Finance Operations Cima Study Notes

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Financial Operations

Principles of Business Taxation

UK & USA is based on a benchmark tax regime Government needs tax to finance expenditure on public services and Gov borrowing

Government uses tax to both stimulate and control the economy.

Adam Smith’s Wealth of Nations

Good Tax should be;

Fair
Absolute
Convenient
Efficient

3 Major principles of any good tax policy

3 E’s

Equity
Efficiency
Economic Effect

American Institute of Certified Public Accountants – 10 Principles

Neutrality
Appropriate Gov Revenues
Minimum Tax Gap
Economic Growth and Efficiency
Simplicity
Transparency and Visibility
Economy of Collection
Convenience of Payment
Equality and Fairness

2 Types of Tax

Directs – income tax, corporation tax etc
Indirect – VAT

Incidence – the distribution of the tax burden has 2 elements Formal – the person who pays they tax Actual – the person who bares the cost

Competent Jurisdiction – Tax authority that has the legal power to assess and collect tax

Hypothecation – Taxes devoted to certain types of expenditure – ie road tax to spending on roads and transport

Tax Gap – the difference between what’s collected and what’s actually owed.

Tax rate structure

Progressive – increases in proportion as amount of income rises
Proportional – same proportion as income rises
Regressive – Decreasing proportion as income rises

Sources of Tax Rules

Legislation
Agreements between countries – ie double tax treaties
Precedents
Directives

Taxes are classified according to their tax base – what’s being taxed.

Trading Income – Tax Base = Profit

Standard Proforma $
Accounting Profit X
- Income exempt from tax, or taxed under other rules (X)
+ Disallowable expenses X
+ Depreciation X
- Tax Depreciation (capital allowance) (X)
= Taxable Profit X

Income exempt = income not relating to the main trading activity of the organization i.e.

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