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-7
Indonesia
Economic Development BH/4 April 7, 1954
Business Taxation ard Regulation of Prof it Transf era in Uinda~erveloped Countries
by Benjamin '-iggins
The sytem of business taxes and regulation of profits trans-fers preser;ed in this paper was originally devised to fit within a general policy framework laid down by 'he Indonesian Government. At
the time, the Government wished to attract foreign capital, but was reluctant to allow unlimited transfers J'or four main reasons: profits higher thin 15% or 20% after tax were considered unjustly high, re-presentirg exploitation of Indonesian resources and workers; it was
considered desirable to block profits in fxcess of 15% or 20% in order tc provide capital for expansion of 'ndonesian industry and agriculture; it was feared that in the absence of such limits, the privilege of transferring profits would be used to transfer capital,
imposi ig a serious drain on foreign exchange reserves; and it was feare that without limits on transfers, the transfer of excessively high ?rofits would in itself result in serious losses of foreign ex--charre reserves.
While the original context of ry recommenditions was therefore spfecifically Indonesian, the conditions which i;formed them prevail ir other underdeveloped areas: difficulty in ac.ieving an appro-p-iately anti-inflationary budget, and a consequent need to make 'ivery reasonable use of business taxes as a source' of revenue, with-out unduly hampering private investment for development purposes; an unfavourable balance of payments, and consequent need to conserve foreign exchange reserves and, if possible, to atttact foreign capital; inadequate domestic savings and taxes (actual or r alistically po-tential) to finance economic development, providing a still more pressing need for foreign capital; strong natlonalist sentiment, ex--pressed as opposition to "exploitation" of dcmestic labour and re.-sources by foreigners through earninc and trznsferrig large profits; and, finally, a shortage of trained and competent personnel to ad-minister the tax and foreign exchange contro2 systems, and a consequent need for simplicity in tax and foreign exchar e measures.
If the only motives shaping tax--and-trarfer policy are to attract foreign capital and to conserve forei;n exchange, a case can of course be made for imposing no limitations on transfers of profits
-2-after tax. At one stage of the discussion of tax-and-transfer policy, I made such a case to the Indonesian Government, in the following termts:
"Exploitation of Indonesian resources and workers, and excessively high profits, are not confined to "foreign" undertakings. A good many firms that pass as "Indonesian" are also engaging in monopolistic, exploitative practices. The best way to deal with this problem is not by limiting transfers, but through a tax on excess profits, perhaps in the form of a tax on profits in excess of a fair return on utilized capacity, as described in an earlier memorandum,
As for providing investment funds, the question is whether investment would be greater with limitations on transfers or without them, I think there can be little doubt that there would be more investment without the limitations; the reactions to the draft statement on foreign investment policy show very clearly that foreign investors regard ary limitation on transfers of profits as a serious barrier to new investment. This attitude is especially strong among potential investors in such in-dustries as oil and plantations, where the investor hopes to earn and transfer very high profits in good years to make up for low returns or actual losses over a long se-quence of bad years. Foreign investors cannot be forced to invest here. If it is desired to retain a portion of high profits for reinvestment, it is necessary to make such reinvestment attractive, A simple way of doing that is to permit new investment, as well as replacement, to be deducted from taxable income, as is done in Sweden and
Switzerland.
With regard to flight of capital as a threat to re-serves of foreign exchange, it is doubtful whether there is any great volume of capital awaiting such an opportunity for transfer. Most of the foreigners eager to get their money out of Indonesia have presumably found a way of doing so by now. Some of those still wishing to repatriate capi-tal may change their minds if investment conditions here are made more attractive0 In any case, it is the net trans-fer that counts; and new investment would be so mu'Wmore attractive if there were no limits on profits transfers that the net inflow of capital would probably be greater if there were no limitations. Finally, with tax rates on com-pany income in the neighbourhood of
50%, there would be no
advantage in transferring capital under the '.uise of profits, and paying the tax on the "profits", rather than transfer-ring capital throu;h the free market, unless the free market.3.
rate is more than double the official rate. If the free market is just double the official rate, it will cost two
rupiahs to transfer one, whether the transfer is called "profit" and the 50% tax paid on it, or whether the transfer is made through the free market. At present the free mar-ket rate is very little more than double the official rate; the added incentive to make transfers, if no limits are im-posed on transfers of profits except the. payment of income tax, cannot be very great.1 If the free market rate can be reduced, to less than double the official rate, especially if an official free market is established, there would be no incentive whatsoever to transfer capital under the label of profits and pay the tax on it. Even under present cir-cumstances, it is unlikely that net capital transfers would impose a heavier drain on reserves without limitations than with them.
In considering the drain on reserves through transfer of excessively high profits, too much attention should not be paid to 'rare instances of extremely high profits. The importance in the whole foreign exchange situation of firms earning 100% to 200% profits in a single year is very small. In any case, these rare instances of extremely high profits can be handled in various ways. An excess profits tax is one way. Averaging of profits over several years for tax
and transfer purposes is another0 With a tax rate of 50%, a firm must average more than 30% profits before tax, if
it is to transfer more without the limitation of transfers to 15%, than it would ift ere were such limits. The num-ber of firms that can average more than 30% return on their capital (before tax) over a period of years is very small indeed. If each firm pays taxes on average profits over the past years, and is allowed to transfer that average profit after tax, the additional drain on foreign exchange reserves by not limiting transfers would probably be quite insignificant.
It must be remembered, too, that if there are no limits on transfers of profits, no transfers for repatriation as such need be permitted. A firm would be allowed transfers for either replacement or debt retirement (not both) and profits after tax. Such a system takes care automatically of cases such as new oil companies, or new plantations, for whom a 15% return is sufficient incentive for investment only if it is averaged over a very long period, perhaps a couple of decades, and who count on withdrawing profits (after tax) when they earn them, to compensate for the long years when their outlays exceed their revenues,
1.
Since this note was written, the free riarket rate on dollars has risen to nearly three. times the official rateo
ash'..
On balance, it seems quite likely that the foreign exchange situation would be more favourable without limits on profits transfers than with them."
These arguments would not apply, however, if foreign firms bar--row substantial amounts in the local capital market. In that event,
'foreign investment" with unlimited profits transfers may involve a 3erious net drain on foreign exchange. If the amount borrowed local-ly is to be deducted from the capital value on which the profits earned are regarded as transferable, there must be some measure of total capital investment, or of bona fide "foreign" investment, and some regulation of transfers. or~ woi the above considerations be of primary importance where profits transfers must be limited for purely political reasons.
Finally, it is my own opinion that the basic improvements in the business tax system itself, made possible by linking taxes to transfer rights, may well outweigh the unfavourable effects on foreign
investment of moderate limitations on transferable profits,---let us say, to an average over several years of 15% to 20% on capital, the figures under consideration by the Indonesian Government at that time. Thus while the Governments of some underdeveloped countries may pre-fer not to limit profits transpre-fers at all-including, apparently, the present Indonesian Government,--the tax-and-transfer system outlined below should have some interest for those concerned with the monetary and fiscal policy of underdeveloped countries.
II
The application of regulations regarding transfer of profits and depreciation on foreign investment requires a definition of the value of capital0 In meeting this requirement, the Government can select a definition which is in accordance with accepted economic theory, and also with some accounting practice and some business thinking. At the same time, the Government can introduce a modifica. tion of the corporation tax system that will constitute an improvement in economic policy while meeting- the demands of Parliament.
Fundamentally, the system consists of evaluating capital by dis-counting returns at an appropriate rate of interest, taking account of the complexity of the managerial problem, and the degree of risk, involved in the enterpriseo According to economia theory, the value of an asset is the discounted sum of anticipated future returns on it; or in other words, the sum of the "present values" of annual earnings over the life of the asset. For purposes of tax administration, for firms with an earnings record extending over several years, valuation
might more simply be based upon a moving average of returns over, say, five years, The Government could permit each firm to state itself what it co)niders a "fair rate of return" in its field of enterprise. However, when the regulations come into effect, the Government should limit the regular corporation income tax, perhaps to 40%, and impose
a supertax on companies wishing transfer privileges, which might run at about 10%, and should be designed to vary versely with the rate of retuva selected as "normal". The formula suggested below is (gross
earnings minus estimated "normal" net earnings) times (20% minus the select d "normal %). This formula has special advantages, explained below,
With such a system, a company has virtually no choice but to maki its estimates as accurate as possible. If it overstates past ea- nings, in order to build up a high capital value as a basis for &timating transferable profits, it will become liable to additional rorporation income taxes, and penalties for tax evasion. If it over.
itates its "normal" rate of return, in order to avoid the supertaxes, its earnings will be capitalized at a high rate of discount, and trans-ferable profits (and depreciation allowances) will be reduced.
The firm may also be allowed to estimate for itself the number of years over which ea'enings are to be projected, in determining capi-tal value. The firm ill then be. required to amortize its plant over the same period, for tax purposes. Ihen the period is up, the firm will of course be allowed no further deductions of depreciation for
tax purposes; and if it then closes down or sells out, it will not be allowed to withdraw more than the capital value as determined. The Government might reserve the option to buy out any firm, fully amortized
by its own definition, or requiring replacement in excess of its own estimates, for the amount of its accumulated depreciation allowances, if it wishes to sell out., Thus if a firm overestimates the life of existing plant, in order to build up a high capital value for transfer purposes, it would not be allowed foreign exchange for replacement in excess of depreciation allwances accumulated. The plant might then break down for lack of adequate replacement, and the company might have to sell out to the Government. If a company underestimates the life of the plant, in order to be allowed quick amortization of its assets, the capital value will be low, transferable profits will be low, and withdrawable capital will also be low. Thus no firm could benefit by giving false information about the probable life of its plant.
If depreciation allovances were used for actual replacement, the value of capital, and tra isferable profits, would ramain unchanged, unless earnings rise. If a firm brings in capital in excess of
depre-ciation allowances, the excess could be added to capital value, and transferable profits, an( permissible replacement or withdrawal, would increase accordingly.
-6--Capitalization of earnings would be unfair to firms with poor earnings records, who can legitimately expect higher rates of return in the future. Such firms may justly contend that the true value of their plant is greater than the sum of present values of average ast annual earnings, over the expected life of the plant, because thetir future earnings are expected to exceed past earnings. Such firms might be permitted to estimate their future capacity for production and sales, as well as their "normal" rate of return, in this case, however, they would be allowed to transfer only the stipulated per-centage of their "utilized" capacity. For example, capital might be valued at Rp. 1,000,000 on the assumption that future output will average 100,000 units per year, and that output can be sold at present prices, and that a normal return for such enterprises is (say) 10%. No price increases should be allowed for, since this would be an in-vitation to speculation and to exploitation of monopoly power. If output turns out to be only 50,000 units, the firm will be allowed to transfer, not 15% on Pp. 1,000,000, but only 15% on the amount of plant "utilized", i.e., Rpa 500,000, In calculating tax liabilities
and permissible withdrawals for replacement, depreciation would like-wise be permitted only on "utilized capacity".' In this case, too, the
supertax would be applied to earnings in excess of a "normal" rate of return on "utilized capacity"0 Under this system it would not pay
firms to overestimate future sales, in order to obtain a high capital valuation for transfer purposes.
Firms might be given the option of capitalizing past earnings, and applying the appropriate rates to the resulting capital value when estimating transferable profits and excess profits tax, or of
capitalizing estimated future earnings (i.e., estimated output times present prices) and having depreciation, transferable profits, and
excess profits tax calculated on the basis of "utilized capacity". Indeed, they might be allowed to avera-e over an five year period that includes the current year. Only firms confident of their ability to produce and sell more in the future than in the past would choose to capitalize on the basis of future earnings alone. If firms demons-trate an ability to produce and sell more at current prices, it is only right that they should be rewarded. The whole system then pro.-vides an incentive to i prove techniques, lower costs, and expand output, and at the same time it destroys the incentive for monopoly restriction or for hoarding.
A simpler way of achieving the same effect would be to. value capital on the basis of past earnings, recalculated at present rates of tax, and to write up capital value in the same proportion that
output increases, The incentive to' expand output is therefore retained; remittable profits rise, and (for given gross earnings) both normal tax and supertax fall, as production increases.
For firms with a complex product mix, the determination of
Suppose, for example, that an oil company chooses to capitalize on the basis of estimated future earnings6 It will estimate its capa-city in terms of so much crude oil, so much refined oil, so much ordinary petrol, so much high octane petrol, kerosine, paraffin, etc. Its actual performance may be above the estimate on others. What proportion of capacity has it used? This question is easily answered in terms of a simple index of output weighted by values in the base year. If the prices of the various products are pi, P2, p , etc., and the estimated outputs are Qg, Q, Q , etc., then the iitial capital falls into proportions Cs 2 2, -- equals p1 Q1,! :P Q3
etc. If new products are added o the mix, they can be vle a
market prices and added to the index. The application of the index may seem complicated, but actually it is statistically a simpler job than adjusting wages to a cost of living index, as some Governments and many private companies do. The magnitude of the statistical task of course varies with the numbe-r of produrcts. For trading com-panies, it might be better to apply an index of prices to sales; but,
in any case, because of rapid turno.ver, few trading companies would want to "capitalize" on the basis of future earning.
A much simpler device for permitting firms to capitalize on the basis of future earnings, while protecting the Government's interests,
is to accept the estimate made by the firm, but to tax them on their estirated profits if their earnings fall below their estimate. The
Tis
should then be given the privilege of revising their estimatesannually. Even so, however, the tax penalty might impose too great a hardship on companies making well justified estimates of higher eernings, but which suffer from unforeseeable difficulties, such as prolonged strikes, riot, etc. Of courve such cases could be handled
tdministratively, but with the limitatiins on personnel in most anderdeveloped areas, the less scope there is for administrative discretion the better.
Firms with adequate records, and new investors, might be offered the alternative of having their capital valued on the basis of actual investment compounded at, say, 5% over the period since the invest-ment was made, and with deductions for past uithdrawals; for relative-ly new firms, there is no problem of determinIng how much foreign
exchange has actually been invested, whereas for old firms it may be impossible to trace through the book's initial investment, depre. ciation, replacement, and withdrawals and come out with an answer that is meaningful. Most new firms would probaoly choose to have their assets valued according to actual investment, because of the uncertainty regarding future earnings. The capital may actually be worth less than it costs, because the venture mwT be ill advised; but in this case there will be little or no profits to transfer and little or no excess profits tax to pay, so that there will be little or no loss to the Government After a number of years of operation -- say five-firms may be required to shift to one of the other two systems.
-8.
To provide protection against internal inflation or devaluation of the currency, foreign firms might be permitted to keep their ac. counts (including taxes, of course) in terms of foreign currencies invested. In the event of obvious and chronic world inflation, it may be necessary to permit revaluation upwards oT Capital values, to
take care of rising prices and costs. However, the problem arises only for old firms; capital values should never be placed high on ,he amble that prices will rise. And if old firms are allowed to value plant on the basis of (say) a five-year moving average of earnings, the effect of price increases on capital values will be automatically taken care of,.
A problem arises in the case of those enterprises, such as plantations, which may suffer wide fluctuations in earnings over veiry long periods. For such enterprises, an averaling period of five years may rot be enough to prevent unduly high taxation and excessive limitations on profits transfers when a period of high easiings occurs after a long period of losses. I see no reason why suvh firms sho'uld not choose a longer averaging period it they like, pnvided that the replacement period is at least as long, and pro-vided records are available. As indicated above, if a firm chooses an excessivly long period for averaging and amortization, its de-priciation allowances for tax purposes will be very low, and its taxes acco'dingly high. It will also be a long time before the firm benefits fully from a shift to a higher level of earnings.
'ransfers of Debt Retirement
A similar problem arises in the case of enterprises such as petroleim companies, which may make heavy investments in explora-tion aid development over two decades or more, without earning any profits, and then move into a phase of- very high earnings. The situation is sometimes further complicated for the oil companies by
"deb',s" to the parent companies. Other concerns, too, may have debt reticement obligations. Such companies naturally wish to liquidate debu as rapidly as possible when they are in a high-earnings phase. Actial physical replacement by petroleum companies bears little re-lation to the magnitude of past investment; they don't"replace" dry ho:.es or fruitless surveys. Nuch the same is true of plantations; arnual replacement may be a tiny fraction of investment made before p':ofits were earned. But it would be unfair to such companies to
insist that they have a valueless asset if they withdraw their past investments (as repatriation) over the first years of a high-earnings phase after many years with low or no earnings. Accordingly, it might be desirable to distinguish among four types of transfer: pro-fits, depreciation (actual replacement), repatriation, and debt re-tirement. In such special cases, by administrative discretion, transfer might be permitted for debt retirement.
-9'-Of course nearly all foreign companies would rather invest their depreciation reserves at home than have them blocked in the underdeveloped area. However, the objections of many foreign firms to having their depreciation reserves blocked could be overcome by two instruments; foreign exchange certificates, equil in value to depreciation reserves and usable at any time for actual replacement; and tax certificates, bearing a modest return, and usable for tax payment. These instruments would assure foreign companies of a safe, liquid asset in which to invest depreciation allowances pending actual replacement, and remove the fear of loss through devaluation of the
currency.
This system can be applied to all foreign firms, including trad. ing firms. The "replacement period" for a trading firm may be only one year or even six months, but no difficulties seem to arise out of this fact, The trading firm can capitalize its earnings over a period of a single year, and withdraw 15% of this tapital value" as profits, and the balance as "replacement", if it replenishes
in-ventories, or as repatriation, if it contracts its scale of operations. Indeed, the system has special merits for enterprises such as film companis, for which it is virtually impossible to define capital in physica1 terms. However, for trading firms there should be a minimum period of averaging of profits to determine what is withdrawable in arr on3 year.
'XI
This system of capital valuation is not without its adminis. trative complications, but for firms established many years ago, this approach would be much simpler than an attempt to measure the Talue of capital actually brought in, especially where records have 'Jeen destroyed. It is also simpler than trying to determine cost of replacement. What, for example, is the cost of "replacing" a
mine or oil well? What allowance should be made for exploration costs, geological research, etc? If a machine is replaced by another which cost the same but produces twice as much, is this "replacement" or expansion? What if product mix is changed? Cost in what country?
At what exchange rates? The "replacement cost" approach could in. volve the Government in endless bickering with foreign firms, and
could undermine the favourable effect on foreign investors that the Government seeks to produce.
Moreovei as may be seen from the examples in Appendix I, the business tax system outlined above has several advantages, which together constituta a major tax reform:
-10-1. Unlike the usual progressive corporation income tax, it does not penalize size -as such. The rate of tax on large profits is the same as on small profits. Taxing size, as such, has never been good eco-nomic policy; a small firm with a tidy little monopoly, or a group of traders who have cornered a market on a minor item, may earn 100% return on their capital, while a large firm may earn only
5%.
(The British plantations in Indonesia have apparently earned only 2.5% average over recent decades; the oil companies apparently earn5%-o
10%). If the intent is to encourage new national firms, these may be exempt from tax for (say) three years, or allowed accelerated depreciation* If it seems desirable to help struggling small firms, profits up to a certain amount might be totally exempt. But large firms are often efficient firms, and should not be penalized merely for being big.2. Since the tax system does not penalize size, neither does it penalize growth. In Example IV, doubling earnings does not increase the rate of tax. The disincentive to expansion involved in a pro-gres!e tax structure is avoided. Indeed, if capital is valued according to output, as suggested above, the tax system encourages expansion. Transfers and tax deductions both rise with output. No penalty attaches to earnings of 30 to 40%, before tax, through ef.. ficiency or innovation. Indeed, hghher rates of return can be
earned, and the balance after taxes ransferred, provided increased earnings come through increased o , and not through monopoly restrictions.
3. At the same time, the system has a built-in tax on very high rates of earning. Suppose the firm in &le III is actually earn-Trg700%. It will not nominate a rate above 20%, even if permitted to do so; otherwise its taxes will rise (through reduced deprecia-tion allowances) and transfers will fall, At 20%, its capital value will of course be valued above cost. But as profits the firm can
transfer only 15% of "capital", or 447. The baance of its profits (before depreciation) can be transferred only as repatriation or for actual replacement. If transferred as repatriation, its entire
capital will be regarded as withdrawn after
5
years and no more trans.-fers of any kind would be permitted. If used for replacement, the firm must invest 2,880 in five years, to replace a plant that is actually worth only 802. In other words, it must build up its actualcapital to the estimated capital, if it wishes to go on transferrn the same amount. It gees no reward for reinvesting, But the
alter-natives are to repatriate, and so give up a profitable enterprise, or have its profits blocked in the underdeveloped country.
h.
As compared to the present system, the proposed system provides an incentive for long-term investment in productive enterprise ra-ther than in trading ventures with quick turnover. The supertax, Txw(EgmE )(20R) is also Txa(E -VR)(20aR)o If E and R are given,
-11--then Txzt(v), with dTx negative. But V=V(P). with V . Thus dTx
y-
- dV dTXp- * is negative0 That is, the supertax falls as the
period of investment increases.2
5.
The system contains a built-in reward for ploughing back profits. By choosing a high rate of "normal" return (20%) a firm can reduce its tax burden, at the cost of having some profits blocked. These profits can be invested domestically. Thus the system results in lower taxes for firms choosing to plough back profits in domestic investment0 (This effect could be enhanced by reducing the normaltax to, say, 35% and raising the supertax rate to (25-R)/100. If loss of revenue were no problem, there would be advantages in these rates, which brings the systam close to "a tax on profits in excess of normal returns on utilized capacity").
6. The only "discrimination" in the system is the imposition of a supertax on firms wishing foreign exchange transfer facilities. In a situation which requires conservation of foreign exchange, such
"discrimination" is perfectly valid. Indeed, the proposed system provides an incentive far firms, nominally "foreign" but actually domestic, not to register as foreign firms and avoid the supertax. 7. If it is not considered desirable to discriminate, domestic firms can be brought within the system. Choosing the 20O rate of "normal" return, to eliminate the supertax, would reduce their capital value, and so their allowable depreciation, f or normal tax purposes, If it seems advisable to strengthen this effect, a flat rate deduction for all firms of X% of capital might be allowed, and offset by a higher
normal tax rate. This modification would also strengthen the built-in built-incentive to undertake long-period productive built-investment.
8. Indeed, its flexibility is one of the great attractions of the system. By minor modifications, the Government can make the system operate in almo3t any way-that it likes.
9. Another great attraction is that most of the work of adminis-tration, and .ost of the decisions, become the responsibility of the firms thtmirselves. The administrative work of the tax
authori-ties is no ;,ore complex tian with the present tax system. Only figures of 'utput, sales, and costs need be checked by the tax au-thorities, and these figures usually require checking to administer existing -ax systems. The computation of tax and transfer rights involves only the simplest kind of arithmetic. The tax forms utilized can be
just
as simple as those commonly in use--perhaps simpler.It would appear, therefore, that where there are sound economic or political reasons for imposing limitations on the transfer of profits, the system of business taxes and transfer regulations out-lined above has much to recommend it.
W
Appendix I: Some Numerical Examples
In the exanples below, the following symbols are used: E 9 Gross earnings
(Total receipts less operating costs) En eNet earnings
(Gross earnings less taxes) Ef n- Estimated net earnings
ET Transferable profits
Ed Net earnings after depreciation D Depreciation
R * Estimated "normal" rate of return
V Value of capital
ER I "Normal" earnings (i.e., ERUVR) Tn - Normal tax, defined 40 of (Eg-D)
T., eSupertax, defined as (E -ER) X (20,-1V) TT u Total tax
4r
CASE I: Turnover 1 year (Film Co.)
R:20% E : V a Tx: 1398 1000 910 91 910 136.5 (1398-910) 4.:196 (1398-91)o1:131 MTI 327 (: 66%) ig T: 1,071 Jq4D: 1,046 Blocked:T E -V :
:
D=
ET.-TX: 1398 1000 870 130 870 130 (1398-870).4:21 (1398-130).05: 63 , T/f TT: 273 (= 51%) -Tn 1125 ErrD 4: 1000 Blocke&IT5 ,- 1398 E1000 V: 830 E= 176 Ds 830 BT 1245 Tns (1398-830) .4227 Ti: 0 TT: 227* E -a* 1171 Eii+,D954.5
Blodec:The above examples involve an initial estimate of taxes above 50% Ed. If taxes are estimated at 50% of Egg
E : 1090 E :1130 E-1170
Egm 1000 1000 EJ 1000
VO: 910 870 a 830
4:
91 FR 130 ER= 1761) : 910 Ed:180 D - 870 Edw260 D:: 830 Ed3I&O
I: 136.5 ET: 130 ET. 124
In (1090-910)o4:72 Tnu (1130-870)04.10h Tn: (1170-830)o4:136 aXw (1090-91).ll00 Trz (1130-130).05.50 Tx: 0
17 1E Tr136 (38%of Ed)
T, 172 (.95% Ed) T. 154r (.60% Ed) EgT 1034 E' a..TTo 918 E -T : 976 ET+D 954 F a-Dw 1046 Ej. D. 1000
Can transfer all net Can transfer all net Blocked: 80
P-6 months R-20% 1090 1000 I of 910-455 .5 x 2 - 91 68 x 2 - 136 2 x 455 - 910 E in- Va--R E-D -Edi1o (o90-910),4-72 (1090-91) (2O -1 R 172 (-95% Ed) TT- 918
D - 1o46 (Can transfer
1170 1000 1 of 830-415 83 x 2 - 166 62 x 2 - 124 415 x 2 - 830 Ede30 T -(1170-830)-136 -0 T - 136 (!38% of Ed) E -T - 1034 all) +TD - 954 Blocked: 0
Replacement in
5years
(anufacture)R-20% R-30% nm v -M ER - ETD -Ed - T- Tx-1398 E ~1000 -3,333 500 ER -67 D -721 Ed -(1i98-670).4-291 Tn -(1.98-500)0-&45 T1
-37
T - 336 (=46% Ed) ETT g T -'.062 +D- 1170Can transfer whole of En 1398 1000 2 nqS 596 447 596 802 (1398-596) .4a-321 0 TT - 321 (- 0' Ed) E T 1077 E +D - 1043 Blocked: 34 E f-1 = ER B12 D -Ed Tn Tx -1398 1000 2,210 663 331 h42 956 (1398-4h2)o4-382 0 TT - 382 (40% Ed) Eg T'10l6 d ET+D 773 Blocked: 243 -a .T Tn ST E CASE III: R=t5l%
CASE II: (An imortr) P=6 months Rtn105
CASE IV: Replacement in 10 Year S a etroleuu co
)
R-10% E - 1398 n- 1000 V n 7900 ER - 395 1) - 790 ET- 1185 Ts n(1398-790)4h-243 Tj -(1398-395)(20-5).150 TT - 393 (-65%) E -T- 1005 g T- 790 + 215 RT+D - 1975 E a 1398 Ai -1000 V n 7200 -576 -7204
1080 Tn e(1398-720) 4k271 T" -(1398-576)(20-8) 99 T B 370 (-5l45) E -T as 1028 g T= 720 + 308 RT+D - 1800'an transfer all of prof-its Can transfer all profits after tax, and replacement after tax, and
replace-ment E - 1398 Ef - 1000 V r= 610 E - 614 DR 6114 E - 918 Ta (1398-614).4=313 T -(1398-614)(20-10) 79 TT B 392 (-49%) E 9TT 1006
4k+D
- 1530Can transfer all profits after tax, and replacement
Note: if tax correctly forecast, E',
ER,
and D would a11 be slight-ly higher, and both T and TR would be slightly Tower bring TT/En- 50%Assume Earnings Doublai:
E - 2796 In: 2000 S=15,800 ER - 790 D = 1580 FP - 2370 T - (2796-1580).4-486 T -(2796-790)(20-5).309 T- 795 (-65%) S-T = 2001 RT+D 3950 E a fn= ER T -T; 2796 2000 14,v00 1152 1.440 2160 (2796-1520)4-532 (2796-1152),12-197 T = 729 (=55,) E -T = 2078 R+D 3600 E -2796 E n- 2000 r - 12,280 ER - 1228 D = 1228 , = 1892 Tn - (2796-1228)14=627 T" e (2796-1228),1=-157
77-T 77-T 772 (-49%) E -T = 2024 Rf+T am 3070
Appendix II: Computation of Tax and Transfers
The system requires good judgement on the part of the foreign firms operating under it, but requires no information that is not needed for intelligent operation of the business in any case, The task involved for the tax and transfer authorities is extremely simple, and involves no checking of accounts that is not necessary anyway for income tax purposes. The simplicity of the system may be seen from the following sample form:
Sample Form
1. Average gross earnings (after operating cost but
2. Average tax before depreciation)
3. Average earnings after tax (but before depreciation)
h.
Estimated normal rate of retun %5.
Period of amortization 6. Capital value.(see Table)7. Depreciation allowance (item 6 divided by item 5)
8. Transferable profits (15% of item 6)
9. Net earnings (item 1 minus item 7)
100 Estimated normal earnings (item 6 times item h)
11. Normal tax (40% of item 9)
12. Supertax (item 1 minus itemm1)Tims (20% minus item h)
13. Total tax (item 1 plus item 12)
Once the firm has presented the usual income tax data, and has decided on its-"normal rate of return", the tax authorities can cal-culate the tax and permissible transfers in a few minutes.
