Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Such status may provide a potential taxpayer complete relief from tax, tax at a reduced rate, or tax on only a portion of the items subject to tax. Examples include exemption of charitable organizations A charitable organization is a type of non-profit organization . The term is relatively general and can technically refer to a public charity (also called "charitable foundation," "public foundation" or simply "foundation") or a private foundation. It differs from other types of NPOs in that its focus is centered from property taxes Property tax, or millage tax, is an ad valorem tax that an owner is required to pay on the value of the property being taxed. Property tax can be defined as "generally, tax imposed by municipalities upon owners of real property within their jurisdiction based on the value of such property." There are three species or types of property: and income taxes An income tax is a tax levied on the income of individuals or business . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate tax, corporate income tax, or profit tax. Individual, exemptions provided to veterans, and exemptions under cross-border or multi-jurisdictional principles. Tax exemption generally refers to a statutory exception to a general rule rather than the mere absence of taxation in particular circumstances (i.e., an exclusion). Tax exemption also generally refers to removal from taxation of a particular item or class rather than a reduction of taxable items by way of deduction of other items (i.e., a deduction). Tax exemptions may theoretically be granted at any governmental level that imposes taxation, though in some broader systems restraints are imposed on such exemptions by lower tier governmental units.
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Specific monetary exemptions
Some jurisdictions allow for a specific monetary reduction of the tax base, which may be referred to as an exemption. For example, the U.S. Federal and many state tax systems allow a deduction of a specified dollar amount for each of several categories of "personal exemptions." Similar amounts may be called "personal allowances." Some systems may provide thresholds at which such exemptions or allowances are phased out or removed.[1]
Exempt organizations
Some governments grant broad exclusions from all taxation for certain types of organization. As an example, the UK generally exempts public charities from rates, VAT, income tax, and certain other taxes.[2] The exclusions may be restricted to entities having various characteristics. The exclusions may be inherent in definitions or restrictions outside the tax law itself.[3]
Approaches for Exemption
There are several different approaches used in granting exemption to organizations. Different approaches may be used within a jurisdiction or especially within sub-jurisdictions.
Some jurisdictions grant an overall exemption from taxation to organizations meeting certain definitions. The United Kingdom, for example, provides an exemption from rates (property taxes), VAT, and income taxes for entities governed by the Charities Law. This overall exemption may be somewhat limited by limited scope for taxation by the jurisdiction. Some jurisdictions may levy only a single type of tax, so a broad grant of exemption may have the effect of an exemption from only a particular tax.[4]
Some jurisdictions provide for exemption only from certain taxes. The United States exempts certain organizations from Federal income taxes,[5] but not from various excise or most employment taxes.[6]
Charities
Many tax systems provide complete exemption from tax for recognized charitable organizations. Such organizations may include religious organizations (churches, etc.), fraternal organizations (including social clubs), public charities (e.g., organizations serving homeless persons), or any of a broad variety of organizations considered to serve public purposes.
The U.S. system exempts from Federal and many state income taxes[7] the income of organizations that have qualified for such exemption. Qualification requires that the organization be created and operated for one of a long list of tax exempt purposes[8] and also requires, for most types of organizations, that the organization apply for tax exempt status with the Internal Revenue Service,[9] or be a religious or apostolic organization.[10] [11] Note that the U.S. system does not distinguish between various kinds of tax exempt entities (such as educational versus charitable) for purposes of granting exemption, but does make such distinctions with respect to allowing a [tax deduction] for contributions.
Governmental entities
Most systems exempt internal governmental units from all tax. For multi-tier jurisdictions, this exemption generally extends to lower tier units and across units. For example, state and local governments are not subject to Federal, state, or local income taxes in the U.S.[12]
Pension Schemes
Most systems do not tax entities organized to conduct retirement investment and pension activities for employees of one or more employers or for the benefit of employees.[13] In addition, many systems also provide tax exemption for personal pension schemes.[14]
Educational institutions
Some jurisdictions provide separate total or partial tax exemptions for educational institutions.[15] These exemptions may be limited to certain functions or income.
Other not for profit entities
Some jurisdictions provide tax exemption for other particular types of organizations not meeting any of the above categories.
Reciprocal exemptions
Some jurisdictions allow tax exemption for organizations exempt from tax in certain other jurisdictions. For example, most U.S. states allow tax exemption for organizations recognized for Federal tax purposes as tax exempt.[16] (multi-jurisdictional recognition of exemption)
Sales tax
Most states and localities imposing sales and use taxes in the United States exempt resellers from sales taxes on goods held for sale and ultimately sold. In addition, most such states and localities exempt from sales taxes goods used directly in the production of other goods (i.e., raw materials).
- See also Sales taxes in the United States Sales taxes in the United States are taxes added onto the price of goods or services that are purchased in the United States. A sales tax is a tax on consumption, which is displayed as a percentage of the sale price. Sales taxes are assessed by every state except Alaska, Delaware, Montana, New Hampshire and Oregon.[citation needed] Hawaii has a, tax-free shopping Tax-free shopping refers to the opportunity for customers to purchase goods or services without paying any tax normally collected at retail, such as sales tax, Goods and Services Tax, value added tax, or consumption tax, tax holiday A tax holiday is a temporary reduction or elimination of a tax. Governments usually create tax holidays as incentives for business investment. The taxes that are most commonly reduced by national and local governments are sales taxes. In developing countries, governments sometimes reduce or eliminate corporate taxes for the purpose of attracting.
Exempt individuals
Certain classes of persons may be granted a full or partial tax exemption within a system. Common exemptions are for veterans[17] or clergymen.[18] The exemption granted may depend on multiple criteria, including criteria otherwise unrelated to the particular tax. For example, a property tax exemption may be provided to certain classes of veterans earning less than a particular income level.[19] Definitions of exempt individuals tend to be complex.
Exempt income
Most income tax systems exclude certain classes of income from the taxable income base. Such exclusions may be referred to as exclusions or exemptions. Systems vary highly. [20] Among the more commonly excluded items are:
- Income earned outside the taxing jurisdiction.[21] Such exclusions may be limited in amount.[22]
- Interest income earned from subsidiary jurisdictions.[23]
- Income consisting of compensation for loss.[24]
- The value of property inherited or acquired by gift.[25]
Some tax systems specifically exclude from income items that the system is trying to encourage. Such exclusions or exemptions can be quite specific[26] or very general.[27]
Among the types of income that may be include are classes of income earned in specific areas, such as special economic zones, enterprise zones, etc. These exemptions may be limited to specific industries. As an example, India proviedes SEZs where exporters of goods or providers of services to foreign customers may be exempt from income taxes and customs duties.[28]
Exempt property
Certain types of property are commonly granted exemption from property or transaction (such as sales or value added) taxes. These exemptions vary highly from jurisdiction to jurisdiction, and definitions of what property qualifies for exemption can be voluminous.[29]
Among the more commonly granted exemptions are:
- Property used in manufacture of other goods (which goods may ultimately be taxable)
- Property used by a tax exempt or other parties for a charitable or other not for profit purpose
- Property considered a necessity of life, often exempted from [sales taxes in the United States]
- Personal residence of the taxpayer,[30] often subject to specific monetary limitations
Conditions imposed on exemptions
Exemption from tax often requires that certain conditions to be met.
Multi-tier jurisdictions
Many countries that impose tax have subdivisions or subsidiary jurisdictions that also impose tax. This feature is not unique to federal systems, like the U.S., Switzerland and Australia, but rather is a common feature of national systems.[31] The top tier system may impose restrictions on both the ability of the lower tier system to levy tax as well as how certain aspects of such lower tier system work, including the granting of tax exemptions. The restrictions may be imposed directly on the lower jurisdiction's power to levy tax or indirectly by regulating tax effects of the exemption at the upper tier.
Cross-border agreements
Jurisdictions may enter into agreements with other jurisdictions that provide for reciprocal tax exemption. Such provisions are common in an income [tax treaty]. These reciprocal tax exemptions typically call for each contracting jurisdiction to exempt certain income of a resident of the other contracting jurisdiction.
Multi-jurisdictional agreements for tax exemption also exist. 20 of the U.S. states have entered into the Multistate Tax Compact that provides, among other things, that each member must grant a full credit for sales and use taxes paid to other states or subdivisions. The European Union members are all parties to the EU multi-country VAT harmonisation rules.
External links
- United States:
- IRS Publication 557, Tax-Exempt Status for Your Organization
- IRS FAQs about Tax-Exempt Organizatons
- UK:
Thu, 02 Sep 2010 09:59:38 GMT+00:00
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