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1.1. PURPOSE OF STUDY
1.2. SCOPE OF THE OBJECT OF INVESTIGATION
1.3. OUTLINE OF THE STUDY
2.1. INSTRUMENTS FOR THE EXECUTION OF INTERNATIONAL TAX COMPARISON
2.1.2. QUALITATIVE METHODS OF INVESTIGATION
184.108.40.206. COMPARISON OF LEGAL RULES
2.1.3. QUANTITATIVE METHODS OF INVESTIGATION
220.127.116.11. CASUISTIC SIMULATION OF ASSESSMENT
18.104.22.168. COMPARISON OF TAX RATES
22.214.171.124. ANALYSIS OF EMPIRICAL DATA
126.96.36.199. EFFECTIVE TAX RATES
2.1.4. CHOICE OF A PARTICULAR INVESTIGATION METHOD
2.2. THE TAX SYSTEM AND INFLUENCES OF TAXATION
2.2.1. PRINCIPLES OF TAXATION
2.2.2. SOURCES OF THE TAX LAW
2.2.3. GENERALLY ACCEPTED ACCOUNTING PRACTICES
2.2.4. OBJECTIVE AND PURPOSE OF THE COMMERCIAL AND THE TAX BALANCE SHEET
2.3. CHARACTERIZATION OF THE CORPORATION TAX
2.3.1. PERSONAL TAX LIABILITY
2.3.2. BASIS OF ASSESSMENT FOR THE CORPORATION TAX
188.8.131.52. ADJUSTING THE ACCOUNTING PROFIT AND VALIDITY OF THE AUTHORITATIVE PRINCIPLE
184.108.40.206. SCHEME FOR THE CORPORATION TAX COMPUTATION
2.3.3. PERIOD OF DETERMINING INCOME FROM TRADE
2.4. FURTHER PROCEEDING
3. COMPARISON OF CORPORATION TAX ASSESSMENT BASES I: BALANCE SHEET ITEMS
3.2. CONCEPTUAL FRAMEWORK AS CORE ELEMENT FOR THE DETERMINATION OF INCOME
3.2.1. BASIC ASSUMPTIONS
3.2.2. QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS
3.3. GENERAL TREATMENT OF BALANCE SHEET ITEMS
3.3.1. RECOGNITION CRITERIA
3.3.2. VALUE MEASURES
3.4. ASSETS SIDE
3.4.1. INTANGIBLE ASSETS (NON-CURRENT)
220.127.116.11. EXCURSUS: DISPOSALS
18.104.22.168. MAJOR SIMILARITIES AND DIFFERENCES
3.4.2. TANGIBLE ASSETS
22.214.171.124.4. EXCURSUS: DISPOSAL
126.96.36.199.5. MAJOR SIMILARITIES AND DIFFERENCES
188.8.131.52. MACHINERY, PLANT AND EQUIPMENT
184.108.40.206.4. EXCURSUS: DISPOSAL
220.127.116.11.5. MAJOR SIMILARITIES AND DIFFERENCES
3.4.3. INVESTMENTS IN SECURITIES
18.104.22.168. EXCURSUS: DISPOSAL
22.214.171.124. MAJOR SIMILARITIES AND DIFFERENCES
3.4.4. TRADING STOCK (INVENTORIES)
126.96.36.199. RECOGNITION AND MEASUREMENT
188.8.131.52. SELLING AND PROCESSING
184.108.40.206. MAJOR SIMILARITIES AND DIFFERENCES
3.4.5. TRADE RECEIVABLES
220.127.116.11. MAJOR SIMILARITIES AND DIFFERENCES
3.5. LIABILITIES SIDE
18.104.22.168. RECOGNITION AND MEASUREMENT
22.214.171.124. MAJOR SIMILARITIES AND DIFFERENCES
126.96.36.199. RECOGNITION AND MEASUREMENT
188.8.131.52. MAJOR SIMILARITIES AND DIFFERENCES
4. COMPARISON OF CORPORATION TAX ASSESSMENT BASES II: ITEMS OF INCOME STATEMENT
4.2.1. GENERAL TREATMENT OF REVENUES
4.2.2. REVENUE INCOME
4.2.3. OTHER OPERATING INCOME
4.2.4. INCOME FROM FINANCIALS AND INVESTMENTS
4.2.5. CHANGE IN INVENTORY/ CAPITALISED SERVICES
4.2.6. EXCURSUS: CHARGEABLE GAINS
4.3.1. GENERAL TREATMENT OF DEDUCTIONS
4.3.2. EXPENDITURE OF PURCHASED GOODS, RAW MATERIALS AND SUPPLIES
4.3.3. PERSONNEL EXPENDITURES
4.3.4. DEPRECIATION/ CAPITAL ALLOWANCES.
4.3.5. OTHER OPERATING EXPENDITURES
4.3.6. EXPENDITURE FROM FINANCIALS AND INVESTMENTS
4.3.7. DIRECT TAX
4.3.8. OTHERS: EXPLICIT NON-DEDUCTIBLE OR RESTRICTED EXPENDITURES
4.3.9. CHARGES ON INCOME (DONATIONS)
4.4. EXCURSUS: TREATMENT OF LOSSES
5. COMPUTATION OF TAX LIABILITIES
5.1. CORPORATION TAX
5.1.2. TAX RATES
5.1.3. SPECIAL TAX RELIEFS
5.2. TRADE TAX (ONLY IN GERMANY)
5.2.1. PERSONAL TAX LIABILITY
5.2.2. MODIFICATION OF TAX ASSESSMENT BASE
5.2.3. SPECIAL FEATURES OF DETERMININING TRADING PROFIT
184.108.40.206. REDUCTIONS TO TAXABLE BASIS
5.2.4. CALCULATION OF TRADE TAX
5.2.5. EXCURSUS: TREATMENT OF LOSSES
6. SUMMARY AND CONCLUSION IN TERMS OF THESES
6.2. BALANCE SHEET ITEMS
6.3. ITEMS OF THE INCOME STATEMENT
6.4. TAX RATES
6.5. FINAL WORD
LIST OF LITERATURE
LIST OF LEGAL SOURCES
Abbildung in dieser Leseprobe nicht enthalten
ABBREVIATIONS: REFERENCES TO LEGISLATION AND OFFICIAL GUIDELINES
Abbildung in dieser Leseprobe nicht enthalten
Sources of Law:
UK Legislation is available at HM Office for Public Sector Information or HMRC http://www.opsi.gov.uk/legislation/uk.htm http://www.hmrc.gov.uk/thelibrary/manuals.htm.
UK Judicial Decisions are summarized by
DOLTON, A., KEVIN, W. (2007), Tolley’s Tax Cases 2007, London 2007.
German Legislation is available at Federal Ministry of Justice: http://www.gesetze-im-internet.de.
German Judicial Decisions are available at
Verlag Neue Wirtschafts-Briefe GmbH & Co. KG, Herne, Berlin http://www.nwb.de.
International Accounting Standards/ International Financial Reporting Standards are available at: http://www.iasb.org.
This work is dedicated to my wife Andrea.
In the discussion of topics relating to corporation law, already from a number of legal form alternatives within the European Union, the UK Private Company Limited by Shares (also referred to in the following as Limited or Ltd.) has been emerging as a preferred legal form with limited liability. The Limited may be presumed the most widespread legal form worldwide as facilitated mainly by the adoption of Anglo-Saxon law in countries of the former British Empire and the worldwide presence of English language.
The growing popularity of Limited in Europe is traceable first to Art. 43 and 48 TEC (freedom of establishment) while also to the breakthrough verdict of the European Court of Justice on "Inspire Art". This means that member states are now obliged to recognise the legal form and along with it limited liability of foreign firms with administrative seat (place of effective management) in their sovereign territory.
Irrelevant of whether the place of effective management is within or outside the United Kingdom of Great Britain and Northern Ireland (in the following as United Kingdom, or UK), establishment and management of Limiteds has to comply with valid corporation law of the home country. The approach also is referred to as the theory of establishment. Accordingly, the place of effective management of a Limited can be located in any European country while maintaining its legal personality.
The subject of present study is to examine whether relocating the place of effective management of a Limited from the United Kingdom to the Federal Republic of Germany (in the following as Germany) is preferable from tax point of view. In order to avoid double taxation of a company with registered seat in the United Kingdom while its place of effective management is in Germany, a double taxation treaty has been signed between the two countries. As far as a company is located in both the countries, as the place of its registered seat the country is considered in which its actual executive management is located (double taxation treaty between Germany and the United Kingdom, Art. 2.1) (sc. tie breaker rule). Where actual executive management is located in Germany, the Limited is caught exclusively by German Tax Law. For aspects unrelated to corporation law, generally the law applies of the country of occupation.
With regard to growing mobility of citizens and businesses within the European Union, there is apart from the competition for the ideal legal form also tax competition for the most attractive business location. Taxation amounts to a key determinant in business location decisions. Taxes do not affect entrepreneurial decisions only but also competitive status of companies. Countries pursue mostly through attractive tax policy to direct entrepreneurial decisions of businesses, trying to motivate companies to open up establishments in their national territory.
Accordingly, subject of present study is scientific examination of UK and German Tax Law regulations concerning Limiteds. Previously published studies on the subject mostly remain restricted to detailed presentation of corporation law provisions. This study pursues both theoretical and pragmatic research aims.
From theoretical point of view while leaving corporation law regulations largely out of scope, the study focuses on tax law regulations of relevance to Limiteds located in the United Kingdom and in Germany respectively as regards tax liability, tax rates and tax assessment bases, with a critical examination of all the aspects. The aim pursued by the procedure, relevant theses shall be formulated on the preferability of either country with regard to tax treatment of selected balance sheet and profit and loss items as well as to tax rates.
From pragmatic point of view, the insights gained in the study shall provide the reader involved with tax law with relevant information on respective tax effects for Limiteds with place of effective management in the United Kingdom and in Germany respectively and provide decision making references for tax optimisation and business economic location selection decisions. Moreover, the insights gained in the comparison of legal standards may serve as references for quantitative examinations of specific case instances.
Subject of present analysis is the legal form of Private Company Limited by Shares. The scope restriction to a specific legal form facilitates a more detailed presentation of applicable tax regulations from corporate point of view. Tax treatment of partners is not subject of this study. The analysis further amounts to an economic examination of operations of at least medium-sized or larger Limiteds. The assessment period is restricted to calendar year 2008.
Determinants are examined of current and local taxation of Limiteds both for the United Kingdom and Germany as business locations. Cross-border activities, non-periodical special tax-triggering events in connection with the act of establishment, dissolution or transformation of legal form, rollover relief and subsidisation events are excluded from the examination.
The examination scope does not include an examination of tax rates only but also of the relevant tax liability and of selected assessment bases in the United Kingdom and in Germany respectively. Due to the prevailing qualitative perspective applied in the examination, definition of the subject scope in terms of qualitative criteria for examination purposes is not necessary.
The study consists apart from the introduction of five main chapters. In the following Chapter Two of the study, references are outlined for conducting international tax burden comparisons. In the process, not just relevant requirements but also the benefits and drawbacks of each method are described. Subsequently, selection follows of the analysis method to apply herein. This is complemented by an outline of the UK and German tax systems and of key determinants that shape the tax law in each case. Finally valid corporation tax regulations are characterised for the United Kingdom and Germany respectively. This mainly entails a description of individual tax liability and a breakdown of the broad structure of the tax assessment bases.
In Chapter Three, comparative examination is conducted of tax assessment bases for selected balance sheet items in the United Kingdom and in Germany respectively. In the first part of the chapter in reference to the authoritative principle under which tax regulations refer to commercial accounting regulations, initially the commercial accounting framework concepts are analysed applicable in the countries. In order to avoid differentiation uncertainties in the second part of the chapter, the general recognition criteria and value measures are discussed for balance sheet items. In the last and most extended section, finally a qualitative examination is conducted of balance sheet items from tax point of view. The balance sheet items concerned have been split for examination purposes generally according to the country between the United Kingdom and Germany as well according to respective item classes of definition, recognition, measurement and disposal. In conclusion to each partial examination, key similarities and differences are summarised and assessed applying qualitative perspective.
In Chapter Four, the comparative assessment is extended to also comprise profit and loss items. The approach applied refers to the cost method structure, comprising apart from qualitative examination of tax treatment of selected profit and loss items also an analysis of general treatment of revenues and deductions respectively. Further the treatment of tax losses is discussed in the United Kingdom and in Germany respectively.
Applicable corporation tax rates in the United Kingdom and in Germany are examined from both the qualitative and quantitative perspectives in Chapter Five. This also entails an exemplification of the German trade tax (local business tax). The study concludes in Chapter Six with a summary of the conclusions reached in form of theses.
In business location decisions, taxation amounts to a relevant factor. Specifically in two-country comparisons, the question arises of corporate tax burden. Yet determining the tax burden on a generic lump- sum basis usually is not possible. Additional variables that enter the taxation formula also have to be determined. Key variables of relevance in tax burden assessments for comparison purposes are as follows:
- Tax subject
Is the assessment to be conducted for a partnership or corporation? Is it possible to specify corporate legal form more precisely? Is the tax burden to be determined at corporate or partner level?
- Assessment period
Are past, current or future tax regulations to be examined?
- Assessment perspective
Is the assessment to be conducted for a particular enterprise or as a macroeconomic assessment for all enterprises?
- Economic activities
Is current taxation at the corporate level or aperiodic special taxation to be examined?
- Economic activity perspective
Is the assessment to be limited to local domestic taxation or are cross-border activities to be included as well in the assessment?
- Comparison scope
Is the comparison to comprise all taxation aspects (tax liability, tax assessment base, tax rate) or focus on specific partial taxation aspects only?
- Comparison perspective
Is the comparison to be conducted for average tax rates or marginal tax rates?
- Comparison reference variable
With which reference variable the identified tax burden is to be correlated with? Is it to be a reference variable defined by tax regulations or by commercial accounting regulations?
In follow-up to identifying applicable determinants, the method is to be defined for conducting the tax burden comparison. Consequently in the following parts, common techniques shall be outlined for determining applicable tax burden. Generally, a differentiation applies between qualitative and quantitative assessment techniques.
In comparisons of applicable legal standards, assessment is conducted of local tax regulations by way of qualitative analysis. Depending on the aims pursued in the comparison, cross-border activities may be considered as well. The comparisons generally serve the purpose of assessment of current or future corporate tax position.
The comparisons exceed the scope of a comparison of tax rates only, examining all key determinants as well that affect the tax assessment base. Local taxation analysis usually entails an analysis of the respective tax systems and a description of applicable corporation taxes as well as an analysis of tax relevant recognition and measurement regulations. This includes for instance an analysis of tax treatment of amortization rates for assets, inventory, provisions, tax deductible expenditures and revenues and tax treatment of losses. Investment allowances or investment grants that can also be referred to as negative taxes may be considered as well. A comparison of applicable standards for cross-border activities includes the respective double taxation treaties, taxes levied at source, types of and prerequisites for tax allowances (e. g. exemption or compensation) as well as requirements concerning settlement prices.
An analysis of applicable tax regulations is preferential to a comparison of tax rates only as from a qualitative comparison of legal standards, also specific tax optimization guidelines may be derived. The relevant drawbacks, the comparison of legal standards only remains limited to a qualitative assessment of corporate tax position and no average or marginal tax rates are determined either in absolute or percentage terms. Consequently relying on a comparison of legal standards only, usually no clear, generally applicable conclusion can be drawn on the preferability of a particular country.
Nevertheless, a tax burden quantification only is possible in reference to analysis of relevant tax regulations. This makes a comparison of applicable legal standards (qualitative method) a general prerequisite in order to be able to conduct any specific tax calculations (quantitative methods) in the first place.
Prerequisite to quantitative comparison of applicable tax burdens via simulated tax assessment is qualitative examination in form of a comparison of applicable tax regulations. A tax assessment simulation usually amounts to a multiple period and/ or dynamic corporate model that refers to company-specific planning and specific figures.
Hence a multiple period simulation of corporate tax developments depends upon the specific assumptions made. In the initial step apart from developing necessary insight into the financial structure of assets, liabilities and capital, particularly assumptions have to be made on the amounts of expected corporate inpayments and outpayments. Inpayments for all periods within the planning horizon are subject to estimates in reference to future sales expectations. In the follow-up referring to the sales expectations, future outpayments for the production factors have to be quantified. This essentially amounts to planning the following resources: personnel, assets, equity or debt capital and raw materials and consumables. In the second step from the planned inpayments and outpayments with regard to applicable provisions on determining taxable income, corporate balance sheet and profit and loss are derived for the periods within the planning horizon. In the last step, the respective tax assessment bases are derived from the data contained in balance sheet and profit and loss. By applying the tax rates to the assessment base, tax liability is generally determined for the respective country. The tax liability then translates into outpayments within the corporate model. The calculation procedures are generally identifiable with tax calculation techniques defined by tax authorities.
The method advantage is full inclusion of applicable tax regulations (e.g. tax assessment base, tax rate) and consequently precise calculation of respective tax liability. However, there is also a major drawback in that the method output is critically dependent upon previously defined model assumptions (see above) and is only valid for the particular case in question. Usually, no generally applicable conclusions can be derived from the output. Individual calculation of applicable tax burden additionally entails significant costs which is why it is recommended to make use of computer software. Another heavy time consuming aspect is the information gathering effort in order to explore current tax relevant regulations in the countries concerned as the information availability usually is restricted and there is no standardized form. However, a note applies that in an assessment simulation, only the tax burden to taxable income ratio is calculated. As such, this amounts to determining average tax burden.
The comparison of tax rates amounts to a simplified comparison of tax burdens at the corporate level. Usually in a tax rate comparison, the tax rates are compared applicable under current taxation of earnings. In the effort, one should make sure that all the applicable corporate profit taxes in the respective country are included in the analysis. For instance profit taxes for a German enterprise do not include corporation tax only but also the solidarity tax contribution and local business tax. Where there are interdependencies between the different types of taxes, the interdependencies have to be accounted for as well. For instance a tax may be deductible in determining another tax liability or allowable against the other tax. Further where several types of profit taxes apply, not always identical tax assessment base is employed for determining applicable tax burden. Existing taxes unrelated to income usually need to be accounted for in tax rate comparisons.
Key advantages of tax rate comparisons include non-exhaustive information gathering effort and simple presentation of output. However, the obvious advantages are opposed by a number of drawbacks the most poignant among which is non-inclusion of applicable tax regulations in determining the tax assessment base. As reference variable in the tax rate comparison, an assumption applies of constant profit before tax in both the countries. Yet the assumption basically does not reflect reality. Realistically, tax regulations in two different countries and hence also the respective tax assessment bases may be expected to be different. The different tax assessment bases further also mean different temporal relevance of the taxes. It is generally recognized in economic theory that carrying tax liabilities forward to future periods is preferable to tax liabilities in earlier periods. However, such tax determinants are not accounted for in pure tax rate comparisons.
In economic reality however, high tax assessment bases do not deter potential investors as much as they are attracted by low tax rates. Nevertheless, investors should not make business economic decisions on business locations in reference to comparisons of applicable tax rates only. A comparison of tax rates only may result in excessive errors of judgement as regards the tax environment.
Analysis of empirical data amounts to a simplified method of conducting tax burden comparisons. For tax burden examination purposes, correlation is conducted of macroeconomic accounting data or published annual financial statement data. Yet this also means that comparisons can be conducted of past tax burdens only.
The advantage to analysis of empirical data is determining actual tax burden while taking into account the complete tax system including any applicable special regulations that were exercised as such in the past. Hence a comparison of legal standards is not a prerequisite to applicability of the method.
However, the advantage does not outweigh the drawbacks coupled with practicing the method. For instance based on macroeconomic accounting data, only average tax burden can be derived for a majority of enterprises. Yet average tax burden frequently is not applicable as a generic reference to enterprises due to disregarding the tax optimization options that would otherwise result in a lower tax burden in the particular case. A tax burden comparison should be conducted from the economic perspective of a particular enterprise. Moreover, available statistics often are heavily aggregated or do not contain all the necessary data for determining applicable tax burden. When referring to published annual statements, the tax liability is correlated with commercial profit. Yet this results in inaccuracies in determining the tax burden as commercial profit usually does not correspond with tax assessment base. Further it is not always clear whether the tax liability reported in a financial statement amounts to current taxation only or whether it also includes tax liabilities of previous periods. Finally due to the reference data employed, the method is not suited for determining current or future tax burdens.
The effective tax rate concept does not amount to a full-fledged method of tax burden comparison. Rather, this is a cash flow-oriented tax measure that reflects the changes in decision making relevant target variables as a result of taxation. The target variables generally are identifiable with economic measures such as present value, accumulated value or yield. Effective tax burden then is determined as a difference between before tax target variable and after tax-target variable divided by before-tax target variable:
Effective Tax Rate = (Target Variable Before Tax ./. Target Variable After Tax)/ Target Variable Before Tax Depending on the economic aspects examined, differentiation is possible between effective marginal tax burden and effective average tax burden.
Decision making relevant tax law aspects are quantifiable under model-based simplifications employing the Effective Marginal Tax Rates method. Under the method, highly simplified finance plans for investment projects are examined that feature a predefined curve of future payments surpluses. A mathematical dependency is determined with the method between the target variable before tax and target variable after tax while also accounting for the financing form and legal form. Further an assumption applies that an investor only invests capital for as long as the internal yield on the investment matches the capital’s real cost. That means the method reflects the marginal circumstances in which an investment is just made yet or just refrained from. For a presumed tax rate, the target variable after tax can be calculated accordingly.
The method advantage is in deploying purely economic reference variables by examining cash flows and internal yield. However, the advantage is opposed by a number of drawbacks. For instance the assumption of ideal cash flows frequently does not reflect reality and mathematical assessment of effective tax burden is exhaustive and not readily comprehensible. The method often is able to reflect applicable provisions under the respective tax law in broad terms only. The method further is limited to marginal circumstances in which investments pay off or not just yet. Yet in searching for an ideal location, specifically investments are sought after with positive capital return values. This leaves the relevance of effective marginal tax rates to business location decisions rather limited.
On the contrary under the concept of Effective Average Tax Rates, average tax burden is determined for profitable investment alternatives with positive capital value. The method has been derived from the concept of effective marginal tax rates which is why it also employs an investment theory-based concept. In order to avoid economically unrealistic assumptions, simulation models are regularly employed on the basis of concrete finance plans. The deployment of models that refer to finance plans allows a more detailed examination of applicable tax system and inclusion of additional economic framework data (e.g. inflation rate, interest rates). This allows to compute tax consequences for a broad range of combinations. Under the concept, usually yield is referred to as economic target variable for determining effective tax burden.
The method advantage is assessment of several investments that mutually exclude each other. This means an order of preference can be determined between several investments. Also a plus is comprehensive examination of economic framework data and of the tax system by deploying finance plans. By means of IT- based simulation models, meaningful information can be extracted on the working principles of tax systems. The method is generally suited for decision making relevant tax burden comparisons between two locations. A significant drawback also here, the relevance of the model output remains limited to the case in question.
In the thesis, an examination shall be conducted of current tax regulations for the Private Company Limited by Shares in the United Kingdom and in Germany respectively. Due to its backward-looking concept, analysis of empirical data and identification of macroeconomic tax rates is not suited as a reference to base business economic decisions on. The method is merely able to visualize an already emergent distribution. Beyond that, the determined average tax burden frequently cannot be applied generically to all enterprises.
Tax burden also should be measured rather from the individual business economic perspective as opposed to macroeconomic perspective.
In tax burden comparisons for business economic decision making purposes, a forward looking perspective should be applied. Calculation of effective average tax rates (EATR) employing finance plan-based simulation models is suited for examining location-related tax aspects as well as for determining applicable tax burden as in departure from casuistic simulation models, the model employs as a decision making relevant target variable an economic measure. Contrary to calculation of effective marginal tax rates (EMTR), under this method average tax burden is calculated for investments with positive capital value. Nevertheless the drawback to forward-oriented quantitative methods, calculation only is possible based on specific comprehensive model assumptions. Despite taking into account provisions regarding tax liability, tax assessment base and tax rate, simulations models always are valid only for the particular case in question. Hence the model output does not amount to conclusions of general relevance valid for all enterprises.
Conclusions of general relevance on the preferability of a specific tax system employing simulation models are not possible due to the large variety of possible assumptions and combinations thereof. In the examinations herein, not just a forward-looking perspective shall be employed but they also shall not remain limited to a single particular case. Consequently, a quantitative analysis of potential tax consequences shall not be conducted for purposes herein.
Hence the thesis core focus point is qualitative analysis in form of an objective comparison of legal standards for selected regulations concerning tax assessment base. As part of the thesis, the causes behind particular tax burden levels shall be examined. This is because only with insight into the interdependencies, decision makers can make informed decisions. The tax burden amount and structure is shaped by various determinants. At the national level, the determinants may relate to applicable tax system, combination of relevant tax types, definition of different assessment bases as well as applicable tax rates. Due to combined effects of tax assessment base and tax rate, additionally for purposes herein a quantitative assessment is conducted of applicable tax rates.
The qualitative analysis shall establish insight into the structure of the respective tax system and into essential tax consequences within a specific tax system that shall be compared in the follow-up with the tax system of the other country. Based on the comparison, logical conclusions shall be drawn on the preferability of a particular system that can be used for tax optimization purposes. Beyond that, the conclusions from the qualitative comparison of legal standards shall establish a reference basis for conducting quantitative analyses in specific cases.
As regards the definition of scope of the analysis subject matter and the related definition of key determinants for a qualitative assessment of legal standards as well as for a quantitative assessment of tax rates, refer to SECTION 1.2.
UNITED KINGDOM AND GERMANY
Taxation generally has to comply with principles of the rule of law. Taxes may only be levied on the basis of a valid act of law. The law must specify apart from the respective matter of fact circumstances also the legal consequences relating to taxation so that the taxpayer is able to calculate applicable tax liability and adapt its actions accordingly (formal component). Taxation further has to be fair and consistent. That means that comparable circumstances cannot be subject to different taxation. All taxpayers are to be treated equally before the law and also taxed consistently (material component). Accordingly in the following sections, key legal sources in tax law are listed governing in the two countries taxation of corporations.
The UK tax legislation consists of statute law on the one hand and case law on the other. Key tax law principles are defined by acts of the parliament. Tax law interpretation resides with courts. Court rulings are binding to all persons. In addition, the UK tax administration (HM Revenue & Customs, HMRC) publishes comments, brochures and summary publications (statements, notices, leaflets) that exemplify implementation of the law in practical applications. The publications only provide interpretation by the tax administration, having no legal backing. The key current acts of law in tax legislation with breakdown according to tax types are:
- Corporation Tax: Income and Corporation Taxes Act 1988 (ICTA 1988)
Capital Allowances Act 2001 (CAA 2001)
Taxation of Chargeable Gains Act 1992 (TCGA 1992)
- Value Added Tax: Value Added Tax Act 1994 (VATA 1994)
- Capital Gains Tax: Taxation of Chargeable Gains Act 1992 (TCGA 1992)
- Income Tax: Income and Corporation Taxes Act 1988 (ICTA 1988)
Capital Allowances Act 2001 (CAA 2001)
Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)
- Inheritance Tax: Inheritance Tax Act 1984 (IHTA 1984)
- Tax Administration: Taxes Management Act 1970 (TMA 1970)
Customs and Excise Management Act 1979 (CEMA 1979)
The acts of law are subject to annual amendments via Finance Acts. Apart from acts of law, Statutory Instruments (SI) are published on a regular basis that on the one hand describe detailed aspects of the different acts of law while on the other are a means through which amendments are implemented of legislational standards.
The United Kingdom further maintains agreements aimed to prevent double taxation, also known as double taxation treaties, with other countries. Where the taxpayer is liable to income or property taxes in two countries, double taxation treaties come into play that aim to either completely eliminate or at least reduce applicable tax liability by way of suitable procedures. Double taxation treaties are treaties under international law that become legally binding by way of implementation in national law.
In Germany, legal sources for taxation entail legal standards, administrative regulations and case law. As legal standards, tax legislation and appertaining practical implementation regulations are referred to.
Generally, tax provisions are defined in tax legislation. No taxation is permissible without a reference legal standard. Tax legislation consists of Federal acts of law that are binding to all persons and are subject to enforcement by national authorities (executive authorities). Federal acts of law are made by legislative bodies, with the acts first passed by the Bundestag (German parliament) and approved by the Bundesrat (Federal council, or upper house of the parliament). The acts of law are signed by the Federal President and announced by way of publication in the German Federal Law Gazette (Bundesgesetzblatt). Tax law is additionally published in the Federal Tax Gazette (Bundessteuerblatt) Part I.
In the same way as in the UK, Tax Law is subject to steady updates by way of replacements and additions through one-off or regular annual amendments. Apart from Tax Law, there are a number of legal regulations published as legal standards by executive authorities (Federal government, state governments or Federal ministry) (Basic Law, p. 80.1). Purpose of the legal regulations is to exemplify the wording of the law. The legal regulations are binding to all persons and are regularly adjusted to current legislation. In Tax Law, the legal regulations are referred to as implementation regulations (German: Durchführungsverordnungen, DV).
The key acts of law in tax legislation and implementation regulations applicable in the Federal Republic of Germany are listed below:
- Corporation Tax: Corporation Tax Law (Körperschaftsteuergesetz, KStG)
Corporation Tax Implementation Regulation (Körperschaftsteuer-DV, KStDV)
Trade Tax Law (Gewerbesteuergesetz, GewStG)
Trade Tax Implementation Regulation (Gewerbesteuer-DV, GewStDV) Income Tax Law (Einkommensteuergesetz, EStG)
Income Tax Implementation Regulation (Einkommensteuer-DV, EStDV)
- Value Added Tax: Value Added Tax Law (Umsatzsteuergesetz, UStG)
Value Added Tax Implementation Regulation (Umsatzsteuer-DV, UStDV)
- Income Tax: Income Tax Law (Einkommensteuergesetz, EStG)
Income Tax.Implementation Regulation (Einkommensteuer-DV, EStDV) Wages Tax Implementation Regulation (Lohnsteuer-DV, LStDV)
- Inheritance Tax: Inheritance and Gift Tax Law (Erbschaft- und Schenkungssteuergesetz,
Inheritance Tax Implementation Regulation (Erbschaftsteuer-DV, ErbStDV)
- Tax Administration: German Tax Code (Abgabenordnung, AO)
Code of Practice for Financial Courts (Finanzgerichtsordnung, FGO) Valuation Law (Bewertungsgesetz, BewG)
Apart from Tax Law and implementation regulations, there are a number of administrative regulations. Administrative regulations comprise tax guidelines published by the Federal government (Basic Law, p. 108.7), orders by the Federal Ministry of Finance (Basic Law, p. 108.3), orders and ordinances of ministries at the Federal and state levels as well as decrees by regional tax offices. Administrative regulations do not count as legal standards. They are binding on a statutory basis for tax administration only but not for courts and taxpayers. The principal purpose of administrative regulations is to exemplify legal regulations, eliminate uncertainties and ensure consistency in application of Tax Law by tax authorities. The tax guidelines are further complemented by sc. tax ordinances for instance Income Tax Ordinance (Einkommensteuer-Hinweise, EStH), Corporation Tax Ordinance (Körperschaftsteuer-Hinweise, KStH) or Corporation Tax Ordinance (Lohnsteuer-Hinweise, LStH). The ordinances are passed by top tax authorities at the Federal and state levels with the aim of notifying legal practitioners of case law verdicts, orders by the Federal Ministry of Finance and other legal sources of tax relevance.
On the contrary rulings by German tax courts and the supreme tax court (Federal Finance Court) are legally binding only for persons and authorities involved in the proceedings but not for tax administration in general. Hence German Case Law only applies on a case-by-case basis. A court verdict is binding for tax administration only as regards the particular case concerned as opposed to other cases, even with similar subject matter. The same applies to subordinated tax courts; these are not bound by the rulings of supreme tax court in other case instances. Though court rulings are only binding with regard to the case concerned, German Case Law nevertheless is of great significance not just to further refinement of Tax Law but also and in particular to tax administration. Tax administration usually applies rulings of Federal Finance Court to similar cases immediately after publication.
In the same way as the United Kingdom, the Federal Republic of Germany also maintains double taxation treaties with other countries that regulate tax jurisdiction between the states where multinational tax liability applies, with the provisions implemented in national law (Basic Law, p. 59).
As UK GAAP in British Tax Law, accounts are referred to of UK-based companies that comply with relevant provisions of Companies Act (CA 1985, p. 226) and the principle of true and fair view (FA 2004, p. 50.4).
According to the lawmaker, the Financial Reporting Standards (FRS) published by the Accounting Standards Board (ASB) comply with the principle of true and fair view (CA 1989, p. 256).
Apart from published FRS, further regulations of relevance to accounting in British legislation are:
- Statements of Standard Accounting Practice (SSAP)
- Urgent Issues Task Force (UITF) Abstracts
- Statements of Recommended Practice (SORPs)
- Financial Reporting Exposure Drafts (FREDs)
- Other Statements by the ASB
Similarly to the US practice, the UK GAAP are not defined by law in the United Kingdom. UK GAAP is more than just accounting principles defined by Accounting Standards and executive orders. The code also contains Companies Act regulations and stock exchange regulations as well as other applicable accounting and industry guidelines. The UK GAAP do not always provide a detailed solution to each particular accounting issue. Where the UK GAAP contain regulatory gaps with regard to the particular issue concerned, provisions apply of relevant International Financial Reporting Standards (IFRS) or the US GAAP. The approach applies as generally accepted best practice in the United Kingdom.
Further by way of Finance Act 2004 and both the 2005 Finance Acts, a ruling was issued on recognition of IFRS equally to UK GAAP as generally accepted accounting practices for tax purposes. The regulation became effective for periods starting on or after 1st January 2005 (FA 2004, p. 50). However, publications of the International Accounting Standards Board (IASB) are only accepted as GAAP in British tax legislation as far as the publications have been recognised each by the European Commission (FA 2005, Sch. 4 p. 25, 49, 50). Accordingly, the following publications enjoy tax relevance:
- International Accounting Standards (IAS)
- International Financial Reporting Standards (IFRS)
- Standing Interpretations Committee (SIC) Interpretations
- International Financial Reporting Interpretations Committee (IFRIC) Interpretations
To sum up, a conclusion applies that the reference base for computing taxable income is commercial accounting profit determined compliant with generally accepted accounting practices. Hence for tax purposes, either IFRS or the UK GAAP apply as generally accepted accounting practices. Credit to growing acceptance worldwide of the international accounting standards, IFRS shall be employed for purposes herein as reference base for computing taxable income in the UK.
A similar interpretation as to what counts as Generally Accepted Accountings Standards is not necessary in German legislation. Due to the prevalence of Code Law in German legislation, all accounting regulations are codified on a statutory basis in German Commercial Law (sc. Handelsgesetzbuch, HGB). The reference base for computing taxable income is commercial accounting profit that is to be determined compliant with German Commercial Law provisions.
There is a significant difference between IFRS and German Commercial Law with regard to presentation of legal standards. IFRS are a typical example of the Anglo-Saxon legal concept of Case Law. The advantage to Case Law are highly detailed provisions on particular circumstances. Because of this, the regulations are enormous in volume and within the regulatory framework, there are a number of reiterated definitions and procedures. German commercial accounting on the other hand is based upon continental European Code Law under which applicable accounting standards are defined by law. The advantage to the German regulations is the brevity in wording of legal standards. The disadvantage on the other hand is the need of interpretation of the regulations. Accordingly in German law, there are a number of comments that elaborate the meaning of the wording of legal standards.
The aim pursued by commercial balance sheets usually is dependent upon reference accounting system. Due to different purposes of commercial balance sheets in the two countries, first the aims are outlined of balance sheets under IFRS and German Commercial Law respectively. In the follow-up, the aims are exemplified of tax balance sheets.
Under IAS/ IFRS applicable as reference standards in the United Kingdom, the purpose of commercial accounting statements has been explicitly codified in the framework concept. The purpose of financial statements is to provide recipients with useful information for decision making purposes (decision usefulness) on the corporate asset, financial and revenue status as well as on any changes thereof. The information provided in the process primarily refers to past events (F.13). The information contained in a financial statement serves the recipients as a means of reviewing management performance, hence as reference for follow-up decisions of economic significance (F.14). The recipients mainly comprise potential and current investors, employees, credit providers, suppliers, customers, national authorities and the public (F.9). As the recipients are fairly varied, the information contained in a financial statement cannot satisfy information needs on part of all recipients. Consequently, the framework concept contains a note to the effect that information that satisfies information needs of investors should generally satisfy also information needs of other recipients (F.10).
The information presented in a financial statement shall enable the recipient to conduct verification whether the company is able to generate positive balance also in the future (F.15). Consequently, it should be ensured that the information on assets in the financial statement is complete and accurate to the present point and that the profit or loss reported reflects reality. Tendentially, IFRS aim at presenting subjective net asset value in balance sheet, with measurement of balance sheet items in commercial accounting usually at replacement costs. In compiling preferably realistic financial information, subjective influence on managerial functions usually can hardly be avoided.
In German Commercial Law, no explicit purpose has been defined of financial statements. Through interpretation of wording and meaning of and correlations between legal regulations, key aims may be derived that can be comprised as follows:
- Documentation function
- Information and account reckoning function
- Tax assessment and capital retaining function
The financial statement documentation function can be derived from the wording of the obligation in commercial accounting to keep accounting records (Commercial Law, p. 238.1). The German lawmaker requires transparent and complete records of all business transactions that must be comprehensible to third persons. This ensures that records are compiled that facilitate reconstruction of events and occurrences.
The financial statement information and account reckoning function may be derived from correlations between various commercial accounting regulations. Managerial functions are held annually to give account of their managerial activities. Accordingly, the financial statement function is to present information to recipients that facilitates assessment of current corporate financial status. Primary recipients of a financial statement are current creditors (credit providers, suppliers, customers and employees) as due to their economic relationship and relationship under obligation law with the company, they deserve particular protection (protection of creditors). Secondary recipients comprise shareholders, national authorities, trade unions as well as potential investors and potential creditors. For corporations, the information function is defined by Commercial Law, p. 264.2. Under the provision, financial statements shall provide an accurate account of assets and of financial and revenue status that reflects reality while complying with applicable quality criteria.
Another financial statement purpose is its tax assessment and capital retaining function. As reference in assessment of profit-dependent income such as dividends and profit-sharing transactions, accounting profit applies. However, profit distribution to shareholders contradicts creditor interests. Due to the limited liability provision for corporations, creditors are intent on holding capital, hence minimising profit distribution to shareholders. The German law on limited liability companies (GmbHG), p. 30.1, explicitly specifies that assets necessary to hold share capital are not subject to distribution to shareholders. Additionally with regard to holding share capital, the German principle of prudence is of material significance. Due to strict application of the principle of prudence, profits are reported tendentially at rather too low amounts and later than appropriate. As Commercial Law provisions usually refer to objective net asset value, balance sheet assets to the balance sheet date also are reported tendentially rather too low than too high. For objective net asset value, value of the different balance sheet items usually can be clearly determined. Only items are recognised that are supported by positive records at their origin costs or at their respective disposal value, whichever is lower. The historical cost of purchase amounts to maximum measurement limit for the purpose.
UNITED KINGDOM AND GERMANY
A tax balance sheet compiled in accordance with tax provisions has a different purpose. The primary aim in Tax Law is to determine taxable income in order to define based on the amount applicable tax liability. Hence the principal recipient of tax balance sheet is the treasury, i.e., the competent tax office. The key purpose of levying taxes is procurement of liquid funds in order to perform the functions of the state. Apart from this fiscal purpose however, non-fiscal aims usually also are additionally pursued. A major non-fiscal aim is promotion of the economy. By means of the latter using taxation tools, the state aims at accelerating the growth of the national economy, adjusting the economic growth curve in the short term or promote in the short or long term specific branches or regions. For the purpose, the enterprises subject to preferential treatment are usually granted higher depreciation allowances. The higher depreciation option means reduced taxable income. Yet in order to establish incentives for specific investments, the depreciation only is implementable by companies that at the same time actually invest. Another non-fiscal aim are tax measures aimed at the environment.
SIMILARITIES AND DIFFERENCES
There are significant differences between the aims of financial statements under British and German commercial accounting regulations respectively. Under British regulations, the purpose of accounting records is to provide information with the main focus on investors. The primary aim in financial reporting is investor protection. On the contrary the German aim in financial reporting is determining distributable profits while observing the need to hold share capital. Key purpose in the effort is creditor (capital provider) protection. In Germany, the principle of prudence is of material significance as opposed to the United Kingdom where actual profit or loss on an accrual basis is a key concern. The outcome of the different aims, assets and revenues usually are reported at higher amounts under IFRS compared to German Commercial Law. On the other hand due to prevalent creditor protection in Germany, liabilities in German commercial accounting are tendentially assigned higher value in relative comparison.
An assumption applies that there are no differences between the British and German aims pursued by tax balance sheet.
All enterprises whose place of management and control is in the United Kingdom are liable without limitations to the UK corporation tax on their global income as far as a double taxation treaty does not specify otherwise. Non-resident enterprises that conduct their operations in the UK via permanent establishment are liable to corporation tax on their domestic income to a limited extent only (ICTA 1988, p. 6). The enterprises liable to corporation tax comprise:
- Any corporate bodies, especially Ltd and Plc;
- Any unincorporated associations;
- Trustees of any authorised unit trust (ICTA 1988, pp. 468.1; 831.1, 832.1-2,).
Partnerships, local authorities and local authority associations do no count among enterprises liable to corporation tax.
In German Tax Law, the following corporations, associations and trusts with registered office (Tax Code, p. 11) or place of management and control (Tax Code, p. 10) in the country are liable without limitations to corporation tax on their global income (Corporation Tax Law, p. 1.1-2; Corporation Tax Guidelines, p. 2) as far as regulations under a double taxation treaty do not specify otherwise:
- Corporate bodies
- Corporations, especially “GmbH” (German limited liability companies) and “AG” (German stock corporations)
- Co-operative societies
- Other corporate bodies, especially incorporated associations
- Business operations of public bodies (Corporation Tax Law, p. 4)
- Unincorporated associations, public institutions, foundations and other special purpose funds
- Mutual insurance companies
Corporations, associations and trusts with neither registered office nor place of management and control in the country are liable to tax to limited extent only on their domestic income (Income Tax Law, p. 49). Local authorities and local authority associations do not fall under the scope of Corporation Tax Law, p. 1.1, hence are liable to corporation tax without limitations. However, they are liable to corporation tax to limited extent only with their domestic income that is subject to tax deductions (such as dividends and interest) (Corporation Tax Law, p. 2).
Individual corporations, trusts and associations may be exempted from corporation tax on an individual basis or on compliance with specific prerequisites, usually where profit-making economic operations (AO, p. 14) are excluded. As examples, national authorities, charity associations and political parties may be given (Corporation Tax Law, p. 5).
A conclusion applies that both the UK Private Company Limited by Shares and the German GmbH are liable to corporation tax without limitations on their global income as far as their registered office or place of management and control is in the country and there are no regulations to the opposite under double taxation treaties. Applied to other forms of corporations, corporation tax liability criteria are very similar in both the countries.
The referential status of commercial accounting provisions for determining trade income for tax purposes in the UK has been historically shaped by Case Law. As the initial reference for tax purposes in Case Law, balance sheet and profit and loss compiled in accordance with ordinary principles of commercial accountancy may be considered. The notion of ordinary principles of commercial accounting that evolved in Case Law was specified in more detail in 1998 by the lawmaker. Accordingly, profits have to be determined on an accounting basis that amounts to a true and fair view (FA 1998, p. 42). Purpose of the regulation has been to establish a more comprehensive interconnection between tax legislation and Companies Act provisions. The notion of true and fair view was replaced in 2002 with the notion of generally accepted accounting practices (with respect to accounts of UK companies that are intended to give a true and fair view) (FA 2002, p. 103.5). Ever since the new regulations have come into force, the generally accepted accounting practices have been applicable as reference for determining tax profits. The scope of generally accepted accounting practices has been clarified by FA 2004, p. 50 and ITTOIA 2005, p. 25 (as well as by both FA 2005).
Accordingly in the initial step, profit has to be determined compliant with generally accepted accounting practices as commercial accounting provisions apply as reference in determining tax profit. In the second step, verification is required whether there are tax provisions stipulating a different method of computing profit. If this may be answered with yes, adjustment is conducted to accounting profit compliant with the provisions of Taxes Act. The accounting profit adjusted for tax provisions is referred to as trading income or tax adjusted trading profit. However, a note applies that not just the trading income schedule but also other schedules have to be derived from accounting profit.
Analogously to British legislation, the process of determining taxable income in German environment also largely refers to Commercial Law provisions. This authoritative principle is explicitly codified in German Tax Law (Income Tax Law, p. 5.1). Via the authoritative principle, commercial accounting provisions for recognition and measurement as well as quality criteria applicable in commercial accounting are of material significance to determining taxable income. Yet in Tax Law, a number of tax adjustments have to be observed specifically with regard to measurement that take precedence over Commercial Law provisions (Income Tax Law, p. 5.6). If there are differences between commercial accounting and Tax Law provisions, a separate tax balance sheet often is compiled in addition to commercial balance sheet. However, the German tax office also accepts – as in British Tax Law - a reconciliation between accounting profit and tax profit (Income Tax Implementation Regulation, p. 60.2). Yet a peculiarity in German Tax Law, not just commercial accounting provisions apply as references for Tax Law, but also vice versa tax regulations may amount to references for Commercial Law in a sc. reverse authoritative principle. Under the principle, an optional right under Tax Law may only be exercised if in commercial accounting, it is implemented in identical manner. In practical applications, optional rights in commercial accounting and under Tax Law usually are exercised identically for enterprises not subject to mandatory disclosure so that commercial balance sheet matches tax balance sheet.
From the authoritative principle, six detailed authoritative guidelines can be derived that have to be observed (Income Tax Ordinance, p. 5.7):
- Statutory capitalisation in commercial accounting becomes statutory capitalisation in Tax Law via the authoritative principle.
- A prohibition on capitalisation in commercial accounting becomes a prohibition on capitalisation in Tax Law.
- An optional right to capitalise in commercial accounting becomes statutory capitalisation in Tax Law.
- Statutory passivation in commercial accounting becomes statutory passivation in Tax Law.
- A prohibition to passivate in commercial accounting results in a prohibition to passivate in Tax Law.
- An optional right to passivate in commercial accounting results in a prohibition to passivate in Tax Law.
In general, a conclusion applies that in determining tax profit, essentially the following procedure is to be observed:
- Recognition of balance sheet items compliant with commercial accounting provisions.
- Measurement of balance sheet items primarily in reference to Tax Law provisions and secondarily only in reference to commercial accounting provisions.
As regards recognition of costs and revenues, the procedure is comparable to that under British regulations (see above).
To sum up, a conclusion applies that structure of the authoritative principle with respect to Accounting Rules in determining taxable income is largely identical in both the tax systems.
The assessment base for the British corporation tax is referred to as profits chargeable to corporation tax (PCTCT) and is determined compliant with the provisions of ICTA 1988, TCGA 1992, CAA 2001 as well as annual Finance Acts (FAs) as far these are not primarily applicable to natural persons. Profit chargeable to corporation tax equals the total of the different schedules which themselves are split into cases. The key schedules relevant to calculating corporation tax are summarily presented below:
Abbildung in dieser Leseprobe nicht enthalten
Income breakdown into schedules generally facilitates application of different assessment provisions, different tax rates as well of different provisions regarding loss compensation. In British Tax Law however in income assessment, separate schedules are exclusively referred to with follow-up addition to total income.
However, breakdown into different schedules also entails a disadvantage in that the reference accounting profit in determining tax profit needs to be distributed among the different schedules. Hence accounting profit does not apply as reference for Schedule D Case I only. In order to arrive at trading income (or tax adjusted trading profit) in Schedule D Case I, it is not sufficient for the accounting profit to be merely applied tax adjustments but also the profit components that serve as references for other schedules need to be calculated on the basis of accounting profit.
The process of determining trading income compliant with Schedule D Case I shall be examined in the following discussion and may be exemplified by means of the following simplified scheme:
Accounting Profits (profit before taxation)
Abbildung in dieser Leseprobe nicht enthalten
The individual tax adjustments are discussed in more detail in the following parts.
The assessment base for corporation tax in German Tax Law is referred to as taxable income (Corporation Tax Law, p. 7.1). Taxable income is determined compliant with the provisions of Income Tax Law and Corporation Tax Law (Corporation Tax Law, p. 8.1). Similarly to British Tax Law, the Income Tax Law provisions are only applicable providing they are actually adequate for use by taxpayers liable to corporation tax in terms of meaning and purpose. For taxpayers liable to tax without limitation required to keep accounting records on a statutory basis, all income is subject to treatment as income from trade (Corporation Tax Law, p. 8.2). Hence in departure from British Tax Law, no accounting profit breakdown is necessary into different schedules. Accounting profit applies as sole reference in determining taxable income.
Taxable income for corporations usually is calculated by means of the following calculation scheme:
Abbildung in dieser Leseprobe nicht enthalten
The calculation scheme has been explicitly codified in Corporation Tax Law, p. 29.1. Except the fact that in British Tax Law, accounting profit applies as reference for several schedules, the procedure in calculating tax assessment base is very similar. Reference value for calculating tax assessment base in both the tax systems is accounting profit. By applying tax adjustments to the amount, the result is tax assessment base for corporation tax purposes.
Financial year for corporation tax in the UK is from 1st April to 31st March of next year (INA 1978, Sch. 1, ICTA 1988, p. 834.1). Financial year is denoted by the start of the period; for instance financial year 2006 starts on 1st April 2006 and ends on 31st March 2007. An accounting period may not span more than 12 months. Where an accounting period wholly matches the financial year, for taxation of profits chargeable to corporation tax only provisions and tax rates applicable in the period may be referred to. Where an accounting period does not wholly match the financial year, i.e., the accounting period exceeds 31st March (end date of financial year), the profits chargeable to corporation tax for the accounting period have to be divided between two financial years. The profit breakdown is highly significant if there are differences in tax provisions, particularly tax rates, between the two financial years due to legislation updates (ICTA 1988, pp. 8.3, 12.1, 72).
The German corporation tax also is an annual tax. However, the financial year in German Tax Law matches calendar year (from 1st January to 31st December) (Corporation Tax Law, p. 7.3). Analogously to British legislation, the accounting period may not exceed the length of 12 months (Income Tax Implementation Regulation, p. 8b; Commercial Law, p. 240.2). The accounting period signifies the period for which enterprises usually compile financial statements. Mostly, the accounting period matches the calendar year. However, also an accounting period may be chosen that is different from calendar year. Nevertheless in departure from British Tax Law, profit does not have to be split between two accounting periods but is taxable compliant with provisions applicable in the calendar year in which the accounting period ends (Corporation Tax Law, p. 7.4; Income Tax Law, p. 4a).
In this Chapter, common tools have been outlined for conducting tax burden comparisons. Beyond that as the assessment method, qualitative assessment has been defined of applicable legal standards combined with a quantitative comparison of tax rates. In a preliminary step to the comparison of legal standards, the different tax systems have been outlined along with an examination of applicable corporation taxes.
In examining corporation taxes, also the composition of the different tax assessment bases has been outlined. In the following Chapters for purposes of examinations herein, the tax assessment base for each country is split into selected partial assessment bases. As in British Tax Law, the tax assessment base already is split into different schedules, in the following parts for each type of income, its assignment to a specific schedule is indicated.
Consequently in Chapter 3, selected balance sheet items and in Chapter 4 selected profit and loss items are examined for their consequences to the respective tax assessment base in the country concerned. Subsequently in Chapter 5, an examination is conducted of tax rates. The examination of assessment bases is necessary due to the assumption that even for identical business transactions, there are differences in assessment bases between the United Kingdom and Germany. The differences shall be determined applying qualitative methods as part of the survey and assessed via conclusions on the preferability of either tax system.
The aim in the following examinations is qualitative analysis of tax assessment base. Due to applicable authoritative principle under which tax balance sheet refers to commercial balance sheet in both the countries, in the following Chapters commercial accounting regulations are exemplified only where there are no tax regulations to different effect. Hence as far as there are tax regulations that take precedence by overriding the commercial accounting regulations (overriding principle), explicitly only the tax regulations are presented.
UNITED KINGDOM AND GERMANY
Prior to examining in the following sections of this Chapter tax treatment of selected balance sheet items in terms of applicable reference values and measurement, first in subsequent part both the general commercial accounting framework and general treatment of balance sheet items shall be exemplified. Due to referential status of commercial accounting regulations with regard to determining taxable income for tax purposes in both the countries, knowledge of the framework concept as well as of general treatment of items is of significance now just with respect to potential gaps in applicable legislation but first and foremost facilitate comprehensive insight into the subject matter of this Chapter.
Basic assumptions comprise the principle of accruals basis and the principle of going concern.
The principle of accruals basis entails a temporal and matching accrual component in British Law. Temporal accrual means that business events and other occurrences are reported in the period of occurrence as opposed to periods in which there are inflows or outflows of means of payment or equivalents thereof (F.22, IAS 1.25). If costs and revenues relate in an indirect relationship only and if the costs result in economic benefit that spreads over several periods, the costs are recognised in profit and loss applying systematic and adequate assignment procedures (F.96). As far as the costs do not generate future economic benefits, they are recognised in profit and loss with immediate effect (F.97). Costs and revenues that apply continuously over a specific period of time are to be recognised proportionally in each partial period (e.g. rent, interest). Where costs and revenues relate in a direct relationship, they are to be reported under the matching principle in the period in which also the corresponding revenues apply. This may also comprise outstanding revenues (F.76). However, the matching principle does not allow for accruals to be applied to balance sheet positions that do not comply with the definition of assets and liabilities (F.95).
 Cf. HECKSCHEN/KÖKLÜ/MAUL (2007), pp. 4-5; JUST (2005), p. 1.
 Treaty of the European Community.
 Cf. European Court of Justice of 30/09/2003, C-167/01. Further also European Court of Justice of 05/11/2002, C-208/00 (Überseering), European Court of Justice of 09/03/1999, C-212/97 (Centros), European Court of Justice of 27/09/88, 81/87 (Daily Mail).
 Cf. CLEARY (2006), p. 6; DEGENHARDT (2005), p. 11; HARTMANN (2005), pp. 37-40; LEISSL (2008), p. 3; SILBERBERG/SCHWENDEMANN (2007), pp. 18-20.
 Cf. DEGENHARDT (2007), p. 48.
 Tax treatment of a Limited with seat in Germany corresponds to treatment of a German GmbH (German limited liability company), cf. BRINKMEIER/MIELKE (2007), p. 77.
 Cf. BRINKMEIER/MIELKE (2007), pp. 60-61; HECKSCHEN/KÖKLÜ/MAUL (2007), p. 263; HERMANN (2008), p. 139; JOHNEN (2006), p. 152.
 Cf. FRITZ (2008), p. 13.
 Cf. LEHNER (2007), p. 1.
 This mostly entails low tax rates that let the country concerned appear as a viable location for investments and the effect that complex tax assessment bases do not deter investors as much as they are attracted by low tax rates, cf. SCHNEELOCH (2002), p. 103.
 Arrival of businesses promotes creation of jobs and higher tax revenues, cf. RUF (2007), p. 1.
 A tax burden comparison for a concrete tax type in one country with that applicable in another country always necessitates an examination of applicable tax assessment bases and tax rates, cf. SCHNEELOCH (2002), p. 103.
 The scope of the term of private company limited by shares for purposes herein is explicitly identifiable with Limiteds established in England or Wales as in other parts of the United Kingdom, partly different corporation law regulations apply.
 The term of United Kingdom for purposes herein comprises Great Britain and Northern Ireland but not the Irish Republic, the Isle of Man or the Channel Islands, compare also WATTERSTON (2006), p. 2. As far as the adjective 'British' is used herein, the term also refers only to regions within the United Kingdom.
 On the subject, compare particularly BLÖDNER/BILKE/HEINING (2007), pp. 407-412; MELVILLE (2009), pp. 319-321.
 Cf. also SECTION 2.1.1.
 Cf. JACOBS (2005), p. 28; SCHMIDT/SIGLOCH/HENSELMANN (2005), p. 454; SMITH (1991), p. 7; SPENGEL/LAMMERSEN (2001), p. 223.
 This includes e.g. circumstances of a change in legal form or business dissolution.
 As far as corporate tax burden consists of various profit taxes, additional taxes (such as the German local business tax) are to be examined as well in addition to corporation tax.
 This also entails treatment of sales proceeds and dividends.
 These are invariably state incentives aimed at promotion of specific economic branches.
 Cf. SCHMIDT/SIGLOCH/HENSELMANN (2005), pp. 455-457.
 Contrary to procedures applied by tax authorities however, this does not amount to taxable income already made but planned taxable income instead, i.e., a tax target variable.
 Cf. SCHNEIDER (1990b), p. 539.
 Another drawback, the model frequently is unable to adequately reflect economic reality. This means that due to the complex nature of economic environment, model-inherent simplifications are inevitable. Less relevant regulations should be disregarded for simplicity’s and comprehensiveness’ sake. On the other hand on overly excessive simplification of complex interrelationships, there is a risk of errors in judgement, cf. LAMMERSEN (2005), pp. 52, 286.
 Cf. SMITH (1991), p. 28.
 Cf. LAMMERSEN (2005), p. 288.
 Cf. LAMMERSEN (2005), p. 50; SCHMIDT/SIGLOCH/HENSELMANN (2005), pp. 458-459.
 Cf. SPENGEL/LAMMERSEN (2001), p. 224.
 For instance in tax rate comparisons, a potentially applicable tax exemption for dividends or sales proceeds is not accounted for. The same applies to state incentives aimed at promotion of investments.
 Cf. SMITH (1991), p. 10.
 Cf. SCHNEIDER (1990b), p. 536.
 Cf. LAMMERSEN (2005); SCHMIDT/SIGLOCH/HENSELMANN (2005), pp. 453-455.
 Cf. GUTEKUNST (2005), p. 16.
 In the effort, both tax liabilities for the total of all enterprises may be examined as well as tax liabilities differentiated according to branches, business sizes or legal forms.
 Cf. SPENGEL/LAMMERSEN (2001), p. 224.
 Cf. HAKIMI (2007), p. 17.
 Further this usually also amounts to an analysis of local domestic taxation only while disregarding cross-border activities.
 Cf. SCHNEIDER (1988), p. 282.
 Another problematic aspect, subject to domestic taxation in an individual financial statement is global income that may also comprise for instance foreign income exempted from tax. Accordingly, this leaves the tax rate too low. For group financial statements, global income is taxed worldwide so that in this case, these are worldwide tax liabilities as opposed to domestic tax burden, cf. SPENGEL/LAMMERSEN (2001), p. 224.
 Cf. KNIRSCH (2005), p. 27; SCHNEIDER (1990a), pp. 500-501.
 Cf. SCHNEIDER (1990b), p. 535; SMITH (1991), p. 3; SCHMIDT/SIGLOCH/HENSELMANN (2005), pp. 460-461.
 Hence this is a decision making neutral assessment base. Contrary to tax assessment simulation, the target tax burden is not correlated with tax assessment base but with a neutral assessment base instead.
 Cf. SPENGEL/LAMMERSEN (2001), p. 225.
 Marginal tax rates indicate by how many cash units the tax burden changes if the economic reference variable grows by one cash unit.
 Cf. NIEMANN/BACHMANN/KNIRSCH (2003), p. 125; SCHNEIDER (1990a), p. 501; SMITH (1991), p. 11.
 Cf. SCHNEIDER (1990b), p. 537.
 Cf. SPENGEL/LAMMERSEN (2001), p. 229.
 Circumstances in which the cost of investment(s) equals return after tax.
 In the study by KING/FULLERTON, effective marginal tax rates have been calculated for a total of 81 combinations of determinants for corporations. The economic measure in the study was yield on an investment, cf. GUTEKUNST (2005), p. 46; RUF (2007), p. 43; SMITH (1991), p. 13.
 Moreover, the calculations due to the complex frameworks of tax regulations as well as different alternative assumptions (yield before tax, interest structure) always remain limited to different combinations of investment and finance intentions for specific branches, private or institutional capital providers and capital providers liable to or exempted from tax. The calculations further do not provide for sufficient interconnection between regulations and the tax assessment base (e.g. equity financing through provisions, inclusion of sales proceeds and subsidies), cf. SCHNEIDER (1990a), p. 502; SCHNEIDER (1990b), p. 539.
 Cf. SMITH (1991), pp. 15-16.
 Cf. SCHMIDT/SIGLOCH/HENSELMANN (2005), p. 463; SPENGEL/LAMMERSEN (2001), pp. 223, 229- 230.
 Cf. GUTEKUNST (2005), p. 29.
 A model for determining both effective marginal tax rates and effective average tax rates has been developed by DEVEREUX/GRIFFITH. The model employs as economic measure net present value, cf. GUTEKUNST (2005), p. 56; LAMMERSEN (2005), p. 84; RUF (2007), p. 57; SPENGEL/ LAMMERSEN (2001), p. 226.
 Cf. SCHMIDT/SIGLOCH/HENSELMANN (2005), p. 464.
 Cf. also SECTION 220.127.116.11. The output of effective tax burden measurement serves mainly as a guidance to political functions. It is of limited value to individual investors as each case is different in terms of applicable setup of variables, cf. LAMMERSEN (2005), pp. 159, 285.
 Cf. SCHMIDT/SIGLOCH/HENSELMANN (2005), pp. 463-464; SPENGEL/LAMMERSEN (2001), pp. 223, 227-229.
 Only wishful thinking coupled with ignorance may mislead into comprising in a single summary tax burden figure the hardly comprehensible number of tax law provisions and their economic consequences, cf. SCHNEIDER (1988), p. 290.
 Cf. SCHNEELOCH (1998), p. 449.
 Cf. BEECK (2007), pp. 6-7.
 Cf. TRIEBEL (2006), pp. 5-6.
 Cf. BERNSTORFF (2006), pp. 9-18.
 Cf. also MALLESON (2007), pp. 26-27.
 This mainly entails annual tax acts, budget supplement acts, acts of law on tax amendment and acts of law under regional investment aid scheme.
 There are tax guidelines to complement all key acts of Tax Law. Specifically to be mentioned are Income Tax Guidelines (Einkommensteuer-Richtlinien, EStR), Corporation Tax Guidelines (Körperschaftsteuer-Richtlinien, KStR), Trade Tax Guidelines (Gewerbesteuer-Richtlinien, GewStR) and Value Added Tax Guidelines (Umsatzsteuer-Richtlinien, UStR). The guidelines are adjusted to topical legal developments at a frequency of once in few years.
 Cf. BEECK (2007), p. 6.
 Cf. BIRK (2007), pp. 20-21.
 Initially, the definition of generally accepted accounting practices was part of ICTA 1988, p. 836A.
 Small enterprises with turnover below GBP 5.6m, balance sheet total below GBP 2.8m and up to 50 employees (small entities) may apply the Financial Reporting Standards for Smaller Entities (FRSSE) effective 2005.
 Cf. BUSINESS INCOME MANUAL (2007), BIM 31020.
 Cf. http://www.hmrc.gov.uk/practitioners/int_accounting.htm; Status: 01/09/2008.
 As the IASB framework concept does not amount to a standard or interpretation, it has not been included in European Community Law. Nonetheless, it amounts to a decision making reference in dealing with accounting issues relating to regulatory gaps within IFRS. In author’s opinion, the framework concept also needs to be observed as part of generally accepted accounting practices in determining taxable income.
 Cf. HOMER/BURROWS (2004), p. 376; LEE (2006), p. 245; TILEY (2005), p. 393.
 Cf. http://www.hmrc.gov.uk/practitioners/int_accounting.htm; Status: 01/09/2008.
 However, IFRS do not amount to pure Case Law as the different accounting standards exist within a framework concept that takes precedence.
 Cf. BUCHHOLZ (2003), pp. 18-19.
 The assumption is based on the idea that investors provide risk capital to companies, hence are in need of more comprehensive information compared to other recipients.
 The principle of prudence is of secondary significance only in this respect.
 Cf. BITZ/SCHNEELOCH/WITTSTOCK (2003), p. 34.
 Particularly Commercial Law, pp. 238.1, 242.1-2; cf. BAETGE/KIRSCH/THIELE (2002), pp. 79-82.
 Cf. BUCHHOLZ (2003), p. 23.
 In other words, the creditors are intent on the company retaining the ability to pay its liabilities.
 Cf. BITZ/SCHNEELOCH/WITTSTOCK (2003), p. 39.
 Cf. COENENBERG (2005), p. 14.
 Cf. COENENBERG (2005), p. 14; BITZ/SCHNEELOCH/WITTSTOCK (2003), p. 41.
 Cf. BUCHHOLZ (2003), pp. 28-31.
 Or a reconciliation between commercial and tax balance sheet.
 As secondary recipient, also credit providers may be given who are regularly interested apart from commercial balance sheet also in tax balance sheet on assumption that application of tax provisions results in a more realistic account of corporate financial status.
 As a result, current tax liabilities are carried forward to future periods.
 Cf. BITZ/SCHNEELOCH/WITTSTOCK (2003), p. 16.
 Cf. BUCHOLZ (2005), p. 4; COENENBERG (2005), p. 16.
 Profits includes both income and capital gains, cf. TILEY (2005), p. 809.
 Other non-resident enterprises that do not maintain a permanent establishment in the UK are liable to the UK income tax on their domestic income.
 Unincorporated associations comprise most clubs and other organisations in which at least two persons participate, cf. Blackpool Marton Rotary Club v Martin (1988), 62 TC 1986.
 Cf. Conservative & Union Central Office v Burrell (1981), 55 TC 671.
 Cf. BORNHOFEN (2008), p. 383; HOFFMANN (2003), p. 48.
 The relevant prerequisite, the bodies must carry out profit-making operations on a regular basis beyond the agricultural and forestry branch. No profit-making intent or participation in business transactions apply as prerequisites. As example, utilities (gas, water, electricity) may be provided in cities and communities, cf. Corporation Tax Law, p. 4.1-3.
 However, they are liable to tax only if the income is not directly taxable as income of other taxpayers (Corporation Tax Law, p. 3).
 The provision generally applies to all other corporations, associations and trusts that are liable to tax without limitations.
 A profit-making economic operation is a regular autonomous operation by way of which income or other economic benefits are generated and which exceeds the scope of asset management. However, income from profit-making economic operations is subject to corporation tax only where the income plus turnover tax exceeds the amount of 35,000 Euro (AO, p. 64.3) No profit-making intent is necessary (AO, p. 14).
 However, the exemption does not apply to domestic income that is partly or wholly subject to tax withheld at source. Corporation tax liability for income subject to tax withheld at source is satisfied by withholding the tax (Corporation Tax Law, p. 32.1).
 In accordance with ICTA 1988, s. 70.1 for the purposes of corporation tax income shall be computed on the full amount of the profits or gains or income, without any other deduction than is authorized by the Tax Acts. Due to vagueness of the term full amount of the profits, an interpretation was necessary by Case Law.
 Cf. Lothian Chemical Co. Ltd v Rogers (1926), 11 TC 508: "My Lords, it has been said times without number that in considering what is the true balance of profits and gains in the income tax acts - and it is not less true of the Act of 1918 than of its predecessors - you deal in the main with ordinary principles of commercial accounting…. but where these ordinary principles are not invaded by statute they must be allowed to prevail." Compare also Odeon Associated Theatres Ltd v Jones (1972); Threlfall v Jones (1993), Lloyds UDT Finance Ltd v Chartered Finance Trust Holdings (2002).
 A note applies that the accounting principles applicable in the United Kingdom generally are further advanced by professional practitioners - auditors/accountants. Instead of publishing its own accounting principles, the lawmaker authorises the principles compiled by professional practitioners.
 Cf. LEE (2006), pp. 245-246.
 Cf. ENGEL/BALMES (2008), p. 1082; HMRC (2007), BIM31001.
 Reference accounting profit also is referred to as before tax accounting profit.
 Cf. SECTION 18.104.22.168.
 Contrary to British Case Law, commercial accounting provisions have been explicitly codified by the German lawmaker in Commercial Law.
 Cf. Federal Finance Court of 03/02/1969, GrS 2/68; Federal Finance Court of 25/08/1989, III R 95/87.
 The schedule system was fully replaced for income tax purposes in 2005 by Income Tax (Trading and Other Income) Act 2005. For income tax purposes, income now is split into different classes of income (employment income, trading income, property income, savings and investment income and miscellaneous income). However, the tax rules governing the schedules remain more or less in effect, cf. MELVILLE (2007), p. 16; LEE (2006), pp. 239-240.
 Cf. MELVILLE (2007), pp. 371-376; INABA/BARNARD (2006), p. 17.
 Cf. also SECTION 4.4.
 Schedule D Case VI means any annual profits or gains not falling under any other Case of Schedule D or any other schedule, cf. BUSINESS INCOME MANUAL (2007), BIM 80101.
 Cf. ACCA (2006), p. 13.
 A list of Income Tax Law provisions to be observed in determining corporation tax liability is provided by Corporation Tax Law, p. 32.
 This specifically entails corporations.
 Cf. also Federal Constitutional Court of 15/01/2008, 1 BvL 2/04.
 The presented scheme is a simplified instance applicable to corporations.
 Accounting profit in German Tax Law directly determines the tax assessment base. On the contrary in British Tax Law, it determines the tax assessment base indirectly only as accounting profit is split into several schedules. Tax adjustments then are conducted within the different schedules. By adding the separate adjusted profits for the different schedules, the result is corporation tax assessment base. Irrelevant of whether accounting profit determines the final tax assessment base directly or indirectly, in both the tax systems accounting profit may be termed authoritative for determining taxable income.
 Cf. WILLIAMS/MORSE (2004), p. 211.
 Where the accounting period used by an enterprise is longer than 12 months, it needs to be split into two or more accounting periods.
 Cf. Marshall Hus & Partners Ltd v Bolton (1981), 55 TC 539.
 Cf. INABA/BARNARD (2006), pp. 17-19.
 German corporation tax generally is levied in form of quarterly advance payments (Corporation Tax Law, p. 31; Income Tax Law, p. 36), cf. SCHEFFLER (2007), p. 199.
 Accounting periods in excess of 12 months are not permissible in German Commercial Law.
 The provision applies to corporations only. For all other types of enterprises, fiscal period matches calendar year.
 Cf. KIRSCH (2007), pp. 18-19.
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