Lecture Notes on Taxation of Banking Operations

Lecture notes on TAXATION OF OPERATIONS OF BANKING
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UNIT 1: BASIC NOTIONS OF TAXATION
1.1 - Definition of Taxation
The term taxation comes from the Latin word " fiscus " which means the basket used for the
collection of money. Taxation can be perceived as the system of raising money to finance
government or as a means by which governments finance their expenditures by imposing charges
on citizens and corporate entities. All governments require financial support through the payment
of taxes by their citizens. Governments use tax revenues to pay soldiers and police, to build dams
and roads, to operate schools and hospitals, to provide food to the poor and medical care to the
elderly, and for hundreds of other purposes. Without taxes to fund its activities, government could
not exist.
The Oxford Dictionary of accounting defines taxation as ‘ a levy on individuals or corporate bodies
by central or local government in order to finance the expenditure of that government and also as
a means of implementing its fiscal policy’. The dictionary further specifies that ‘payments for
specific services rendered to or for the payer are not regarded as taxation’.
Other scholars define taxation as ‘ the science which studies the set of monetary deductions
carried out by the state on natural and artificial persons’
In practice, we have taxes at the core of taxation.
1.2 – Definition of Tax
A tax can be defined as "a compulsory payment, levy, duty or contribution, without direct
compensation
demanded by the state or its decentralised organs from natural and artificial persons."
1.3 – Some Basic Terminologies in Taxation
The following terms are used in the domain of taxation either as a notion of tax or
interchangeably.
➢ Sin tax: This is an ad valorem tax or flat-tax levied on activities or goods considered physically
or morally harmful, such as cigarettes, gambling, and liquor.
➢ Rates: They represent the revenue of local authorities and can be described as levies to be paid
to the various local authority organs of the state when a public service is required by a citizen,
or in general, to help provide revenue for any decentralized organ of the state.
➢ Duties: They are similar to a tax in that their payment confers the right to use a public service.
➢ Contributions: These are levies imposed on the population to help the state in the provision of
social services or social insurance understandings. Examples are levies made for the interest
of the National Social Insurance Fund, to the Local Council Support Fund, to the Housing Loan
Fund or the National Employment Fund.
➢ Tariffs: They represent the ranges of duties on imports and other home-made products.
Theoretically, these terms appear to be distinguishable but in practice they may be total
confusion as in most cases they are used interchangeably. The binding notion within them is that
they should be obligatory payments when the services of the state are required or to help the state
in the provision of social services to the benefit of its citizens.
Apart from these terms used as taxes, it is equally important to master the following terms
commonly used in the domain of taxation:

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➢ The tax bearer: The tax bearer is that natural or artificial person subject to the domain of
application of an obligatory payment and who bears the burden of the said payment.
➢ The taxpayer: The taxpayer on the other side is that natural or artificial person who has carried
out an operation which generates taxes. There are two classes of taxpayers: the legal taxpayer
and the actual taxpayer.
✓ The legal taxpayer is the person (natural or artificial) who is responsible for the payment of
the tax to the fiscal administration.
✓ The actual taxpayer is the tax bearer, which is the person who bears the burden of the tax.
➢ A tax advance (tax on account): It represents a payment made for a particular tax before its
liability date. The purpose in most cases is to enable the state to generate revenue in order to
meet up with its running expenses and to relieve the tax payer from paying a lump sum for
taxes at the end of the year (or at the liability date of the tax). These advances are mostly
required on taxes to be paid on annual basis. For instance, the tax liability date for income taxes
(Personal Income Tax and Company Tax) is December 31st, with the assessment base being the
annual income. However, some advances are collected on these taxes on monthly bases such
as the levy of 2.2% or 5.5% on monthly turnovers respectively.
➢ Taxes retained at source: Retentions at source come in under two situations:
✓ Taxes retained at source by governmental units and major enterprises: This is a special
measure taken by the government when making payments to taxable persons. This measure
is aimed at avoiding situations whereby a tax is paid by the government to a taxpayer and
this taxpayer is later requested to pay back the same tax earlier collected to the state. The
base of this special measure is expanded beyond all governmental units to some major
enterprises in the country. For instance, when governmental units and these major
enterprises make purchases for taxable supplies, they will retain the VAT invoiced by the
supplier and pay it directly to the state treasury. NB: See appendix 6 for the list of
corporations authorised to retained taxes at source when making payment to their suppliers
as authorised by the Minister of Finance in January 2017.
✓ Taxes retained at source by persons paying out taxable revenues: This is another special
measure taken by the government which requires that taxable persons paying out taxable
revenues should retain the tax due by the beneficiary and pay out only the net revenue after
tax. The person retaining the tax has fifteen (15) days to pay the tax to the state treasury.
This measure is aimed at shortening the tax collection process, its administrative
procedures and collection burden both for the state and the taxpayer. For instance when
paying salaries and wages, all income taxes due by the salary or wage earner has to be
deducted and later paid to the state treasury by the employer.
➢ Tax base (tax assessment base): This is the specific aspect or domain on which a tax is levied,
for instance an individual’s income for income tax, the profits of companies for corporation tax,
the estate of a deceased person for inheritance tax, or the value of a landed property for land
tax. In simple terms, the tax base is the amount/value on which the tax rate is applied or the
income bracket for the tax.
➢ Tax returns: These are forms used by taxpayers to make periodic tax declarations and
payments.

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➢ Tax-deductible: This is an amount that can be deducted from income or profits in order to obtain
the final amount of income or profit that is subject to tax.
➢ Tax allowance: This is a deduction made in calculating the taxable income. It reduces the tax
base and serves as a tax benefit.
➢ Taxable income: This is the income liable to taxation. It is calculated by deducting income tax
allowances and tax-deductible expenses from the taxpayer’s gross income.
➢ Tax bracket: These are figures between which incomes or amounts are subjected to a specific
rate of tax. For instance, income between 1 and 2 000 000 CFAF is tax at 10%, between 2 000 001
and 3 000 000 CFAF at 15%, etc.
➢ A tax advantage: This is a benefit enjoyed by a taxpayer as a result of a reduction in a charge to
taxation.
➢ Tax rebate: This is a repayment of a tax already paid by a taxpayer. It is like a refund on taxes
earlier paid by the taxpayer. In order to obtain a tax rebate, the taxpayer has to make a
repayment claim to the Inspector of Taxes and the refund due to the taxpayer will be made by
the Collector of Taxes following the Inspector’s instructions.
➢ Tax exempt: This represents an item (payment, income, revenue, allowance, etc) which is not
subject to taxation. That is, a tax-free item.
➢ A tax heaven: This is a state, country or territory where certain taxes are levied at a low rate
or not at all. It also refers to countries which have a system of financial secrecy in place. It is
an area identified as having a composite tax structure deliberately established to take
advantage of, and exploit a worldwide demand for opportunities to engage in tax avoidance.
➢ Tax avoidance: This is a legal usage of the tax regime in a given country to one’s own advantage
to reduce the amount of tax that is payable by means within the law.
➢ Tax sheltering: This is a legal method of minimising or decreasing an investor’s taxable income
and, therefore, his or her tax liability. Tax shelters can range from investments or investment
accounts that provide favourable tax treatment, to activities or transactions that lower taxable
income. It is very similar to tax avoidance, although unlike tax avoidance, it is not necessarily
legal.
➢ Tax evasion: is the illegal evasion of taxes by individuals, corporations and trusts. This entails
taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities in
order to reduce their tax liability and includes dishonest tax reporting, such as declaring less
income, profits or gains than the amount actually earned, or overstating deductions. It is
commonly associated with the informal sector.
➢ Tax liability: This is the total amount of tax that an entity or individual is legally obligated to pay
to an authority as a result of the occurrence of a taxable event. This is obtained by applying the
appropriate tax rate on the tax base.
➢ Taxable event: This is any event or transaction that results in a tax consequence or tax liability
for the party who executes the event. Common examples of taxable events for investors include
the receiving of dividends and interests, selling securities for a gain and exercising options.
1.4 - The Legal Grounds of Taxes
The question then is: " on what grounds should the state demand this compulsory payment? "
The right to levy taxes is an attribute of sovereignty. For any fiscal measure to have legal grounds,
the consent of the citizens must be democratically expressed through the intermediary of their

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elected officials, both nationally (Parliamentarians and Senators) and locally (municipal
councillors).
These elected officials must make sure that the required equilibrium or balance is
maintained between the demands of the state and the request of the rights and interest of
individuals. To satisfy this requirement, proposals for financial deductions or levies from the
government must be annually authorised by the people’s elected officials. That is, all proposals on
fiscal policies must be deliberated in the national assembly, the senate and council sessions before
being promulgated into law.
1.5 - Functions and Purposes of Taxes
The functions of taxes can be perceived from two points of view:
▪ The fiscal function;
▪ The instrumental function.
1.5.1 - The Fiscal Function of Taxes
This function refers to “ how the government spends taxes ”. In a state, country or community,
the citizens or members of that community require a certain number of needs. Individually, these
people cannot succeed in acquiring all the resources needed to satisfy these needs. Collectively,
these people can use their collective efforts through the coordination of the state to acquire
resources which can satisfy these needs. Therefore, the execution of duties of collective interest
falls in the hands of the state.
Some of the duties of general or collective interest include:
▪ national defence: the largest government expenditure;
▪ social security: the most important non-military programme whose function is to provide
income to individuals during their retirement years;
▪ payment of interest for money borrowed through treasury bonds;
▪ public school systems;
▪ police and fire protection;
▪ construction and maintenance of roads and highways; public health services; etc.
The state therefore carries the obligation of providing these services to its citizens. In order
to get the finances required for these services, the state has to levy taxes on natural and artificial
persons. This financing function through public levies constitutes the fiscal function of taxes.
1.5.2 - The Instrumental Function of Taxes
In addition to using taxation to raise money (which is the main function or purpose of
taxation), a government uses taxes as an excellent means of intervention in the economy or the
society. A government may raise or levy taxes to achieve social and economic objectives, or to
achieve political popularity with certain groups. Taxation can redistribute a society’s wealth by
imposing a heavier tax burden on one group in order to fund services for another. Also, some
economists consider taxation as an important tool for maintaining the stability of a country’s
economy.
Concretely or in other words, taxes are used by a government to:
▪ Orientate, regulate and promote certain economy activity;

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▪ Redistribute incomes in favour of the poor; that is to bridge the gap of inequality. This is done
through the progressive tax system whereby the rich pay a higher amount of tax than the poor.
That is, the higher the income, the higher the tax and vice versa;
▪ Encourage certain behaviours and activities considered to be useful to the citizens, such as
education; or to discourage those that are not, like fighting against the consumption of tobacco
and alcohol through high taxes on these items in order to inflate their prices.
▪ Protect infant industries from foreign competition. Infant industries are young or new industries
that are still developing; the government encourages and protects them from foreign
competition by levying high custom duties on imported goods.
▪ Encourage investment by offering tax relief for investment in certain schemes.
▪ Stabilise economic growth through taxation policies which will influence economic factors such
as importation/exportation, employment levels, inflation, …
Review Questions
State how a government can use taxes as an instrument to promote the following
policies: A. To promote the provision of educational facilities by private individuals.
B. To protect a home based manufacturer of cement.
C. To discourage the setting up of breweries in the country.
D. To encourage the importation of rice into the country.
1.6 - Types of Taxation Policies
These are the means by which taxes are raised and collected in accordance with the tax
legislation. Taxes can be levied following one of the following Taxation procedures:
▪ the proportional tax;
▪ the progressive tax;
▪ the regressive tax;
▪ the ad valorem or percentage tax;
▪ the per capita tax; The specific or unit tax.
1.6.1 - The Proportional Tax
A proportional tax imposes the same percentage of taxation on everyone, regardless of
income. The amount of the tax to be paid is obtained by applying a fixed rate of tax on the
assessment base of the tax. The tax rate remains constant whatever the amount of the assessment
base.
For instance, if the tax rate is 10% on the monthly income, a person earning 100 000 CFAF is
required to pay 10 000 CFAF as tax; while another person who earns 250 000 CFAF also pays 10%
of it, that is 25 000 CFAF; every income earner pays 10% of his income.
Though favoured by the economist, Adam Smith, a proportional system of taxation is
nowadaysregarded
as being less equitable than a progressive system.