IN recent times, various news media have been inundated with news of business people, politicians, and celebrities hiding their incomes in tax havens in a bid to evade taxation. Of course, for corrupt politicians, their motives are even more sinister because their wealth was not legally earned. A tax haven is a country that levies little or no personal income taxes on individuals nor corporate income tax on companies. This low/ zero tax regime attracts individuals to register their businesses or obtain residency in these havens because a business is subject to primarily obey the laws of the jurisdiction which it registers as its head office, and a person to her country of residence. Since countries use tax revenue for infrastructure and socioeconomic purposes, why would any country choose to be a tax haven? A look at these countries reveal they are usually small economies that would not draw the attention of global investors if extra benefits were not used to bait the investors. Those companies would never domicile their business in such countries, nor would rich individuals reside there, so the issue of earning of tax revenues, high, low or zero, would never arise. But when these foreigners come in under the low/ zero tax regime, they bring in much needed foreign exchange that buoys the value of the local currency and helps with FX based import payments. Also, the funds deposited into the local banks are used to lend money to local businesses, thus generating employment, increasing GDP, and ultimately improving living standards in those havens.
The laws state that every working citizen must declare her income honestly and pay the taxes due promptly. Each of us is expected to have a Tax Identification Number (TIN) for ease of processing. As individuals, which taxes exactly are we obliged to pay? Taxes fall into two main categories – direct and indirect. Simply put, we pay direct taxes directly and indirect taxes through another taxpayer. Direct taxes include personal income tax ((PIT), withholding tax (WHT), capital gains tax (CGT), inheritance tax, gift tax,estate tax, and custom duty. Indirect taxes include service tax, value added tax (VAT), stamp duty, and excise duty.
Personal Income Tax, (PIT) is the tax payable on the taxable portion of our income. PAYE (pay as you earn) tax which is levied on salary earners is a type of PIT. Business owners who do not have regular monthly income pay PIT usually once a year. The tax rate is not calculated on our whole income but on the taxable portion; as the laws provide for allowances and deductions, both general and those peculiar to the individual. General deductions include contributions to retirement savings accounts and the national health fund. Individual peculiarities include family circumstances;for instance, two people who earn the same salary would not pay the same taxes if one of them is single and the other is married with three children. Other permissible deductions include charitable donations (up to a maximum of 10% of income), medical expenses and life insurance premiums.The law expects us to include not only earned income but all incomee.g., rent income, dividends, and interest incomes.
Withholding tax, (WHT) can be both direct and indirect. It is money withheld from non-salary income e.g., dividends, interest income and work done by contractors.This is why banks deduct WHT from interest earned on fixed deposits and publicly quoted companies deduct it from dividends paid.This upfront WHT deduction is government’s way of ensuring that should the taxpayer omit to declare all these incomes, at least they would have taken some via WHT. To avoid double taxation, taxpayers are expected to deduct WHT from their total PIT and pay only the balance.
Capital gains taxes, (CGT) are taxes payable when assets increase in value,hence the term – capital gains. They are only payable when the asset is being sold and the capital gain is being monetised. It would be impractical to value an asset (e.g., a house) every year and pay CGT on the increase in its market value.But if you buy a house and sell it later at a profit, CGT is due on the profit from the sale. Remember to deduct permissible expenses like commission paid to the real estate agent from the taxable amount. CGT is also payable on profits made on sales of company shares, cryptocurrencies, and other assets.
To be continued.
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