66,667) 7% - 27%

100 million – 200 million (US$133,333) 10% - 33%

200 million – 350 million (US$233,333) 12% - 39%

Over 350 million (US$233,333) 12% - 45%

 1-21

Taxation – Definition & Type

Inheritance Tax

- The inheritance tax is levied on each

beneficiary’s net inheritance.

- The taxable inheritance is the gross estate less

expired or irrecoverable debts, debts of the
deceased, debts related to the estate, and
burial expenses.
- Each beneficiary is also entitled to exemption
amounts and special allowance.
 1-22

Taxation – Definition & Type

Inheritance Tax

☯ Exemption Amounts

 LBP40 million (US$26,667) for the spouse,

parent, children
 LBP16 million (US$10,667) for the grandparents
 LBP8 million (US$5,333) for other heirs
 1-23

Taxation – Definition & Type

Capital Gains Tax- 10% flat rate
- Capital gains tax is a tax on income from
the sale of capital assets, which include
stocks, bonds, real estate, and
partnerships.
- Most countries treat capital gains more
favorably than ordinary income, such as
wages, interest, and dividends.
 1-24

Taxation – Definition & Type

Capital Gains Tax
- People disagree over whether capital
gains should be taxed at a lower rate
than ordinary income.
- Some favor a lower rate as a means of
encouraging savings, investment, and
the sale of capital assets -- and to make
up for artificial "gains" in an asset's
value due to inflation.
 1-25

Taxation – Definition & Type

Capital Gains Tax
- Opponents of lower rates stress that
such rates benefit primarily higher-
income people.
- Some people fear that low capital gains
tax rates result in lower government
revenues.
- But low rates may increase revenues by
encouraging the sale of capital assets.
 1-26

Taxation – Definition & Type

Capital Gains Tax
- The capital gains tax is different from
almost all other forms of taxation in that
it is a voluntary tax. Since the tax is paid
only when an asset is sold, taxpayers
can legally avoid payment by holding on
to their assets--a phenomenon known as
the "lock-in effect."
 1-27

Taxation – Definition & Type

Capital Gains Tax
- There are many unfairnesses imbedded in the
current tax treatment of capital gains. One is
that capital gains are not indexed for inflation:
the seller pays tax not only on the real gain in
purchasing power but also on the illusory gain
attributable to inflation.
- The inflation penalty is one reason that,
historically, capital gains have been taxed at
lower rates than ordinary income.
 1-28

Taxation – Definition & Type

Tariff
- tax placed on goods that one nation
imports from another.
- Many nations use tariffs to protect their
industries from foreign competition.
- Tariffs provide protection by acting to
raise the price of imported goods.
- Thus, tariffs encourage domestic firms to
increase their production, and
consumers are forced to pay higher
prices for the protected goods.
 1-29

Taxation – Definition & Type

Tariff

- But such tariffs are sometimes used in

other countries to raise revenue.
- A nation may also use tariffs to
influence, or protest against, political or
economic policies of other countries.
 1-30

Taxation – Definition & Type

Tariff

- Nations set their tariff rates in various ways.

- They may have commercial treaties that include
a most-favored-nation (MFN) clause. Under an
MFN clause, each nation's lowest regular tariff
rates apply to all countries that sign the treaty.
- Preferential tariffs, which are lower than MFN
tariffs, may be applied to favor imports from less
developed countries.
 1-31

Taxation – Definition & Type

Tariff

- Nations set their tariff rates in various

ways.
- Nations that form a customs union
eliminate tariffs on trade among
themselves. These nations also have a
common set of tariffs that cover their
trade with nonmember countries.
 1-32

Taxation – Definition & Type

Main kinds of tariffs
☯ Tariffs may be classified according to their
purpose.
 Tariffs levied to restrict imports are called
protective tariffs.
 Those levied to increase government revenue
are known as revenue tariffs.
 Many governments used revenue tariffs in the
past. But today, income taxes and sales taxes
are the main sources of government revenue,
and revenue tariffs are seldom used.
 1-33

Taxation – Definition & Type

Main kinds of tariffs
☯ Tariffs may also be classified according to
the way in which they are levied.
 Specific tariffs are levied as a certain sum of
money per unit of the product imported. For
example, a government may levy a specific tariff
on a product at a rate of 10 cents per pound or
25 cents per liter.
 Many specific tariffs are levied against such raw
materials as iron ore and rubber and such food
products as sugar, wheat, and wine.
 1-34

Taxation – Definition & Type

Gasoline Tax
- tax on the purchase of gasoline.
- This tax, commonly known as a motor
fuel tax, is paid chiefly by road and
highway users.
- Different types of motor fuels are taxed
at different rates.
- In addition, the rates vary among the
countries. In some cases, the rate
depends on the number of axles on the
vehicle in which the fuel is used.
 1-35

Taxation – Definition & Type

Value-Added Tax
- tax imposed by a government at each stage in
the production of a good or service.
- The tax is paid by every company that handles
a product during its transformation from raw
materials to finished goods.
- The amount of the tax is determined by the
amount of the value that a company adds to the
materials and services it buys from other firms.
 1-36

Taxation – Definition & Type

- Major Types of Taxes

Income taxes:
- levied on income from such sources as wages
and salaries, dividends, interest, rent, and
earnings of corporations
- There are 3 types :
- (1)tax on business profits;
- (2) tax on salaries, wages and pension benefits;
- (3) tax on investment income.
 1-37

End of chapter