Things you should understand about tax types

Direct taxes, like income and property taxes, are paid directly by taxpayers and are typically progressive. Indirect taxes, such as VAT and excise duties, are levied on goods and services, with the cost passed to consumers. Transfer pricing involves setting prices for transactions within multinational companies, regulated to prevent profit shifting and ensure compliance with tax laws.

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‍Direct Tax 

Direct taxes are levied on income, wealth, or property and are paid directly to the government by the taxpayer.

Direct taxes include:

1. Income tax: Levied on an individual's or corporation's income or profits.

2. Corporate tax: Imposed on the profits of companies.

3. Property tax: Charged on the value of property owned.

4. Wealth tax: Levied on an individual's net wealth.

5. Inheritance or estate tax: Imposed on the estate or inheritance received after someone's death.

Direct taxes are typically progressive, meaning the rate of taxation increases with the income or wealth of the taxpayer. They are also harder to avoid or shift compared to indirect taxes like sales or VAT.

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Indirect tax

Indirect taxes are levied on goods and services and are passed on to consumers as part of the cost, rather than being directly paid by the taxpayer

Common examples of indirect taxes include:

1. Value Added Tax (VAT): A tax added to the price of goods and services at each stage of production or distribution.

2. Sales tax: A tax on sales or on the receipt of goods and services, typically added at the point of sale.

3. Excise duties: Taxes on specific goods such as alcohol, tobacco, fuel, and other products.

4. Customs duties: Taxes on imported goods.

5. Environmental taxes: Levies on goods or activities that are harmful to the environment, such as carbon taxes or waste disposal taxes.

Unlike direct taxes, the burden of indirect taxes can often be shifted from the producer or seller to the consumer, making them easier to collect but sometimes harder for the consumer to identify.

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Transfer pricing

Transfer pricing involves setting the prices for goods, services, or intangible assets exchanged between related entities, such as subsidiaries, branches, or divisions within a multinational company. These internal transactions within the same corporate group are governed by "transfer prices.

Transfer pricing is crucial as it determines how income and expenses are allocated within a company, directly affecting tax liabilities.

Tax authorities closely monitor this to prevent profit shifting to low-tax jurisdictions, ensuring compliance with higher-tax regions.

To avoid this, many countries enforce strict transfer pricing rules, requiring companies to set prices based on the arm's length principle, ensuring they align with those charged in similar transactions between unrelated parties.

Common examples of transfer pricing include:

• Pricing for the sale of goods between subsidiaries.
• Fees for services provided between related entities.
• Royalty payments for intellectual property (IP) rights within the group.