INTRODUCTION

dr. sc. Nevia Čičin-Šain, Senior teaching assistantConsultations Thursdays from 10:00 till 11:30ĆM 4, room 45

Scope and aim of Financial science

The aim and scope of Financial Science is to determine and investigate financial activities of the State and other public authorities that are in charge of providing public services based on a certain legal act.

Financial Law on the other hand is branch of law which regulates the financial relations arising when public revenues are being collected, managed, distributed and spent.

Financial law is a part of public law. On the one side of the relation there is the State, whilst on the other side we have a private person (either a physical person or a company).

Therefore, the relation is not based on equality but rather on inequality: firstly, the legal relation arises based on the will of the lawmaker; secondly, the position of the State is privileged in comparison to other subjects of the relation.

International Tax Law?- in this class we will frequently encounter the term

“international taxation” - however, this term may be considered a misnomer,

because with minor exceptions tax laws are not “international”. There is no overriding international law of taxation. The most obvious “international” aspect of a country’s income tax system are bilateral tax treaties (there are over 2.000 bilateral tax treaties in existence, most of which are based on the OECD Model Convention as well as the UN Model convention). However, these too are creations of sovereign states.

What are public revenues? Generally, the term encompasses all revenues that are

destined to finance public purposes. These vary from State to State – depending on the type of social, economic or political conditions reigning in the State. The methods of public revenue and its volume have greater impact on production and distribution of wealth and income of the country. With the increase in government functions and expenditure, the volume of public revenue has increased manifold in recent times.

They are collected in money, rarely in commodities.They are collected from newly created value (only

exceptionally they can be collected from the existing value – some property taxes can be paid out of the property itself).

Classifications of public revenues - classifications of public revenues are various: - original and derivative (the ones that the State generates

by performing its own economic activity, or based on its property rights or the ones that it generates based on its sovereignty – by imposing taxes by the authority of the State)

- of public or private origin (very similar to the one stated before)

- regular or exceptional (war times) - collected from natural or legal persons - refundable or non-refundable (the majority of public

revenues are not refundable. However, subjects to enjoy a certain service rendered instead. In most cases the value of the service has no regard to the amount of money the subject paid in the first place)

- belonging to the State or local or regional authorities - collected for a specific or general public purposes - paid in money or commodities (rarely, war times, historical

value)

What are taxes?Main characteristics of taxes:- they constitute a form of derivative

public revenue- the are a compulsory contribution- they are levied for a public purpose- there is no direct service rendered in

return for the collection of tax- they are usually levied in money- they are not levied for a special but

rather a general purpose

Theories of taxationTheory of cost

The theory of equal sacrifice (least aggregate sacrifice)

Theory of reproduction of taxes

Socialist theory

Tax terminologyTaxpayer

Tax guarantor

Taxable person

Tax base

Tax rate

Tax assessment methods

Automatic method

Direct method

Indirect method

Official method

Comparison method

Principles of taxation

Adam Smith

OECD

Tax incidence

is a term which describes who bears the burden of a tax

How it works/Example

Why it Matters

The Croatian Tax System

Classifications of taxes1. Direct and indirect2. Personal and real3. Synthetic and analytic4. General and taxes with a specific purpose5. Taxes assessed based on a cadastral

value or a tariff 6. Assessed and factual taxes7. Ad valorem and specific8. 9. regular or exceptional 10. repartitional 11. main and auxiliary taxes12. taxes of the central or local government

INDIVIDUAL FORMS OF TAX

Certain questions common to both personal and corporate income taxFiscal jurisdiction – is considered to be

the right of a State to legally regulate all aspects of its fiscal revenues and expenditures. It is commonly accepted that there are two aspects to a state’s sovereignty - the power over a territory and the power over a particular set of subjects. Taxing jurisdiction is one aspect of the fiscal jurisdiction – it encompasses the rights of a state to levy taxes on the residents of its territory.

How to determine a tax liability

- you need to determine:1. the taxable subject (taxpayer) 2. the taxable object (income, sales, property or other) 3. the taxable event (the receipt of income, selling of securities, property and so on)4. define the way the tax base will be assessed5. determine the tax rate

How to determine who is a taxable subject- the material aspect – determines the person who

will be the taxpayer (for instance – a natural or legal person, the family or individual spouses)

- the formal aspect – determines the criteria the person satisfying the material aspect needs to fulfil in order to be considered a taxpayer (resident, citizen, non-resident...).

This is a very important part of the lecture. A person is usually taxable by a certain State because it is its resident. Another criterion can be that it is its citizen (e.g. the criterion applied by the USA).

We shall see further on what does it mean “residency” in the corresponding individual tax forms.

How to determine the taxable object

- the material aspect – how to determine what is a taxable good – income, property, expenditure ...

- the territorial aspect – means the determination of a geographical space in which the taxable good needs to be in order to be within the fiscal jurisdiction of a certain authority.

How to determine the taxable object II:

the territorial aspect - Here we have 2 governing principles:

The so-called residence principle– means basically the taxation of worldwide income.

The so-called source principle – comprehends taxation in the state where the income has its source. This is the governing principle for taxing non-residents.

How to determine the taxable object III: - unlimited tax liability

When we are talking about unlimited tax liability we are talking about the fact that a resident or a citizen of a certain State needs to pay taxes on all of the income he/she earns anywhere in the world.

This is a combination of: the formal aspect of the determination of the taxable subject + the principle of worldwide income when determining the territorial aspect of the taxable object

How to determine the taxable object IV: - limited tax liabilityWhen we are talking about limited tax

liability we are talking about the fact that a person will be taxed by a State even though the income is received by owners who are not residents or citizens of that State.

Many countries in Latin or Central America apply only the source principle when determining the territorial aspect of their direct taxes. For instance France does the same regarding corporate income tax.

PERSONAL INCOME TAX:

Income Tax was first introduced by William Pitt (the younger) in 1798 as a means to raising further funds for the prosecution of the war against France (Napoleon).

Why so late – because the main source of income before the end of the 18th century was income deriving from property and not wages.

Personal income tax in Croatia Regulations: Personal Income Tax Act (NN 177/04, 73/08, 80/10 , 114/11,

22/12, 144/12, 43/13, 120/13, 125/13, 148/13, 83/14, 143/14) – in force since 01. 01. 2015.

Regulations on Renting of Flats, Rooms and Beds to Travelers and Tourists and Organizing Campsites which will be Presumptively Taxed, on the Amount of the Presumptive Tax and on the Method of Payment of the Presumptive Tax (Official Gazette of RC 'Narodne novine' No. 48/05, 148/09).

Regulations on Presumptively Taxation of Independent Activities (Official Gazette of RC 'Narodne novine' No. 143/06, 61/12, 160/13).

Regulations Concerning Income Tax, (Official Gazette of RC 'Narodne novine' No. 95/05, 96/06, 68/07, 146/08, 2/09, 9/09 - correction, 146/09, 123/10, 137/11, 61/12, 79/13, 160/13, 157/14).

Taxable person:It is the natural person who acquires an income.

(If several natural persons jointly acquire an income, each natural person is separately a taxable person, in respect to his/her share in the jointly acquired income – the cases of Civil Law partnerships).

A resident taxable person is a natural person who in the Republic of Croatia has:

- his/her residency (domicile) or habitual abode;- neither, but is employed in the civil service of

the Republic of Croatia and receives a salary on that basis.

Domicile/residency – Article 38 of the Croatian General Tax Act “For the purposes of this Act, taxpayers shall be deemed to have

domicile in the home they own or possess for not less than 183 days in one or two calendar years. Actual residence in such home is not required.

(2) If the taxpayer in the Republic of Croatia owns or holds several homes, the domicile relevant for taxation shall be determined according to the domicile of the family, while the domicile of solitary taxpayers shall be that location in which they predominantly reside or from which they predominantly depart for work or performance of other activities.

(3) Taxpayers with domiciles both in Croatia and abroad shall be deemed domestic taxpayers.

(4) For the purposes of this Act, the habitual abode of taxpayers shall be determined as that location in which they reside under circumstances which generally lead to the conclusion that they do not reside there temporarily. For the purposes of this Act, habitual abode shall be deemed permanent or chronologically linked residence with a duration of not less than 183 days in one or two calendar years. Brief pauses not longer than one year shall not be relevant to the determination of habitual abode.”

Non-resident

A non-resident taxable person is a natural person who has neither residency nor an habitual abode in Croatia but acquires an income in the Republic of Croatia which is subject to taxation provided for by the Income Tax Law.

Sources of taxable incomeA resident has the following sources of income

acquired in Croatia and abroad (worldwide income principle) taxed:

1. income from employment2. Income from independent personal activities

(small business, self-employment and professional income)

3. income from property and property rights4. income from capital

5. income from insurance6. other income

A non-resident has the same kind of income taxed if it was acquired in Croatia.

TAX BASE OF A RESIDENT: The total amount of income that the taxpayer obtains

inland and abroad (income from employment + income from independent personal activities or self-employment + income from property and property rights + income from capital + income from insurance + other income) - personal allowances.

Income from independent personal activities (self-employment income) acquired by a resident in Croatia and abroad shall be reduced by:

1. the amount of salaries of the newly employed persons, 2. the amount of state grants for education and training

and apprenticeship for crafts and trades occupations pursuant to special regulations,

3. the amount of expenses for research and development, and

4. the loss carried in Croatia and abroad.

TAX BASE OF A NON-RESIDENT: The total amount of income that the taxpayer obtains in

the Republic of Croatia (income from employment + income from independent personal activities or self-employment + income from property and property rights + income from capital + income from insurance + other income) - personal allowance.

Income from independent personal activities (self-employment income) acquired by a non-resident in Croatia shall be reduced by:

1.the amount of salaries of the newly employed persons, 2.the amount of state grants for education and training

and apprenticeship for crafts and trades occupations pursuant to special regulations,

3.the amount of expenses for research and development, and

4. the loss carried in Croatia.

Income from employment:

Income from employment:Receipts from employment (wages, salaries and

pensions)- (minus) paid employee contributions for obligatory

insurance (20% compulsory contributions for retirement insurance based on the pay as-you-go system OR 15% for compulsory contributions for retirement insurance based on the pay-as-you-go system and 5% contributions for retirement insurance based on fully-funded savings)

Pensions1. Pensions acquired on the basis of previously paid compulsory pension insurance contributions2. Pensions paid out by insurers on the basis of contributions3. Pensions of residents earned abroad ...

Wages: - any remuneration in cash or in kind paid or given by an employer to an employee on account of employment pursuant to the regulations governing employment (present, previous or future work)Including (but not limited to)...:

wages

receipts on

account of

compensations, grants,

rewards,

wages or salary

paid to an employee by some

other person

instead of the

employer

premiums for

voluntary pension

insurance above 6.000

any other receipts paid or

given to an employee for a work

done on the basis of a

work contract

Benefits in kindBenefits in kind are for example – the use of buildings or means of transportation, favourable interest rates on credits and other privileges granted by employers or payers of the receipts or salaries, to employees or natural persons who acquire receipts.

Use of a house, garage…

Use of vehicles

Gifts without counterremuneration

Stocks. . .

Pensions

1. Pensions acquired on the basis of previously paid compulsory pension insurance contributions2. Pensions paid out by insurers on the basis of contributions3. Pensions of residents earned abroad ...

Income from independent activities :

Income from independent activities :

income from small business and self-employment activities, income from independent professional activities and

income from agriculture and forestry

Tax base:+ business receipts incurred during the taxable period - business expenditure incurred during the taxable

period (including premiums paid for voluntary pension insurance that the taxpayer who acquires income from independent personal activities pays for himself or in favour of his workers)

- the amount of wages and salaries of the newly employed persons

- the amount of state grants for education and training and for the apprenticeship training for trades and crafts pursuant to special regulations

- the amount of expenses for research and development

- the loss carried forward in Croatia (for 5 years at most)

Income from property rentals and property rights:

Tax base: 1. Income from property on the basis of rental or lease of

movables and immovable property (receipts incurred during the taxable period from rental and leases diminished by the expenses to the amount of 30% of the realised rental or lease)

2. Income from property rights (difference between the receipts from a time limited cession of copy rights, the rights of industrial property and other property rights incurred during the taxable period and the expenses incurred in the tax period in connection with these receipts)

3. Income from alienation of real estate and property rights in the real estate or property right is alienated 3 years after its procurement (difference between the receipts determined at market value of the real estate or property right alienated and the procurement value increased by a rise in producer prices of industrial products).

Alienation shall be any sale, exchange or other transfer of real estate or property rights. Alienation costs may be deducted as expenses.

Income from capital:

Tax base: 1. Receipts acquired by natural persons from dividends and

corporate income shares on the basis of the share in capital which exceed 12.000 HRK per year (the reduction for a non-taxable portion of receipts up to 12.000 HRK per year shall be recognized in the income tax annual assessment on the basis of the filed annual tax return

2. Receipts from shares in corporate income of members of the board of management and employees of corporations that are obtained via allocations of own shares or the share purchase options

3. Receipts acquired by natural persons from the withdrawal of assets and the use of services

4. Receipts from interest acquired by natural persons on account of claims arising from loans and credit granted, including the receipts from commission loans realised through banks.

Income from insurance

Tax base: = Receipts in the amount of paid and tax allowed life and

voluntary retirement insurance premiums (Income from insurance shall be also deemed the receipts in

the amount of paid in voluntary pension insurance premiums which were exempt from taxation and were tax deductible expense or expenditure for the employer or for the taxpayer trader or self-employed person)

Other income:

Tax base: Receipts that are not deemed receipts from employment,

independent activities, property and property rights, capital and insurance, in particular the following receipts:

1. Receipts arising from the work of members of meetings and supervisory boards of companies...

2. Royalties paid pursuant to a special act governing copyright and related rights

3. Benefits in kind – the use of buildings, means of transportation, favourable interest rates on credits and other privileges granted by the taxpayers of these receipts to natural persons other than their employees.

4. Scholarships to pupils or students above the prescribed amount (HRK 1.600 annually)...

5. Scholarships paid to sportsmen pursuant to special regulations for the improvement of their sport skills above a certain amount...

A certain catch all clause.

Sooo… INCOME ACQUIRED IN THE REPUBLIC OF CROATIA

+ INCOME ACQUIRED ABROAD (foreign income)

= TOTAL INCOME

- Personal allowance

= TAX BASE

Personal allowance:A personal allowance of a resident is 2.600 HRK

for each month of the taxable period. The personal allowance of a resident is augmented

when the taxpayer is a resident of an area of special national concern or hill and mountain areas

it can be increased for dependant members of the immediate family (Dependent persons are natural persons whose taxable receipts, the ones which are not subject to taxation and other receipts not deemed income do not exceed 13 000 HRK (5 times the amount of the personal allowance) on an annual basis

a further increase of the personal allowance is provided if the dependent person is disabled

MONTHLY TAX BASE ANNUAL TAX BASE TAX RATES

Up to HRK 2.200,00 Up to HRK 26.400,00 12%

Over HRK 2.200,00 up to HRK 13.200,00

Over HRK 26.400,00 up to HRK 158.400,00 (the next HRK 132.000,00)

25%

Over HRK 13.200,00 Over HRK 132.000,00 40%

Annual tax return:Taxable person obliged to file the annual tax return Taxpayer may file a tax return, even though

he/she is not obliged, in order to exercise:

1. a taxable person who during the taxable period has obtained income from employment with two or more employers at the same time

1. the right to an unutilised personal allowance

2. a taxable person who during the taxable period has obtained income from independent personal activities

2. the right to an evenly distributed annual tax, i.e. a levelled out annual tax base

3. a resident taxpayer who in the tax period has directly received income from abroad, whereby the advance payment of the tax was not paid or was paid in an amount less than the amount that would be calculated according to the Income Tax Act

3. other rights prescribed by legislation

4. the tax administration has required that the taxpayer pays subsequently the income tax

 

5. the taxable person if the employer, payer of the receipts or the taxable person himself/herself failed to calculate, withhold or pay the advance income tax