Why do people have taxes? Well the simple answer is that taxation is the only possible means of increasing the revenue to fund government expenditure on the services and goods that all require public support. Without taxes people or governments will not be able to run their businesses and maintain social order. As it is the case governments to provide public services, and it is important that these services are maintained.
So why do governments need to control their fiscal balance? It is argued that taxation acts as a control mechanism, helping citizens to make informed decisions about how to spend their money. It also increases the efficiency of economic growth by ensuring that public investment is used to its fullest extent and that resources are properly utilized for the benefit of society as a whole. For example, if tax rates are too high then people would divert some of the wealth to paying taxes instead of use it to expand productive capital assets. In a way tax administration is like public finance.
Taxation issues are very important to the project company. The size, the number and variety of projects, the commercial activities and the projects profile will determine the type of tax regime that needs to be implemented. Issues in projects vary from location, land use, land and resource allocation, and income and profits sharing among others.
In an attempt to address the varied issues and requirements of projects the taxation system can be implemented using a mixed combination of administrative, legislative and private investment strategies. This paper discusses issues that arise in projects, both from a policy and operational perspective and suggests ways in which these issues can be addressed in a cost effective and logical manner. First, an introduction to taxation should be made as it has different meanings to different people. In the literature we refer to three main tax administration forms, which are usually agreed upon as being representative of the three mainstream approaches to taxation.
The approach taken in developing nations will differ from those developed nations, as will the nature of the economy and taxation systems in each of these countries. The focus of this paper is on the working paper methodology of undertaking international private investment projects and therefore attempts to generalize the key features of taxation. The approaches taken in developing nations have differing effects on both the quality and quantity of services and products produced by firms and therefore the level of living standards also varies widely.
Developing nations tend to have high tax rates and the inefficient administration of their internal tax administration system results in inefficient tax collection. The main challenges for such economies include poor management of resources, low wages and insufficient infrastructure. The lack of available private investment capital coupled with poor management of internal resources results in inefficient collection of tax payments. Private investors in these markets are reluctant to invest in poor economic conditions and most governments have little scope for improving the poor economic conditions of their nations; consequently inefficient tax administration continues.