Retirement and Tax Planning Specialist Module

Flashcards based on the FPSB Retirement and Tax Planning module covering tax principles, terminology, cross-border rules, and tax-yield calculations.

What is the principle of productivity in a tax system?

The goal of a tax system to generate the revenue a government needs to pay its expenses.

Distinguish between horizontal equity and vertical equity.

Horizontal equity means taxpayers with the same income levels pay the same tax rate; vertical equity suggests those with more income or assets should pay a proportionately greater amount of taxes.

What is a progressive tax structure?

A system where tax rates increase as the underlying sum to which the rate applies (taxable income) increases.

How is a proportional tax system defined?

A system that applies the same tax rate to all levels of taxable income.

What does the principle of elasticity refer to in taxation?

The ability to adjust the tax system, such as increasing or decreasing rates, in response to changes in the economy and government needs.

List Adam Smith’s four canons of taxation.

Equality, Certainty, Convenience, and Economy.

What is the difference between the 'worldwide method' and the 'territorial method' of corporate taxation?

The worldwide method taxes income earned abroad with a credit for foreign taxes paid; the territorial method (participation exemption system) wholly or partially exempts active business income earned abroad from home territory tax.

What is a Value-added tax (VAT)?

A type of consumption tax placed on each step of the production process and collected when the product is sold.

How do sales taxes differ from Value-added taxes (VAT)?

Sales taxes are collected from consumers only at the point of sale, whereas VAT is collected throughout the supply chain at every production step.

What are the two types of excise taxes?

Ad valorem (a fixed percentage charged on a specific good) and specific (a fixed amount based on the quantity purchased).

Define transfer pricing.

The pricing of sales of goods or services between different divisions, departments, or related entities (like a parent and subsidiary) of a company.

What is the difference between a tax credit and a tax deduction?

A tax credit directly reduces the actual taxes owed, while a tax deduction is applied against expenses to reduce the amount of reportable income.

Define tax avoidance versus tax evasion.

Tax avoidance is the legal reduction of taxes via proper strategies; tax evasion is the illegal avoidance of income reporting or tax payments.

What is the difference between tangible and intangible property?

Tangible property has a physical existence that can be touched; intangible property has no physical existence and is represented by documents (e.g., stock certificates or patents).

How are personal property and real property distinguished in the text?

Personal property is mobile (e.g., furniture, cars), whereas real property is land and buildings that cannot easily be moved.

Define 'basis' in the context of investment property.

The adjusted cost of property, where adjustments like maintenance or improvements increase the amount and depreciation decreases it.

What is a realized capital gain?

A gain that results when an owner actually sells an asset and receives the proceeds.

What formula is used to calculate the nontaxable portion of a periodic annuity payment?

$$\text{Payment Amount} \times \frac{\text{Total Investment}}{\text{Total Expected Return}}$$

In cross-border scenarios, what is a certificate of compliance?

A document often required by a territory to prove an individual has complied with tax laws prior to leaving the territory.

How is interest income generally sourced for tax purposes?

Interest paid by individuals, partnerships, or trusts is sourced at the payor’s residence; interest paid by a corporation is sourced at the place of incorporation.

What is the purpose of a Double Tax Avoidance Agreement (DTAA)?

To alleviate the problem of an individual or entity being taxed twice on the same income by two different territories.

Define tax arbitrage in a legal tax planning context.

The process of exploiting differences between two different tax results for the same transaction in different jurisdictions.

What does the term 'situs' refer to?

The place in which an entity (such as a corporation or trust) is officially identified, incorporated, or chartered.

What is the formula for calculating Tax-Equivalent Yield?

$$\text{Tax-Equivalent Yield} = \frac{\text{Tax-Free Yield}}{1 - \text{Tax Rate}}$$

What is income shifting?

The transfer of income from a person in a higher tax bracket to someone in a lower bracket, often via gifting from a parent to a child.

Which accounting standards are used in the U.S. compared to the rest of the world?

The U.S. follows Generally Accepted Accounting Principles (GAAP); most of the rest of the world follows International Financial Reporting Standards (IFRS).

What is the difference between a private limited and a public limited joint stock company?

Private limited companies have shares held by members not open to the public; public limited companies offer shares through a prospectus to the general public.