methods have been used to categorize taxes. There are direct taxes that are clearly rec-
ognizable and can be found on a financial statement, such as income taxes. In addi-
tion, there are indirect taxes, such as consumption taxes, whether they be a state or
local sales tax, which is common in the United States, or a value-added tax, which is
more common outside the United States; property or capital taxes; excise taxes; estate
and gift taxes, employment taxes, and so-called user fees, a term that may be more po-
litically acceptable than the term tax. Although international business tends to focus
on income taxes, other taxes, especially consumption type taxes, may have an impor-
tant impact on a business activity. Although estate and gift taxes impact on individu-
als rather than on business entities, because they can impact on employees who are
transferred into a foreign country, they impact on the employer. Consumption taxes af-
fect the cost of assets purchased by a business entity, and, when they take the form of
a transfer tax, they often dictate the means of buying and selling businesses. For ex-
ample, the relative importance of transfer taxes in Europe often necessitates the pur-
chase of a business taking the form of a purchase of shares of stock rather than the un-
derlying assets, whereas, in the United States, the relative lack of significance of
transfer taxes, except when real property is involved, leads to more flexibility in the
purchase and sale of businesses. Despite the importance that nonincome taxes can
have on a business enterprise, businesses tend to focus more on income taxes, since
these taxes can most easily be affected by tax planning. Consequently, this chapter fo-
cuses on United States international income taxation. However, the reader should be
aware that nonincome forms of taxation are also important, as is foreign taxation.
(b) Classical versus Integration. The United States has (as this chapter is written)
the so-called classical system of taxation. This means that there is a tax at the corpo-
rate level, with a second tax at the shareholder level, when the corporate profits are
either distributed as a dividend to the shareholders or the shareholders sell their in-
vestment in the underlying corporation. There is a trend in most of the other devel-
oped nations away from the classical system of taxation to an integrated or imputa-
tion type of taxation. This means that the corporate tax and the shareholder taxes are
integrated in such a fashion so that only one tax is levied on the profits. In most cases,
there is a lack of full integration but only a partial integration. This integration can
take several forms. In some countries, such as Germany, retained profits are taxed at
a higher rate than distributed profits. In other countries, such as the United Kingdom,
shareholders receive a credit for some of the underlying corporate taxes. (This sys-
tem was abolished for distribution on or after April 16, 1999. In addition, the general
corporate tax rate was reduced to 30%, with lower rates for small companies.) This
can best be understood by the following simple example:
A U.K. corporation is subject to a 33% corporate tax. When it distributes a divi-
dend to its shareholders, a portion of that dividend (currently, 25/75) is remitted to
the U.K. tax authorities as an Advance Corporation Tax, or ACT. This ACT serves a
dual purpose: it serves as a credit against the mainstream corporate tax, and it can
also be claimed as a credit by the shareholder against its tax liability on the received
dividends. If the U.K. shareholder were to receive a dividend of 75 with an ACT of
25, it would report a total dividend of 100 (75 + 25) with a tax credit of 25 against
the individual income tax liability on that 100. By this means, the United Kingdom
have partially integrated its corporate and shareholder income taxes.
Depending on the form that integration takes, it has a potential of favoring local
investors and discriminating against foreign investors. Consequently, the United
30 • 2 INTERNATIONAL TAXATION