1. Definition of a tax
What is a tax?
An enforced contribution exacted pursuant to legislative authority in the exercise of the taxing power and imposed and collected for the purpose of raising revenue to be used for public or governmental purpose.

2. According to the definition Tax cover the following characteristics:
1- the payment to the governmental authority by law.
2- the payment is required pursuant to the legislative power to tax.
3- the purpose of requiring the payment is to provide revenue to be used for public or governmental purpose.
4- special benefits and services or privileges are not received as a result of making the payment.
The payment is not a fine or penalty that imposed under the powers of government.

3. Standards for evaluation tax
Equity . Certainly . Convenience . Economy
Equity:
A tax should be based on the taxpayers ability to pay.
The payment of a tax in proportion to the taxpayers level of income results in equitable distribution of the cost of supporting the government.
Certainty:
A taxpayer should know when and how a tax is to be paid. And determine the amount of tax to be paid.
If not, the taxpayer can ignore the payment ??

4. Standards for evaluation tax
Convenience:
A tax should be levied at the time it is most likely suitable for the taxpayer to make the payment (when receive income) and have the money available to pay the tax.
Economy:
A tax should have minimum compliance and administrative costs. To maximize revenue for government.*

5. Types of the US (federal) taxes
Income taxes
Employment taxes
Social security taxes
Unemployment taxes
Sales taxes (VAT)
Property taxes
Excise taxes
Wealth transfer taxes

6. Direct taxes (no ability to be avoided) 1- income taxes
Local taxes
Direct taxes (no ability to be avoided)
1- income taxes
2- property taxes
Indirect taxes (can be avoided in some cases)
1- excise taxes
2- sales taxes (the same with VAT 14.5%)
3- customs

7. VAT case for financial institution
The total salaries for the Islamic bank = 40000$
and the net profit end year = $ after vat for salaries
Required:
1- calculate the vat must be paid by the bank monthly and at the end of year.
2- calculate income tax assuming income tax rate = 15%. And vat = 16%

8. Answer 1- vat paid monthly = 40000* 16% = 6400
Vat for salaries end year = 6400* 12= 76800
2- vat for net profit = * 16% = 40000
Vat for the year = =
Net profit after vat for profit = =
Income tax = *15%= 31500

9. Case for the relationship between VAT and PROFIT
Najeeb company LTD started trading without bookkeeping but all transaction with tax invoices entered to the statement of purchases and sales.
When examine the calculation we know that :
1- total amount paid to VAT government office during the year = 5600
2- no ending inventory
3- total amount of fixed assets purchased which entered to statement of purchase and sale = and the depreciation rate 6%.
4- the base value for delayed purchase invoices for the next year =5000
5- during the current year paid the following expenses:
15000 salaries. 300 interest. 200 others.

10. Required:
Calculate the accrued income tax if income tax rate =15%. And VAT rate 16%.
Notes:
The base value of delayed purchase invoices due to current year but did not entered to statement.
Invoices of purchasing the fixed assets have been entered to the statement of the year and that mean deducted. But these purchasing due several years.
So depreciation for one year should be deducted, That means we should add the base value of purchasing fixed assets to the profit value.
Expenses which did not pay VAT did not enter the statement and did not deducted. So we must deduct it.

11. answer The profit from the VAT statement= Payment * 100/16
5600 *100/16= 35000
Add the base value of purchasing the fixed assets
= 11600/1.16= 10000
Vat for fixed assets= 10000*16/100= 1600 to make sure of Vat
Deduct the base value of purchase invoices delayed to next year (5000)
Net profit before expenses not pay VAT 16% =40000
Deduct expenses not pay VAT as follow:

12. Salaries (15000)
Interest (300)
Others (200)
Depreciation of fixed assets 10000*6%=(600)
Total of expenses 16100
Net profit = ( ) =23900
Income tax = 23900* 15%= 3585

13. The relationship between VAT and other indirect taxes
The most important step in calculation taxes by the following arrangement:
1- customs
2- the purchase tax (sales)
3 value added tax
The following case show the details.
A company will import raw material for trading with price 4000 and the customs 20% and purchase tax 60% and the vat 16%.
Required: calculate the price after taxes.

14. answer Statement Value Taxes The price 4000 Customs 4000*20% 800
Price after customs
4800
Purchase tax
4800*60%
2880
Price after purchase tax
7680
VAT
7680* 16%
1229
Price after VAT
8909

15. Calculation of importing several goods
Merchandise
Cost
Customs
Added rate
Purchase tax
VAT
Value after taxes
Soap
10000
13.6%
50%
10%
17%
Cars
90000 7% -
75%
Milk
5000

16. Merchandise
Cost
Customs
Added rate
Purchase tax
VAT
Value after taxes
Soap
10000
13.6%
50%
10%
17%
21930
Cars
90000 7% -
75%
197174
Milk
5000
10238

17. The difference between VAT and customs
Standard
VAT
Custom & purchase tax 1
When imposed
With all steps of production. sale. distribution
Imposed once when enter the goods for local area 2
Mechanism of collection
Collect from consumer then paid to government
First paid to government then collect from consumer 3
Tax classification
Consider balance sheet account
Part of good cost (trading account) or income statement 4
Tax rate
14.5%
It is according to good classification and & economic agreements and political situation 5
The ability of facing problems
difficult in applying
Easy 6
Evasion
Easy (Paris agreement)
Difficult or no way

18. (includes income from all resources) Minus: excluded income
Income defined
(includes income from all resources)
Minus: excluded income
Equals: gross income
Minus: deduction and exemptions
Equals: taxable income
* tax rate (from tax law)
Equals: income tax
Minus: tax prepayments
Tax credit
Equals: tax (refund) due with return

19. Note: The exchange rate for dollar 4 NIS.
case
Omar work in private company with monthly salary 2000 NIS. Calculate the income tax if you know that he is married and has 2 sons under 18 years old.
Note: The exchange rate for dollar 4 NIS.

20. Answer:
Annual income = 2000*12= 24000
24000/4 = 6000$
Exemptions
Resident 3000
Wife
Sons =500*2
Total =4500
Taxable income =1500* 8% 120$ annually
Tax value per month = 120$/ 12 =10$
10$*4 = 40 NIS
Salary after income tax= 1960 NIS

21. case
Hassan work in private company with monthly salary 3000 NIS.
He lives in a rent home 200$ monthly.
He is married and have 5 sons.
Required:
Calculate the accrued income tax if you know that the exchange rate for dollar 4 NIS.

22. Answer:
Annual income = 3000*12/4= 9000$
Exemptions
Resident 3000
Wife
Sons =500*5
Rent
Total of exemptions =(8000)
Taxable income =1000* 8% 80$ annually
Tax value per month = 80$/ 12 =6.66$
6.66$*4 = 26.6 NIS
Salary after income tax= NIS

23. case
Mr. Marwan work as manager for a company with monthly salary 9000 NIS and have bonus addition career 1500 and bonus addition high cost of living 750 and bonus addition for travel 250
Required: calculate the income tax if you know that he is married and have 2 sons.
One of them study via Islamic university
the exchange rate for dollar 5 NIS
Note: Marwan work in private company so bonus for travel included with income tax

24. Answer:
Base salary 9000
Bonus addition career 1500
bonus addition high cost of living 750
bonus addition for travel 250
Total salary *12/5= 27600$
Exemption:
Resident 3000
Wife
Sons = 500*1
Student (university) 2500
Total of exemption = 6500$

25. Taxable income = 21100$
10000*8%= 800
6000*12%=720
5100*16%= 816
Annual income tax = =2336
Monthly income tax= 2336/12=194.6$
194.6*5=973 NIS
Salary after income tax = =10527 NIS

26. case
Mr. Jehad work in the Investment Bank with monthly base salary 309$ and bonus addition high cost of living amounted 80% of base salary. and bonus addition for cash risk 25.7$ monthly.
If you know that his contribution of saving box with 5% of base salary. And social security contribution (pension) 32.02$. Mr. Jehad get 14 salaries yearly (banking system)
Required: calculate the income tax in case
1- single.
2- (married + 4) and gets additional income from part time work 200$ for 6 months annually.

27. Answer: case 1
Base salary 309$
+ addition high cost of living 247.2$ (309*80%)
+ addition for cash risk 25.7$
total monthly salary = 581.9$
Deduct nontaxable income
saving box 15.45$
social security contribution (pension) 32.02$
Total of nontaxable income = 47.47
Net income =
Annual net income =534.43*14= $
Deduct the exemption
Resident 3000
Net taxable income *8% = $
Monthly income tax / 12 = 29.88$

28. Answer: case 2
Base salary 309$
+ addition high cost of living 247.2$ (309*80%)
+ addition for cash risk 25.7$
total monthly salary = 581.9$
Deduct nontaxable income
saving box 15.45$
social security contribution (pension) 32.02$
Total of nontaxable income = 47.47
Net income =
Annual net income =534.43*14= $ + ( 200$*6)=
Deduct the exemption
Resident 3000
Wife
Sons (500*4)

29. Net taxable income 3182.02*8% = 254.56$
Monthly income tax / 12 = 21.21$