International Tax Environment

In the recent past, Kenya has experienced serious cases of tax evasion and avoidance from individuals and corporates (MNCs). This is a worrying trend for any successful government. The trend could have partially been aggravated by the run-away corruption witnessed in different sectors. With a proper tax system, some of these challenges can be avoided.

Objectives of taxation

1. Tax neutrality- is the concept that the structure of a fund does not lead to a duplicative layer of taxes borne by investors.

There are different types of neutralities.

i. Export neutrality- an ideal tax should be effective in raising revenue for the government and not have any negative impact on economic decisions of the payer.

ii. National neutrality- taxable income is taxed in the same manner regardless of where it is earned.

iii. Capital import neutrality- tax burden should be the same regardless of where it is earned.

2. Tax equity- Regardless of the country in which the MNCs or their affiliates earn taxable income, the same rate of tax due should apply.

Principles of a good tax system

1. productivity/fiscal adequacy- the tax system should yield adequate resources to run the government.

2. Elasticity- as the economy grows, revenues should grow.

3. Diversity- the government should have various tax avenues.

4. Taxation should be an instrument of economic growth through capital formation.

5. Taxation should be an instrument of income and wealth distribution- the rich should pay more through progressive taxation.

6. Taxation should ensure income stability- taxation should ensure economic stability through inbuilt flexibility that allows changes in national income.

Types of Taxation

1. Income tax-is the tax levied on active income from services and goods that have been provided.

2. Withholding tax- tax levied on passive income e.g. interest income on dividends.

3. Value added tax- tax levied on the production of goods and services as it moves through various stages of production.

National Tax Environment

1. Worldwide taxation- entails taxing national residents of the country on their worldwide income no matter in which country it is earned.

2. Territorial taxation- entails taxing all income earned within the country by any tax payer, domestic or foreign.

Terms in taxation

Foreign tax credit- credit given to the parent firm against taxes due in the host country based on the taxes paid to the foreign tax authority on foreign source income.

Tax Drag- is the amount by which total income on the investment is reduced due to taxes

Organizational structures of reducing tax liability

Branch and subsidiary income- a branch is not independent of the parent, therefore taxation for the parent may include branch’s tax. A subsidiary on the other hand is exposed to different tax jurisdictions. To reduce tax liability through this method, MNCs may prefer to have branches rather than subsidiaries since they will only pay tax in their country.

Controlled foreign corporation- local nationals may own majority stake in a company, making it only taxable in that country.

Tax haven- companies may establish businesses in countries with lower taxes to reduce tax burden.

Transfer pricing- Aspects of intercompany pricing arrangement between related business entities often involving transfers of tangible or intangible property thereby reducing tax liability.