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An income tax is a government levy (tax) imposed on individuals or entities
(taxpayers) that varies with the income or profits (taxable income) of the
taxpayer. Details vary widely by jurisdiction. Many jurisdictions refer to
income tax on business entities as companies tax or corporation tax.
Partnerships generally are not taxed; rather, the partners are taxed on their
share of partnership items. Tax may be imposed by both a country and
subdivisions thereof. Most jurisdictions exempt locally organized charitable
organizations from tax.
Income tax generally is computed as the product of a
tax rate times taxable income. The tax rate may increase as taxable income
increases (referred to as graduated rates). Tax rates may vary by type or
characteristics of the taxpayer. Capital gains may be taxed at different rates
than other income. Credits of various sorts may be allowed that reduce tax. Some
jurisdictions impose the higher of an income tax or a tax on an alternative base
or measure of income.
Taxable income of taxpayers resident in the
jurisdiction is generally total income less income producing expenses and other
deductions. Generally, only net gain from sale of property, including goods held
for sale, is included in income. Income of a corporation's shareholders usually
includes distributions of profits from the corporation. Deductions typically
include all income producing or business expenses including an allowance for
recovery of costs of business assets. Many jurisdictions allow notional
deductions for individuals, and may allow deduction of some personal expenses.
Most jurisdictions either do not tax income earned outside the jurisdiction or
allow a credit for taxes paid to other jurisdictions on such income.
Nonresidents are taxed only on certain types of income from sources within the
jurisdictions, with few exceptions.
Most jurisdictions require
self-assessment of the tax and require payers of some types of income to
withhold tax from those payments. Advance payments of tax by taxpayers may be
required. Taxpayers not timely paying tax owed are generally subject to
significant penalties, which may include jail for individuals or revocation of
an entity's legal existence.
Income taxes are used in most countries around
the world. The tax systems vary greatly and can be progressive, proportional, or
regressive, depending on the type of tax. Comparison of tax rates around the
world is a difficult and somewhat subjective enterprise. Tax laws in most
countries are extremely complex, and tax burden falls differently on different
groups in each country and sub-national unit. Of course, services provided by
governments in return for taxation also vary, making comparisons all the more
difficult.
Countries that tax income generally use one of two systems:
territorial or residential. In the territorial system, only local income ¨C
income from a source inside the country ¨C is taxed. In the residential system,
residents of the country are taxed on their worldwide (local and foreign)
income, while nonresidents are taxed only on their local income. In addition, a
very small number of countries, notably the United States, also tax their
nonresident citizens on worldwide income.
Countries with a residential system
of taxation usually allow deductions or credits for the tax that residents
already pay to other countries on their foreign income. Many countries also sign
tax treaties with each other to eliminate or reduce double taxation.
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