Business income refers to any income usually realized for the execution or transaction of business activity. This indicates that business income is the aspect of earned income from the perspective of business transaction or activity. In order for the business income to apply to the aspect of the taxation system, it is essential to classify business income as ordinary income. Business income consists of business expenses, business losses, and business profits. It is the difference between revenues and expenses of the process of business transactions. This indicates that business income can be positive or negative within the financial year depending on the size of the expenses and revenues. Business income is received from the transactions or sales of products or services within the defined market.
OECD model treaty defines a clear perspective in relation to the handling of the business income. This is through indicating that the income of an enterprise of a contracting state shall undergo taxation only in the state in context unless the entity executes business activities in the context of other contracting states with the establishment of permanent facilities therein. In the determination of the amount of tax, the authority shall offer an allowance in relation to the volume of financial resource in the integration of the permanent establishment in the contracting states. No business income shall undergo attribution of the permanent establishment because of the concept of purchasing the establishment of the goods or services of the business entity. The determination of the business income will be consistent annually with exception to good, vital, and sufficient reasons to avert the decision in relation to evaluation of the income (Gustafson & Pugh, 1993).
In the international business transactions, business income may become subject to taxation by more than one jurisdiction. This is the aspect double or multiple international taxations. Countries across the globe focus on the minimization of this limitation in order to promote effective and efficient international trade. This is through integration of valuable treaties such as multilateral and bilateral treaties with the aim of reducing these barriers to the international trade. This treaties focus on the illustration of how taxation of the business income should occur between or among the contracting states thus the opportunity to promote international trade through minimization of the barriers and increase the volume of transactions. Bilateral treaties and multilateral contracts also contribute towards the reduction of the level of taxation on the business income with various contracting states in order to minimize the burden of taxation.
In the determination of the ‘source of income’ by the courts, several factors guide the decision of the judges. One of the essential factors in the determination of the ‘source of income’ by the courts is the location of the item of income (Gustafson & Pugh, 1993). This focuses on illustration on where the income will fall within the context of the taxation system. This is essential for the development of the taxation laws with the aim of leveraging the taxes concerning the type of income. Another essential factor in the determination of the ‘source of income’ by the courts is the area or region in relation to the income. This indicates the determination of the ‘source of income’ while focusing on the permanent establishment of the products or merchandize of the entity in question. This is also essential in the determination of the taxable amounts and rates for the income under the influence of the courts.
The United States determines its source of income on different grounds in relation to the item of income. In the determination of the salaries, wages, and relevant compensation, the United States applies the location for the performance of the services. In the determination of the source of the business income, personal services, sales of inventory (purchased and produced), the nation applies three factors: allocation, selling area, and performance location. In the determination of the source of interests, the nation evaluates the residence of the payer of the income. In the evaluation of the source of dividends, rents, loyalties, natural resources, and patent, the United States applies location of the item, nationality of the corporation, and location for implementation of the item. In the determination of the sale of real property, the guiding factor is the location of the property. Sale of personal property is determined by the seller’s tax home (Scha-fer, 2006).
In the determination of the source of income in the United Kingdom, several factors are essential in the making of the final decision for the taxation purposes (Scha-fer, 2006). One of the essential factors in the determination of the source of income in the United Kingdom is the location of the item of income. This focuses on the geographical location of the permanent establishment in the context of the item of income. Another method or factor in the determination of the source of income in the United Kingdom is the evaluation of the residence of the taxpayer. This is essential in the determination of the taxable amount and rate for the purposes of effective implementation of the taxation system. The United Kingdom also focuses on the determination of the use or application of income while evaluating its source. It is also ideal to focus on the performance location with the aim of determining the source of income in the United Kingdom.
Tax credit refers to the amount or sum deducted in relation to the total tax owed by the taxpayer to the state or nation (Ault & Arnold, 2010). Within the context of various nations or states, tax credits are usually granted in relation to various tax categories and types. For instance, tax credits could be granted in the aspects of the property tax, income tax, and VAT. The implementation of the concept of tax credit is beneficial to numerous taxpayers in various ways. When granted as a deduction from the total amount of tax owed to the state, individuals who are under a different jurisdiction of taxes will feel the real shrink in tax burden. When granted as a subsidiary, these individuals will have to pay minimal taxes thus essential in the minimization of the tax burden in relation to the taxpayers under the influence of numerous jurisdictions.
Double taxation is a crucial factor in the determination of the volume of the international trade. This is because of the restrictions it applies on investments and transfer of products or factors of production across the border. Implementation of the tax treaties contribute massively in the minimization of the influence of double taxation on the context of the investors. Nations enter in tax treaties with the aim of enhancing their volume of international trade and investments across the borders. This is because tax treaties are usually designed to encourage cross-border investment and business transactions or economic activities. Tax treaties offer an effective opportunity for the contracting states to identify and solve taxation disputes or conflicts. Relevant authorities also have valuable chance of implementing or enforcing taxation laws concerning the taxation treaties. This provides the opportunity for the reduction of the barriers in relation to the foreign direct investment. This indicates that tax treaties focus on the minimization of the concepts of double taxes thus reducing the tax burden on the investors (Gustafson & Pugh, 1993).
Services income focuses on the provision of rewards to the efforts of an individual, individuals, or companies in relation to the skills and services offered to the public and private sectors within the economy (Ault & Arnold, 2010). This indicates that for an individuals or entity to have service incomes, it must come from the act of labor or skills of the entity, individual, or individuals within the defined economy. An example of service income is the aspect of labor in the form of laying bricks. Financial resources from this action or form of labor are known as the services income. Employment income or income from employment is the amount or sum individual accumulates on a monthly basis or in accordance with the terms of the contract while offering his or her skills to the corporations, public, and private sectors (Ault & Arnold, 2010). Examples of income from employment include wages, salaries, or fees.
There are differences and similarities between the employment income and services income. One of the main similarities in the context of the employment income and services income is the type of income. In most cases, services and employment are paid in the form of salaries, wages, and fees. Another similarity is the adoption and implementation of the concept of domestic test in the evaluation of the source of income. The test is used in both employment and service incomes to determine the difference in the sources of income for the application of taxation laws. One of the main differences between the employment income and services income is the aspect of regular payment. In employment income, employees obtain regular installment for their payment in relation to the terms and conditions of the contract. This is contrary to the mode of payment in the form of services income in which the payment mode is the lump sum in most cases (Ault & Arnold, 2010).
Several tests are applicable in the evaluation of the source of income with reference to various entities across the globe. One of the most essential tests in the determination of the source of income in relation to the services or employment is the domestic test. This focuses on location in which the income was generated. It also identifies the area of performance of the source of income in relation to the rules and taxation system of the income. This will enable taxation systems and authorities to evaluate the source of income either in the form of the aspect of employment or services. An example of the domestic test in the context of internal and international trade is the gross domestic product. This focuses on the determination of the source of income on the gross domestic product (Ault & Arnold, 2010).
In the handling of international economic activities, the determination of the tax implications of an individual or business entity is through the evaluation of the source of income and implementation of the concept of the permanent establishment test. Permanent establishment is a term to the refer to the fixed place or particular location of the business or economic activity essential in the generation of income and value added tax in relation to a specific taxation system of jurisdiction. The permanent establishment test focuses on the evaluation of the business activity in the context of three valuable elements: fixed, place, and business. This type of test is integrated in most of the international tax treaties with the aim of providing sufficient guidance for the taxation of the international economic transactions or activities. This indicates that the focus of the permanent establishment enables the international investor to determine the amount he or she will pay as tax in relation to the concept of fixed establishment of the economic activity (Ault & Arnold, 2010).
Pension refers to a fixed amount or sum paid to an individual at regular course especially after the aspect of retirement in accordance to the contract of the employee. The payment of the pension by relevant employment entities focuses on the making of payments through regular installments. This is the main distinguishing feature between the aspect of pension and the concept of severance pay. Severance pay is offered to the employees, not in the aspect of regular installments, but lump sum. The main aspect of the pension is to motivate employees to remain loyal in the execution of their duties and obligations to the entities. Pensions are essential in the enhancement of the living condition of the employees following their dedication and commitment in handling of the duties and obligations of the organization. This indicates that pension is a form of appreciation to employees for their services to the business entity (Scha-fer, 2006).
In the aspect of appreciating employees for their services and commitment to the organization, companies or business entities have the opportunity to adopt two types of pension plans. These pension plans include a defined-benefit plan and defined-contribution pension plan. Defined-benefit pension plan refers to the aspect in which the employer guarantees definite amount or sum of benefit to the employee when he or she retires from the duties and obligations. This is effective regardless of the performance of the economic activity within the market and industry operation. On the other hand, defined-contribution pension plan occurs in the case of development or generation of predefined contributions for the employee. In this scenario of the pension plan, the amount or sum after retirement will adhere to the performance of the business entity or investment of the employers (Scha-fer, 2006).
Ault, H.J., & Arnold, B.J. (2010). Comparative income taxation: A structural analysis. S.l:
Kluwer Law International.
Gustafson, C.H., & Pugh, R.C. (1993). International income taxation: Code & regulations, selected sections. Chicago, Ill: Commerce Clearing House.
Scha-fer, A. (2006). International company taxation in the era of information and communication technologies: Issues and options for reform. Wiesbaden: Deutscher Universita-ts-Verlag.
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