1. Discuss the advantages and disadvantages of the corporate tax. (6 marks)
Advantages
i. Source of Revenue - Corporate taxes can be effectively utilized as a tool for the government to generate higher revenues as corporations are the largest money makers in the every economy. The government can therefore create a steady and strong flow of cash by targeting those making large profits. ii. Distribution – Taxing companies that are making profits helps redistribute the benefits to the society through provision of public services that generally the private corporations would not provide. It still allows for businesses to function and grow and do not overly inhibit companies’ ability to make profit. iii. Equitable – This tax is equitable in that …show more content…
Transfer of burden of tax - The fact is, although corporate taxes are meant to tax wealthy companies, the costs actually end up being transferred somewhere else. The groups that end up getting the burden of these taxes are none other than the consumer and the worker. Workers are affected in that the costs of the tax either reduce their salaries or hiring. While consumers are affected in that the company passes on the tax in their products and services by making them more expensive.
ii. Attack on Corporations - In addition to that, another con of the corporate tax system is that it takes away funds from companies/corporations. This is economically inefficient, because in an economically efficient situation, no one can be made better off without making someone else worse off. Corporate taxes end up making companies worse off than if they were not being taxed.
iii. Scares away Business - Lastly one must consider the economic growth in a country. Companies try to pick the best place that can facilitate their growth, where they could be the most profitable. By introducing a corporate tax in a certain country, companies may avoid it and search for other alternatives. Some may turn to tax shelters like the Cayman Islands; others just search for locales that have lesser taxes. Quite simply, a corporate tax can scare away potential and current investors to other countries, leading to a reduction of economic …show more content…
The government may be forced to lower their taxes in order to earn additional revenues from resident individuals earning income abroad.
Disadvantages of a Worldwide Tax System
i. Domestic Kenyan firms may be left with higher tax rates than their foreign competitors. ii. Regulatory and compliance costs are high for both the government and the tax-payer.
Advantages of a Territorial Tax System
i. Puts Kenyan businesses on a more even playing field as income from other territories will not be subjected to tax. ii. Increases attractiveness of locating headquarters in the Kenya as businesses are not taxed on their worldwide income. iii. Reduces regulatory and administrative burdens for both the government and the tax payer.
Disadvantages of a Territorial Tax System
i. Kenyan firms could be compelled to shift greater profits offshore to lower-taxing jurisdictions ii. Would result to erosion of the Kenyan tax base if corporations consider the Kenyan tax rates as high. iii. It creates an opportunity for the abuse of transfer pricing practices between corporations.
4. What are tax treaties? Examine any three tax treaties that Kenya has signed with other countries and comment on the tax treatment of interest and dividends earned in Kenya by residents of those countries. (8
Advantages
i. Source of Revenue - Corporate taxes can be effectively utilized as a tool for the government to generate higher revenues as corporations are the largest money makers in the every economy. The government can therefore create a steady and strong flow of cash by targeting those making large profits. ii. Distribution – Taxing companies that are making profits helps redistribute the benefits to the society through provision of public services that generally the private corporations would not provide. It still allows for businesses to function and grow and do not overly inhibit companies’ ability to make profit. iii. Equitable – This tax is equitable in that …show more content…
Transfer of burden of tax - The fact is, although corporate taxes are meant to tax wealthy companies, the costs actually end up being transferred somewhere else. The groups that end up getting the burden of these taxes are none other than the consumer and the worker. Workers are affected in that the costs of the tax either reduce their salaries or hiring. While consumers are affected in that the company passes on the tax in their products and services by making them more expensive.
ii. Attack on Corporations - In addition to that, another con of the corporate tax system is that it takes away funds from companies/corporations. This is economically inefficient, because in an economically efficient situation, no one can be made better off without making someone else worse off. Corporate taxes end up making companies worse off than if they were not being taxed.
iii. Scares away Business - Lastly one must consider the economic growth in a country. Companies try to pick the best place that can facilitate their growth, where they could be the most profitable. By introducing a corporate tax in a certain country, companies may avoid it and search for other alternatives. Some may turn to tax shelters like the Cayman Islands; others just search for locales that have lesser taxes. Quite simply, a corporate tax can scare away potential and current investors to other countries, leading to a reduction of economic …show more content…
The government may be forced to lower their taxes in order to earn additional revenues from resident individuals earning income abroad.
Disadvantages of a Worldwide Tax System
i. Domestic Kenyan firms may be left with higher tax rates than their foreign competitors. ii. Regulatory and compliance costs are high for both the government and the tax-payer.
Advantages of a Territorial Tax System
i. Puts Kenyan businesses on a more even playing field as income from other territories will not be subjected to tax. ii. Increases attractiveness of locating headquarters in the Kenya as businesses are not taxed on their worldwide income. iii. Reduces regulatory and administrative burdens for both the government and the tax payer.
Disadvantages of a Territorial Tax System
i. Kenyan firms could be compelled to shift greater profits offshore to lower-taxing jurisdictions ii. Would result to erosion of the Kenyan tax base if corporations consider the Kenyan tax rates as high. iii. It creates an opportunity for the abuse of transfer pricing practices between corporations.
4. What are tax treaties? Examine any three tax treaties that Kenya has signed with other countries and comment on the tax treatment of interest and dividends earned in Kenya by residents of those countries. (8