Sample Business Studies Research Paper on Taxation Jurisdictions in Australia and U.S

Taxation Jurisdictions in Australia and U.S

Introduction

Australia and United States of America are two modern democratic nations. More so, they are both English-speaking countries as they were originally colonized by the British. They however have different systems of governance, education, health services, law enforcement, and taxation. This research will however compare and contrast taxation jurisdictions in both countries. The Australian Federal Government has been capturing major tax bases of personal and corporate income tax. More so, it has sole access to the indirect taxation of products and services. Consequently, it derives a significant amount of revenue from natural resources through its resource rent tax arrangements (Oliver, & Bartley, 2005). Thus, the degree of vertical fiscal imbalance in Australia has been rated as very high. As a result, fiscal equalization is a function undertaken by the by Australia. The equalization function often takes the form of providing general revenue grants to the Australian government on the basis of relativities that have been assessed especially by the Commonwealth Grants Commission. This has led Australia to be recognized as a nation with the most comprehensive fiscal equalization model. More so, the Grants Commission has been examining both the expenditure and revenue sides of the budgetary equation and concluded that, the Australian taxation system ensures that the richer are equalized down to the standard. Conversely, the poorer are equalized up to the standard (Hancock, & Smith, 2001).

Background about Taxation Jurisdictions in Australia

According to the Commonwealth of Australia, all Australian citizens ought to pay taxes.This mandate is carried out by the Australian federal government as it imposes taxation regulations. The Australian tax system is a mix of direct and indirect taxes. The taxes are levied by both the Commonwealth and State governments. The levying however also depends on the type of tax. This has enabled the Federal Government of Australia to tax Australian residents on income. Thus, it has jurisdictions to tax the citizens and residents on incomes from worldwide sources. Persons living in Australia without legal documents to be acknowledged as non-residents are however taxed based on the Australian sourced income they are able to accumulate. Their taxation mandates are enforced under the Australian legislation containing specific rules relating to residence. This is crucial for tax purposes as it determines whether an individual or organization will be taxed as a resident. The Australian taxation system is also required to determine whether an income amount is sourced within Australia. Thus, it should identify incomes earned within Australia as well as incomes earned outside the country. Ultimately, Australian taxation jurisdiction ought to determine if income is sourced in the place of employment or the fixed place of business (Commonwealth of Australia, 2006).

With regards to international transactions, the government ensures they are sourced according to where the relevant contract is made although some variations depending on the circumstances are undertaken to the broad rules. For example, amounts of income may be taxed in two different countries if risks are associated with residents and comply with rules on the source of income. In order to avoid this, the Australian government entered into many double tax agreements with other countries to ensure they prevail over domestic laws (Wills, 1997). Taxation is therefore imposed once, on any given amount of income, according to the double tax agreement. Additionally, Australia operates a system of foreign tax credits. The system determines tax credits to be awarded Australian residents although they are required to pay foreign tax on foreign income. Consequently, the tax credits are utilized in offsetting Australian taxes that have been remunerated on an equal amount. This ensures income is only taxed once (ABS, 2006).

The Australian taxation system can therefore be described as a self-assessment model as it ensures taxpayers fulfill their taxation responsible by filing their own taxation returns. More so, individuals and organizations are required to lodge an annual ‘Income Tax Return’ although the firms and other entities may have further requirements for the purposes of withholding taxes. Consequently, no tax return in Australia is reviewed by the Australian Taxation Office. This is because each taxpayer’s income evaluation is taken to be correct hence, true. The Australian Taxation Office however does undertake audits of individuals’ tax returns. It also audits companies’ tax returns. These audits ensure that taxpayers’ actual tax affairs are consistent with their self assessment (IBP Inc, 2015).

Ultimately, Federal Government of Australia has the authority to tax Australian residents. As a result, it should impose taxes on incomes from worldwide sources. Thus, non-residents are only taxed on incomes sourced while staying in Australia. This affirms the Australian legislations on taxation are imposed unambiguously rules relating to residency are precise. Thus, they ought to be applied in determining whether an individual or company is a resident. It should be noted that, international transactions are sourced according to where the relevant contract is made. Some circumstances however can rise allowing some variations to the broad rules (Reinhardt, & Steel, 2006).

Background about Taxation Jurisdictions in the United States of America

United States of America comprises of different local and state governments to form the federal country. This allows taxes to be imposed at each of the levels. The taxes imposed include tax on income, estates, capital gains, sales, property, payroll, imports, dividends, gifts, and some forms of fees. For example, the country’s municipal, state, and federal governments collected almost twenty percent of the nation’s Gross Domestic Product as taxes. Taxes collected often fall under the labor income rather than on the capital income category. Consequently, taxes and subsidies for different forms of income and spending can be divergently constituted. This allows them to form the indirect taxation of some activities over others. For instance, various people often spend much on education. Such individuals can be said to be taxed at a high rate if the comparison involves other forms of personal expenditure which are formally recognized as investments (PWC, 2016).

Across United States, taxes are imposed on net incomes earned by individuals and organizations. The taxes are imposed by the federal government. They can however also be imposed by some state and local governments. Thus, citizens and residents in the federal government of United States are taxed on worldwide incomes. More so, they are allowed a credit for foreign taxes. As a result, all incomes subject to tax are not determined under accounting principles as tax accounting rules are applied. Business expenses however tend to reduce taxable income. Limits however apply to a few expenses. Conversely, individuals are permitted to reduce taxable incomes. The reduction can be attained by decreasing personal allowances and certain non-business expenses. Such expenses include local and state taxes, home mortgage interest, medical expenses, and charitable contributions. Certain expenses incurred above certain percentages of income are also included in the category. State regulations resolving how incomes ought to be taxed therefore differ from federal rules. For instance, federal tax rates of taxable income diverge between 10% and 39.6%. Conversely, local and state tax rates vary between 0% and 13.30% of income although many are graduated. It should be noted that state taxes are normally treated as deductible operating expenses during computation of federal taxes. For example, a high-income resident in California, in 2013, was required to pay 52.9% as the top marginal income tax rate (Wise, 2009).

The United States taxation jurisdiction is also noted as one of the two countries in the world that imposes tax on non-residents on worldwide income. The second country is Eritrea. This decision was implemented after the Supreme Court advocated the constitutionality of the payment of such tax. This was after the Supreme Court ruled in the case of cook vs. Tait, 265 U.S 47 (1924). It was implemented to ensure payroll taxes are imposed by federal and all state governments (Frej, 2016).

Compare and contrast the taxation jurisdictions in Australia and United States

Tax burden

Australia’s tax to Gross Domestic Product ratio is often low by international standards. For example, in 2010 Australia had the fifth lowest tax burden compared to other Organization for Economic Co-Operation and Development countries including United States.  This was during Australia’s 2010-11 financial year the latest which was compared with available international data. Australia has therefore had among the lowest tax burden when compared to the other Organization for Economic Co-Operation and Development countries including United States.  It is often ranked in the bottom third of countries since 1965. In 2010 however, Australia’s tax to Gross Domestic Product ratio was 25.6%. This was below the Organization for Economic Co-Operation and Development average of 33.8 per cent which United States had attained. Thus, the tax to Gross Domestic Product ration in United States is higher than that recorded in Australia (Jager, 2015).

Tax mix

Australian tax mix is broadly similar to most Organization for Economic Co-Operation and Development countries including United States and Australia. There are however a few distinguishing features. For example, Australia raises the majority of its taxation revenue from direct taxation. Thus, about 62.3% of the tax revenue collected in 2010 was levied on incomes such as salaries and wages as well as payrolls and profits. The 62.3% tax revenue was close to the Organization for Economic Co-Operation and Development average of 61.6 per cent. Although some countries often have a higher reliance on direct taxation, Australia’s taxation revenue is often derived from indirect taxation such as goods and services taxes, property taxes, and excise and customs duties. For example, Japan and Switzerland often have a higher reliance on direct taxation at 71.3% and 70.0% respectively. United States however records a lower reliance on direct taxation. Although the Organization for Economic Co-Operation and Development average is 38.4%, United States’ reliance on direct taxation is often rated very low. For example, it was rated below zero in 2010. The country’s reliance on indirect taxation however, exceeds Australia. For example, it was rated above 70% compared to Australia which was rated below 65% in 2010 (TTT, 2013).

Thus, Australia’s composition of direct taxes differs from that of United States. Consequently, Australia is recognized as one of the two countries that do not levy social security taxes with the second country being New Zealand.  Social security taxes should however be acknowledged as some of the large sources of direct taxation revenue for Australia and United States.  Consequently, when Australia is compared to United States, it has a lower level of total taxation on personal income. Personal income includes taxes on personal income, social security taxes and taxes on payroll. Thus, Australia’s tax burden relating to the mentioned items is lower than that of United States (James, 2015).

Petrol taxation

According to the Australian Government through the Treasury, the rate of excise duty on unleaded petrol in the country is 38.1 cents per litre. The Treasury maintains that the rate has been sustained since March 2001 after the indexation of petrol excise rates to the consumer price index (CPI) ceased. The impact of excise duty on unleaded petrol coupled with the impact of general consumption taxes such as value added tax (VAT) and sales taxes has been low compared to United States. Thus, the total tax imposed on consumers and the average level of tax included in petrol prices for Australians and United States Citizens has been low per litre especially in the second quarter of 2012. In comparison, the level of tax included in Australia’s unleaded petrol prices for the second quarter of 2011 was about half this amount which was lower compared to that of United States (TTT, 2014).

Based on the three analyses, it is evident that Australia has only form of income tax namely federal while United States includes State and local or municipal. Consequently, it can be noted that Australia’s taxes are more expensive than those in United States. The country however relies on the taxes to subsidize a few important areas such as education and health which is not the case in United States. Ultimately, Australia’s taxation system is more conservative than that of United States. For example, couples are not required to file joint taxation reports. More so, tax payers are not permitted to use multi-layer averaging. These measures are not observed in United States of America. Australia’s economy can therefore be defined as stronger than that of United States as the government ensures taxes increase to stifle growth (Kluwer, 2015).

The most effective or efficient taxation system between Australia and United States

Traditionally, United States has had a strong focus on managing its channels and service delivery. This is often undertaken without having one single document describing the whole strategy dimension. This is because the country applies a number of strategies that also have governed how the country deals with channel management (Warren, 2004). The strategy hierarchy in United States is also complimented by the e-Government strategy which provides the main directions and the goals to make it easy for citizens to obtain services and interact with the federal government. This has played a key role in ensuring the government efficiency, effectiveness and responsiveness to citizens improve. This led the channel strategy to be represented in the IRS strategic plan where one of the three main goals is to improve taxpayer service. The means and strategies to achieve this goal have been diverse including increasing the scope and accessibility of taxation services offered electronically (PWC, 2013).

United States also strives to deliver focused education, outreach and alternative services directly and through stakeholder relationships. This strategy purposely focuses on taxpayers who are not utilizing electronic services. Consequently, it provides tools ensuring accurate, timely and accessible responses. This is mainly with regards to tax laws as well as account issues and inquiries United States has also been through an extensive modernization process especially since 1998. Thus, modernized channel infrastructures have been part of a program ensuring each operating division within the IRS has developed concepts of operations designed for the future. The modernized channel infrastructures have therefore played a key role in improving and expanding education and awareness activities towards taxation.  More so, it has optimized use of partner services and elevated self-service options to meet taxpayer expectations (Frej, 2016).

For example United States taxation system is recognized for ensuring different types of goods imported from many jurisdictions pay custom duties. Such custom duties ought to be paid before the imports are legally traded in. Tariff rates often vary from 0% to more than 20% depending on the particular goods as well as country of origin. Lastly, the federal government imposes taxes on estate and gift. Some state governments can also impose estate and gift taxes on the transfer of property inheritance. This can be done by either will or life time donation. Taxes on federal estates and gifts are similar to federal income taxes after they are imposed on worldwide property of citizens and residents. They allow a credit for foreign taxes (Carl, Kelly, Matthew, Robert, Jeff, & Alla, 2009).

With regards to the Australian Taxation Office, it first developed its channel strategy in 2003. The main driver for the strategy was its administrative reform program. The program was known as the ‘Easier, cheaper, and more personalized program’. The program began as a community-driven initiative in attempts to improve taxpayers’ experience in tax administration (Pinto, 1999). The Australian Taxation Office believed the channel strategy was a simple plan for to determine channels clients ought to use for different purposes. The channel was also to be implemented in order to determine the strategy Australian Taxation Office ought to use to meet the set out objective (OECD, 2004).

The Australian Taxation Office has also been expressing the following strategic intentions. Foremost, it intends for the Tax Office to promote use of particular channels to improve payers’ experiences when dealing with the Tax Offices. It also plans to ensure costs for both clients and the Tax Office to be as low as possible. Thus, a successful channel migration strategy is required in order to contribute to confidence in the Tax Office and the tax system. These intentions however have not reduced income tax being paid by the citizens which has been expensive. This has not hindered the country to implement measures to improve tax compliance (Campbell, 2012).

More so, it has continued to maintain a longstanding and close agreement with United States based on respect and mutual assistance in tax matters. This is because both nations desire to conclude the agreement to improve international tax compliance. Thus, Article 25 of the Convention between United States and Australia for avoidance of double taxation and prevention of fiscal evasion with regards to taxes and income authorizes exchange of information between the two countries for tax purposes. Thus, United States enacted provisions known as Foreign Account Tax Compliance Act introduces a reporting regime for financial institution for certain accounts. Consequently, Australia supports the underlying the policy goal of Foreign Account Tax Compliance Act in order to improve tax compliance (FATCA, 2011).

 Ultimately, both United States and Australia acknowledge they ought to coordinate their reporting obligations under Foreign Account Tax Compliance Act and other taxing reporting regulations in Australia in order to avoid double taxation. This plays a key role in reducing legal impediments facing the taxation systems in each country. More importantly however is the fact that it reduces the burdens faced by Australian financial institutions. Thus, the Australian taxation jurisdiction can be described as cumbersome compared to that of United States of America. Both systems however, are equally effective and efficient in ensuring citizens meet and fulfill their taxation duties and responsibilities diversely (CEICTM, 2011).

Conclusion

Broadly, both United States and Australia have particular policy objectives to achieve in order to attain tax compliance. They also need to revise and modernize the tax treaty. Some major departures from Australia’s long standing treaty practice should also be revised and updated in order to reach a mutually acceptable concurrence. For example, reductions in withholding tax on royalties and interest income can be revised and updated by involving a cost to revenue ensuring benefits are much more widely spread in the economy. Additionally, most direct benefits can be accrued by businesses. Conversely, both nations should consider maximizing on indirect revenue benefits. The indirect revenue benefits are likely to arise from increased trade and investment. For example, they can be witnessed between the countries and reduced tax credit obligations especially for United States taxes. Ultimately, a temporary examination of costs and benefits can be provided as the impacts of tax treaties cannot be quantified in a number of important areas (Ernst & Young LLP, 2014).

Consequently, educated guesses of the trade and investment expected growth rates should not be speculated. This is due to lack of information coupled with intricacies associated with determination of the range and impacts of behavioral responses with any certainty as benefits flowing in economic ventures are often difficult to quantify. Impacts of taxation programs, strategies, and treaties should therefore be determined with greater authority. For example, impacts of direct revenue with regards to reduction of withholding tax should be determined. This will ensure Australian persons either with or seeking debt finance from financial institutions from United States benefit from the interest withholding tax exemption for interest paid to the United States financial institutions (Brooks, 2016).

In conclusion, the article proves Australia has a low tax burden, both currently and historically. For example, Australia had the eighth lowest tax burden among the Organization for Economic Co-Operation and Development nations in 2003 including United Nations.  More so, Australia’s tax mix is broadly consistent with other countries as it raises the majority of its taxation revenue from direct taxation levied on incomes and payrolls. Consequently, Australia’s tax burden on individuals and payrolls is significantly lower than United States of America.

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