Front Matter

Front Matter

Victor Thuronyi
Published Date:
June 1998
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    volume 2

    Tax Law Design and Drafting


    Victor Thuronyi



    © 1998 International Monetary Fund

    This book was designed and produced by Choon Lee, Philip Torsani, and IMF Graphics Section and edited by Elisa Diehl

    Library of Congress Cataloging-in-Publication Data

    Tax law design and drafting / editor, Victor Thuronyi

    • p. cm.

    • Includes bibliographical references (p.) and index.

    • ISBN 1-55775-633-3 (vol. 2)

    1. Taxation—Law and legislation. 2. Tax administration and procedure. 3. Bill drafting. 4. Taxation—Government policy. 1. Thuronyi, Victor.

    K4460.4.T37 1996 96-34672

    328.3’73—dc20 CIP

    Price: $25.00

    Address orders to:

    External Relations Department, Publication Services

    International Monetary Fund, Washington D.C. 20431

    Telephone: (202) 623-7430; Telefax: (202) 623-7201



    Summary of Contents



    This is the second of two volumes dealing with tax law on a comparative basis. The present volume focuses on the income tax.1 It also contains a bibliography of comparative tax literature and the most comprehensive listing available of the world’s tax laws. The first volume concentrates on taxes other than the income tax, although many of the issues it considers also have a bearing on the income tax. It also deals with two specialized income tax topics—inflation adjustment and presumptive taxation. The reader is referred to the introduction to the first volume for a discussion of the genesis and general orientation of this work. The various caveats stated there apply equally to this volume. While complementary, the two volumes are designed so that they can be used independently; for example, volume 2 can be used in courses on income taxation. The index in this volume covers both volumes. Acknowledgments are stated in the first volume.2

    As an orientation to the chapters in this volume, I begin by briefly examining the role of the income tax in developing and transition countries. I then consider comparative income tax law in broad outlines to set the stage for the more detailed discussion in the individual chapters.

    I. Role of Income Tax

    In the industrial countries, the individual income tax typically brings in a substantial share—in some cases, a majority—of tax revenues.3 By contrast, in many developing countries, the bulk of tax revenue is raised from indirect taxes, principally taxes on imports or exports, and, increasingly over the last twenty years or so, from some form of value-added tax (VAT).4 Moreover, in developing countries, the corporate income tax represents a larger share of total income tax revenues than in the OECD countries; in many cases, more revenue is raised from corporate than from individual income tax, while the reverse is by and large the case in OECD countries.5 This is not surprising in countries where many individuals fall below the poverty line.

    At first glance, one might conclude that, in order to make developing country tax systems more progressive, the share of the individual income tax in overall tax revenues must be increased. This is not necessarily the case, however. In a system that relies heavily on indirect taxes for revenue, the income tax can supply progressivity at the top end of the income distribution scale. While critical in making the tax system more progressive, the income tax need not necessarily represent a large share of tax revenues in order to do so.

    The above-described scheme, whereby the income tax supplements the VAT and other indirect taxes, may be appropriate for many developing countries because of its administrative implications. Only a small portion of the population would be required to file income tax returns. Instead of comprising most of the adult populace, as in a country such as the United States, the taxpaying population could be confined to relatively wealthy individuals and to businesses. By contrast, in many transition countries, the number of individuals who pay income tax tends to be higher than in developing countries, but most taxpayers would still not have to file returns because tax on wages and interest and dividends can be collected through withholding.

    It is often said that, within the constraint of raising the desired amount of revenue, a well-designed tax system will satisfy the criteria of equity, efficiency, and simplicity. Equity means the establishment of a fair relationship between the resources available to a taxpayer and the amount of tax paid by that taxpayer. Efficiency refers to the effects that taxes have on economic behavior. Simplicity refers to the costs that a complex system imposes on both taxpayers (in complying with the laws) and the government (in collecting taxes). These criteria are merely one way of classifying the policy considerations that go into making decisions about tax law and should not be seen as excluding other factors. It should be clear that making decisions about taxation involves trade-offs among the relevant criteria and, hence, political or value judgments. For these, unique technically correct solutions cannot be dictated.

    The primary role of the income tax is to provide horizontal and vertical equity to the tax system. The income tax is the only broad-based tax that can contribute significant progressivity (vertical equity) to the tax system. Of course, there are limits to the desirable degree of progression. Excessively high marginal rates are problematic because of their incentive effects and because of the difficulties they create for administration. For this reason, it is best to achieve progressivity by making sure that the tax base includes all income, rather than by imposing high rates on a tax base that is full of holes. The income tax can also make a unique contribution to horizontal equity (equal treatment of taxpayers in equal positions). Because the income tax is calculated on an individual basis, the definition of taxable income can be tailored to match a society’s concept of equity among taxpayers. The challenge of income tax design is to give operational meaning to the concept of horizontal equity and to balance equity against other tax policy criteria (e.g., an income tax with too high rates will contribute to vertical equity but will lead to economic inefficiency; one that draws too fine distinctions between taxpayers may satisfy horizontal equity but will undermine simplicity).

    How to design the income tax law in the face of these trade-offs is the topic of the chapters that follow.

    II. Comparative Income Tax Law

    Comparative income tax law can be pursued from different angles. Most studies have examined particular aspects of income tax law, comparing their development in different countries.6 For example, Brian Arnold has traced the development of the taxation of the income of controlled foreign corporations and investment funds.7 This kind of study can be helpful in the formulation of specific aspects of tax legislation.

    In this introduction, I take a different approach—namely, to categorize families of income tax laws and to highlight some of the common characteristics within each family, and among families, as well as some of the differences. In advising a country on income tax design and drafting, it is important to be aware of the basic legal structure of the existing law so that any reform can build on it. As can be seen from the discussion below, the income tax law of most countries fits more or less clearly within one of several families. Legal concepts are inevitably shared within each family. Advice by a foreigner that is not based on an understanding of the family within which the law falls is not likely to be successful or appropriate to the country’s situation. Of course, one must not fall into the opposite error either. Just because a law may be classified within a particular family does not mean that a country may not have developed rules of its own that differ radically from its brothers and sisters. Careful study is needed. More likely than not, however, particular rules, even if they cause the law to differ from the rest of the family, will be rooted in the common legal heritage and may be framed as an antithesis or modulation of rules that are part of that heritage. To understand those rules, it is helpful to know about the common family heritage.

    Division into families is also of assistance to those seeking to understand the income taxes of different countries, whether for the purpose of comparative study or as part of tax practice. Identifying common characteristics of each family gives a head start to someone trying to sort out the law of an unfamiliar country. In the case of comparative income tax law research, the classification suggests that such research should include at least one country from each of the groups if it is to embody a truly global perspective.8

    The classification scheme is not a novel one and largely tracks the classification of legal families by comparative law scholars. At the same time, the focus on the income tax means that some countries that might be grouped into different families for private law purposes may fall into the same family for the income tax because their income tax laws are similar.9

    Virtually all the member countries of the IMF have some form of income tax law.10 The families into which these appear to fall are set forth in Table 1.11 The grouping is based on primary historic commonality or influence; much influence from one country to another is not captured in this grouping.

    Table 1.Families of Income Tax Laws
    1. BritishAntigua and Barbuda, Australia, Bahrain, Bangladesh, Barbados, Belize, Botswana, Brunei Darussalam, Canada, Cyprus, Dominica, Fiji, The Gambia, Ghana, Grenada, Guyana, India, Iraq, Ireland, Israel, Jamaica, Jordan, Kenya, Kiribati, Kuwait, Lesotho, Malawi, Malaysia, Malta, Mauritius, Myanmar, Namibia, Nepal, New Zealand, Nigeria, Oman, Pakistan, Papua New Guinea, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Samoa, Saudi Arabia, Seychelles, Sierra Leone, Singapore, Solomon Islands, South Africa, Sri Lanka, Sudan, Swaziland, Tanzania, Tonga, Trinidad and Tobago, Uganda, United Kingdom, Zambia, Zimbabwe
    2. AmericanLiberia, Marshall Islands, Micronesia, Palau, Philippines, United States
    3. FrenchAlgeria, Benin, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoros, Republic of Congo, Democratic Republic of the Congo, Cote d’lvoire, Djibouti, France, Gabon, Guinea, Haiti, Lebanon, Libya, Madagascar, Mali, Mauritania, Morocco, Niger, Rwanda, Senegal, Togo, Tunisia
    4. Latin AmericanArgentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, Venezuela
    5. Transition countries
    a. The Baltics, Russia, and other former Soviet Union countriesArmenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan
    b. OtherAlbania, Bosnia and Herzegovina, Bulgaria, Cambodia, China, Croatia, Czech Republic, Hungary, Lao People’s Democratic Republic, former Yugoslav Republic of Macedonia, Mongolia, Poland, Romania, Slovak Republic, Slovenia, Vietnam
    6. Northern European
    a. GermanAustria, Germany, Luxembourg, Switzerland
    b. DutchNetherlands, Suriname
    c. NordicDenmark, Finland, Iceland, Norway, Sweden
    d. BelgianBelgium
    7. Southern European
    a. PortugueseAngola, Cape Verde, Guinea-Bissau, Mozambique, Portugal, São Tomé and Príncipe
    b. ItalianEritrea, Ethiopia, Italy, San Marino, Somalia
    c. SpanishEquatorial Guinea, Spain
    d. GreekGreece
    8. MiscellaneousIslamic State of Afghanistan, Bhutan, Egypt, Indonesia, Islamic Republic of Iran, Japan, Korea, Syrian Arab Republic, Thailand, Turkey, Yemen

    While there are considerable variations in the details of the income tax rules from country to country, it is important not to lose sight of the considerable commonality in the income tax laws of all countries, and the even greater commonality among the various groups of countries. Also, considering the systems of eight groups of countries is considerably less daunting than considering all the countries of the world individually. Therefore, obtaining a general overview of the income tax laws of the countries of the world is not as difficult as it may seem at first.

    Historically, the income tax is a relatively new phenomenon and, in its modern form (late nineteenth and early twentieth centuries), the influence of three countries—Germany, the United Kingdom, and the United States—has been predominant. Other systems can for the most part trace their origins back to these three, in some cases in combination. For example, the original income tax law of France was influenced by that of Germany and the United Kingdom.12

    At a general level, the degree of commonality in income tax is striking, given that the theoretical possibilities for different forms of income taxation are virtually limitless. For example, while there has been extensive academic discussion of a personal expenditure tax, even to the extent of working out the details of such a tax, no country has one. Most countries have a generally similar approach to taxing the chief forms of income (wages and business income), and perhaps a greater divergence of approach in taxing various kinds of income from capital, although the degree of variation is limited. This relatively broad similarity does not mean that there are not differences in technical detail. At the same time, there are substantial differences in policy on particular issues, more so than in the case of a tax like the VAT, which is much more uniformly applied from country to country than the income tax.

    In the balance of this section, I highlight some basic structural differences in the income tax laws of the families of countries identified in the table.

    The first group consists of countries whose income tax law has been influenced by that of the United Kingdom. For the most part, these countries fall under the common law legal system (in some of the countries, the legal system as a whole may not be common law but the income tax law has a common law influence). The income tax laws of a number of countries in the group go back to a British colonial model law of 1922.13 Each country has modified its law independently since then; the extent of independent development varies. Countries that achieved independence from Britain before this time (Australia, Canada, New Zealand) developed their income tax laws independently and have not been influenced by the 1922 model.14 For these countries, the common statutory language or structure is minimal, but there are similarities in the concept of income and allowable deductions that justify placing these countries into the same tax family as the United Kingdom. The income tax law of the United Kingdom itself of course has also undergone considerable independent development since the 1920s, which has not been closely followed by the other countries, except Ireland. Only the income tax law of Ireland therefore bears a close resemblance to that of the current U.K. law. Some of the countries in the group (Brunei Darussalam, Kuwait, Oman, Saudi Arabia) have an income tax statute of limited application that has a common law influence dating from a later period (after World War II).

    Although the United Kingdom itself has separate laws for income tax and corporation tax, the 1922 model was a unitary law covering both individuals and corporations, and this approach of having only one income tax law is generally followed by countries in the group.

    The modern income tax originated in Great Britain in 1798.15 Initially, the tax was imposed on a global basis. A schedular structure was introduced in 1803, but the tax again had a global form by 1842, although still based on a schedular definition of income.16 The 1922 model ordinance represented a considerably simpler statute than the law then in effect in the United Kingdom, namely the Income Tax Act, 1918. The 1918 act defined different types of income in schedules to the act and specified different rules for allowable deductions in each schedule. By contrast, the model ordinance provided unified definitions of income and deductions. There was a schedular element to the definition of income in the model, in that there were six paragraphs listing separate types of income, so that any receipts not listed in one of these paragraphs were not subject to tax.

    Many of the common law countries have departed from a schedular definition of income. Income is often defined globally, and there is no segregation of rules for determining allowable deductions according to particular schedules. Instead, the rules for deductions are stated in terms that apply generally to all types of income. Even where the statute has adopted such a global form, however, judicial concepts of income may hearken back to the old schedules. Concepts of what is employment income, what is a capital gain, what is a business, what is a revenue item, and what expenses are deductible, among other matters, tend to be similarly treated in the judicial decisions, although in some countries these judicial rules have been overridden by statute. An underlying theme for the judicial concept of income (again, except as overridden by statute) is the source concept, under which a receipt is considered to be income only if it is periodic in nature and derived from capital or from an income earning activity.17 The source concept is shared with continental systems and is in sharp distinction to the United States, which, despite earlier judicial flirtation with the source concept, has enjoyed a judicial concept of income that is broad in scope, reflecting any realized accessions to wealth. The source concept used to be most important for the taxation of capital gains, which are not considered income under a source concept; however, by now many countries with a source concept of income have overridden it by statute with respect to capital gains (or at least some capital gains).

    The United States, together with the few countries whose income tax law is closely modeled on that of the United States, is listed as the second group. It shares with most of the countries in the first group the common law legal system. Therefore, some aspects of drafting, administrative law, and the role of judicial decisions are similar to those in the first group. In contrast with civil law countries, where concepts defined in codes tend to be applied uniformly in tax law,18 the tax law in the United States and other common law countries tends to be autonomous from other branches of law.19 However, the United States is categorized in a separate family because its income tax has developed along different lines. There was never an influence of the old U.K. schedules, because the U.S. definition of income was always a global one. Decisions in the U.K. courts on the concept of income and allowable deductions have had little influence in the United States. Although the influence of the U.S. tax rules on other countries in specific areas has been extensive in the past few decades, and although a number of countries—including, for example, many Latin American countries, Canada, Indonesia, and Japan—have taken some inspiration from U.S. tax law, only those few countries whose tax laws were modeled fully on that of the United States are included in the same group.

    The United States is characterized by a global definition of income, a comprehensive system for taxing capital gains (although capital gains have been subject to tax at preferential rates, and although the realization rules are not as broad in the United States as they are in Canada, for example), a classical corporate tax system, a single law for corporate and individual income tax, and a worldwide jurisdictional approach based on both citizenship and residence, with the use of a foreign tax credit system for granting relief from international double taxation. The United States has some of the most highly developed rules in virtually all areas of income taxation, which have as a whole become impossibly complex to deal with. A good deal of the law—both basic concepts and detailed interpretations of the statute—is judge-made, probably more so than in any other country. The United States also boasts a high percentage of returns filed compared with the total population.

    The third group consists of France and countries that have modeled their tax laws on those of France, largely deriving from a colonial period. There is a substantial degree of commonality among the income tax laws of countries in this group. The resemblance generally is to the tax law of France at an earlier time rather than to the tax law of France today. In France and in many other countries in the group, the tax laws are all gathered into a single tax code (some countries have separate codes for direct and indirect taxes). However, the individual and corporate income taxes are set forth in separate chapters of this code and are considered to be separate taxes. The French definition of income is structured according to eight categories: income from immovable property; business income; remuneration of certain company managers; agricultural income; wages, salaries, and pensions; professional and miscellaneous income; investment income; and capital gains.20 The rules for determining income and allowable deductions differ from one category to another. Before 1960, income in each schedule was separately taxed, and a global tax was superimposed on the schedular taxes (this is known as a composite system).21 This composite approach has been replaced in France with a global approach. The scheme of division into schedules is similar to that of Germany (see below), except that Germany has an additional category of miscellaneous income that includes pensions. Capital gains in Germany are taxed under either business income or miscellaneous income. Apart from these and a few other details, however, the German and French schedules follow the same basic approach. The French system does, however, have a number of distinctive features, including a special “family quotient” method for granting relief for dependents,22 the relatively extensive use of presumptive assessment methods,23 the preferential treatment of business capital gains,24 and its approach to taxing income earned abroad (exemption for business income of corporations; no foreign tax credit except under treaties).25

    The Latin American countries share a similar legal system and the same or similar language. They do not belong in the same family as Spain and Portugal, however, despite the language similarity and colonial background, although they would be placed together if the topic were private law rather than income tax law. The reason is that colonial independence was achieved well before the development of the income tax. Therefore, the development of the income tax in Latin America, Portugal, and Spain occurred with substantial independence and along different lines.26 Brazil’s income tax resembles Argentina’s much more than it does Portugal’s.

    All of the countries in the group follow the approach of a single income tax law, covering both individuals and corporations. There are, however, substantial differences within the Latin American group, even in terms of the basic architecture of the income tax law. Some countries have a global definition of income; for example, in Colombia the global definition of income goes back to the origins of the income tax in that country in 1925.27 By contrast, Chile still follows a composite28 system of income taxation, under which schedular taxes on different categories of income are creditable against a global complementary tax.29 The Chilean law divides income into only two categories: capital and business income (first category) and earned income (second category). In the middle fall countries like Argentina. The Argentine law follows continental Europe in defining income differently depending on whether individuals or companies are involved.30 In the case of companies, any increment to wealth constitutes income (this brings about an equivalent result to the balance sheet approach of France and Germany).31 In the case of individuals, the source theory is followed, under which an item is income only if it is periodic and comes from a permanent source.32 Many of the Latin American countries have experienced substantial inflation and have enacted comprehensive inflation-adjustment rules (as contrasted with the ad hoc rules adopted in some European countries) that have by and large been retained even as inflation has declined in recent years.33 These rules are quite similar in all the Latin American countries that have them. The Latin American countries have generally followed a territorial approach to international taxation, although several have now adopted a global approach. Many of the countries in the group have over the past decade enacted a tax on assets as a minimum business income tax.34

    The fifth group consists of countries making the transition from a socialist to a largely market-oriented economy. Generally, these countries have separate taxes on the income of individuals and of legal persons. The group is divided into two subgroups, the first of which consists of the 15 countries that formerly made up the Soviet Union. The income tax laws of these countries have been subject to rapid development over the past six years. The pace of change is particularly noteworthy because all these countries started with virtually identical tax laws as of the time of the breakup of the Soviet Union in early 1992. This common origin justifies their inclusion in one group, at least as of the time of writing, even though there are now substantial differences among them. Since 1992, several members of this group have made radical changes to their income tax legislation (and other tax legislation). The Baltic countries, Georgia, Kazakhstan, the Kyrgyz Republic, and to some extent Uzbekistan and Moldova have adopted systems heavily influenced by international models. Russia and Ukraine have been slower to make fundamental changes, but have nevertheless enacted a substantial volume of tax reform legislation in the income tax area, as with other taxes.

    The legislation in place in 1992 was appropriate to the tax system existing under the Soviet Union. Separate laws governed the taxation of physical persons and legal persons. The income tax for individuals had a limited role given the restrictions on individual property ownership and entrepreneurial activity. Under the 1992 legislation,35 the definition of income for individuals is global in concept. Residents are taxed on their worldwide income, nonresidents only on their domestic-source income. However, a wide variety of exemptions apply covering many types of payments and benefits, including both items received from the state and also many benefits offered by employers (social benefits, pensions, compensation for injuries, severance pay, unemployment benefits, scholarships, interest on state bonds, lottery winnings, and interest on bank deposits, to mention only a few of the long list of exemptions). Under the Russian legislation, capital gains were in principle subject to tax, with exclusions. Enforcement of a capital gains tax is, however, difficult in the region, and some countries eliminated the tax.36 Special exemptions apply for veterans, other individuals who provided heroic service of specified kinds, and the disabled. Deductions are provided for charitable contributions, dependency allowances, and home construction expenses. Despite the global nature of the definition of income, special rules (primarily having to do with withholding, but also in some cases specifying allowable deductions) were provided for wages received at the primary source of employment, wages received at other sources of employment, business income, income of foreign resident persons (i.e., noncitizens), and nonresidents. A number of the rules are holdovers from the former economy (e.g., special rules for noncitizens). The general orientation of the law was focused on collecting tax from withholding in all possible cases, even for business income.37 This obviously made sense only in the context of the former economy, where little independent business activity existed. As the economy developed, it is therefore not surprising that substantial changes in the income tax would be made.

    The tax on enterprises was designed with state-owned enterprises in mind. Its accounting rules and concept of income were the same as those under the accounting rules used for general purposes by state enterprises. Indeed, there was no conception that there could be a difference between financial accounting and tax accounting. The concepts involved developed out of a planned economy and had little to do with the concept of profit under a market economy. Under these accounting rules, many expenses that are normally deductible under European standards were not deductible. Advertising costs are one example; excessive wages are another,38 the latter having to do primarily with concerns for regulating state-owned enterprises. Thus, what was required at the time of dissolution of the Soviet Union and transition of these countries toward market-based systems was a fundamental overhaul of these laws in short order. Even six years later, the process is only in its incipient stages in many of the countries in this group, although a few (particularly Estonia and Latvia) have advanced much further in the direction of European standards than the rest.39 Even where progress has been made in reforming the law, administrative practice may take longer to change. The result is that the old Soviet accounting principles may still exercise an important influence in a number of countries. Those countries that have adopted substantially reformed laws may have freed themselves from these principles in theory, but now face the task of elaborating and applying the somewhat skeletal provisions found in the new legislation.

    The other transition countries face similar issues, although they are distinguished from the former Soviet Union group in that they did not inherit the Soviet tax laws as of 1991. These countries similarly started with an accounting system designed for central planning. They have generally by now undertaken at least one round of fundamental revision of their tax laws, but further rounds lie ahead. In many cases, the definition of income under the individual income tax is global in form. To varying degrees, individual countries have looked to particular European countries as models. For example, the income tax law adopted by the Czech and Slovak Republics bears resemblances to the laws of Germany, and the income tax and profit tax laws adopted by (or being considered by) Romania resemble those of France.

    The sixth group (northern European) consists of countries whose law has been influenced to varying degrees by Germany and is further broken down into subgroups to reflect the degree of resemblance within each of these. Generally, these countries have separate taxes on individuals and on legal persons. Germany’s definition of income is schedular in form and is based on seven categories of income; the same approach is followed in other countries in the same subgroup. The German categories are incomes from agriculture and forestry, business income, income from independent work, income from employment, investment income, rental income, and miscellaneous incomes.40 The other countries in the group also use a basically schedular definition, but with fewer categories (three or four).41 In these countries, there is generally no separate concept of capital gains in a business context; gains on the disposition of business assets are taxable as part of business income.42 Germany has a very important concept (largely shared by other countries in the group and by France) that distinguishes between business assets and private assets. The withdrawal of business assets from business use is a realization event (this is also true in France). By contrast, gains on the sale of private assets are generally not taxable. Exceptions are made for the disposition of shares that represent a significant holding in a company and for short-term gains.43 Accounting for business income generally follows financial accounting.

    As with the northern European group, the seventh group (southern European) has separate taxes on individuals and on legal persons. In contrast to the global approach of Germany, the southern European countries have a history of schedular taxation.44 Thus, the Italian system has historically been schedular (i.e., separate taxes with independent rate structures) and territorial, and has had a strong element of presumptive taxation.45 The approach to taxation of capital gains has been similar to that of Germany: private gains are taxed only if attributable to speculative activity; gains of companies are taxed as part of business income. Italy has had a corporate income tax only since 1954.46 This also had an important presumptive element in that it consisted of two components, the first being the assets of the company and the second being income that exceeds 6 percent of the taxable assets.47 The income of corporations was determined in the same manner as for individuals, that is, on a schedular basis. While the income and corporate taxes have now taken a more global form, the historical roots described above have influenced the form of these taxes. Spain also started with a schedular system, including presumptive elements, to which was eventually added a complementary global tax. Finally, the law of September 8, 1978, established the tax on a global basis, but still on a schedular definition of income.48 Accordingly, the tax is imposed on the following types of income: income from labor, income from nonbusiness capital, income from business and professional activity, capital gains, and income taxed on a flow-through basis.49 The corporate income tax in Spain goes back to the beginning of the century. By 1957, it was calculated on a global basis.50 The tax law provides its own accounting rules (i.e., the tax law is autonomous from commercial accounting); however, in practice the differences between tax and commercial accounting are minimized because the regulations call for the commercial accounting rules to be followed for tax purposes unless the tax law stipulates otherwise.51

    The final miscellaneous category represents countries whose income tax laws do not closely resemble those of any other group. Many of these belong to the Islamic legal family.52 This is not to say that there has not been a substantial cross-country influence for this group. For example, Turkey has been influenced by Germany and perhaps France. Indonesia has been influenced in recent years by the United States, particularly in the 1983 reform of its income tax law. We also include in the miscellaneous category Japan and the Republic of Korea. There is a close resemblance between the tax laws of these two countries, which have been influenced by Germany and the United States, but have unique features of their own. In Japan, tax accounting for business income is determined by financial accounting, with such adjustments as are specified by the tax law.53 There is a schedular definition of income, but the schedules differ from those used in Europe, consisting of Type I (corporate income), Type II (interest), and Type III (individual income).54 The system of taxing corporations is largely a classical one. The general approach to relief of international double taxation is a foreign tax credit system.

    One could go on to identify numerous instances of legislative imitation (which in many cases involves borrowing from, or being influenced by, countries outside the group) beyond the influence of predominant countries in these groups, some of which may not be apparent from the legislative language itself. The grouping in the table therefore does not begin to tell the full story as to the influences of various systems on each other.

    A Note on Terminology

    With some exceptions, the terminology for legal categories of persons and things used in this book corresponds to that used in civil law countries:55

    “Physical person” corresponds to “individual” in common law countries. “Legal person” is any person who is not a physical person. “Movable property” corresponds generally to “personal property” in common law jurisdictions. “Immovable property” corresponds generally to “real property” in common law jurisdictions. “Cost base” corresponds generally to “basis” or “tax cost.”56

    Acronyms and Citation Style

    The citation style in the footnotes generally follows The Bluebook: A Uniform System of Citation (15th ed. 1991). This uses some Latin terms that may be unfamiliar to those not accustomed to this style: supra (above, in this book), infra (below, in this book), and id. (short for idem, in the same work). To avoid clutter, tax laws are cited using a standard abbreviated format: country abbreviation, abbreviation of law, and § (which refers to section or article, according to the context). Local style in many countries uses “art.,” “s,” or “sec.” instead of §, but it seemed easier and understandable here to use the same format for all countries, since our abbreviated format in any event normally would not be the same as local citation style. Complete references to the laws are given in the bibliography.

    The following acronyms are used in this volume:


    Commonwealth of Independent States


    European Economic Interest Grouping


    export processing zone


    European Union


    foreign direct investment


    first in, first out


    first in, first out


    General Agreement on Tariffs and Trade (superseded by WTO)


    International Bureau of Fiscal Documentation


    last in, first out


    Organization for Economic Cooperation and Development




    taxpayer identification number


    undertakings for collective investment in transferable securities


    value-added tax


    World Trade Organization

    In numerical examples, “$” is used to refer generically to a country’s local currency. If a reference to U.S. dollars is intended, US$ is used.

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