Tax Policy – Inventory Valuation in Europe
As with capital investment, businesses cannot immediately deduct the full cost of inventory purchases against taxable income. Instead, the cost of inventories is deducted when sold and the deduction amount depends on the inventory valuation method. Today’s map shows which of the three inventory valuation methods European countries allow their businesses to use for tax purposes.
Because it would be impractical to track specific inventories, there are three cost-flow assumptions to calculate how much inventory costs should be deducted from taxable income when inventories are sold: First-in, First-out (FIFO); Last-in, First-out (LIFO); and Weighted-Average Cost.
The map reflects the best inventory valuation method available in a country, with LIFO the most preferred one, Weighted-Average Cost second, and FIFO last. Of the 26 countries covered, 11 allow businesses to use LIFO, 10 only allow the Weighted-Average Cost method, and five restrict their businesses to FIFO.
The choice of cost-flow assumption impacts a business’s taxable income. To illustrate this, assume a business first purchases an item of inventory at $10. Later, if prices have increased, the business may buy a second unit of the same item for $15. Now that the business has two units of this item in its inventory, one of these items is sold for $20.
- Under FIFO, businesses assume that the first inventory item purchased is the first one to be sold. So FIFO assigns a cost of $10 to the item sold because the first item purchased had a price of $10. The taxable income then is $10 ($20 revenue minus $10 cost).
- Under LIFO, businesses assume that the last inventory item purchased is the first one to be sold. So LIFO assigns a cost of $15 to the first item sold because that is the price of the most recent item purchased. The taxable income then is $5 ($20 revenue minus $15 cost).
- Under the Weighted-Average Cost method, businesses assume that the cost of the units sold in any given year is the weighted-average cost of all the available inventories for sale that year. In our example, the unit sold would be valued at $12.50 (average of $10 for the first item and $15 for the second item). This leads to a taxable income of $7.50 ($20 revenue minus $12.50 cost).
As these examples show, the method by which a country allows businesses to account for inventories can significantly impact a business’s taxable income. When prices are rising, as is usually the case, LIFO is the preferred method because it allows inventory costs to be closer to true costs at the time of sale. This results in the lowest taxable income for businesses. In contrast, FIFO is the least preferred method because it results in the highest taxable income. The Weighted-Average Cost method is somewhere between FIFO and LIFO.
Source: Tax Policy – Inventory Valuation in Europe
IRS Tax News – Procedure for obtaining EINs to change May 13
Beginning May 13, the IRS will accept employer identification number (EIN) applications only from individual taxpayers who have either a Social Security number or an individual taxpayer identification number as the responsible party on the EIN application.
Source: IRS Tax News – Procedure for obtaining EINs to change May 13
Tax Policy – Texas Would Check off Wayfair Requirements with New Bills
Two bills sitting in Texas’s Senate Finance Committee would put the Lone Star State in a good position to tax online sales. Senate Bills 70 and 890 solve legal issues with online taxes by outlining a uniform internet sales tax for state and local jurisdictions along with specific guidelines for distribution of the revenue. This bill increases transparency and simplicity, but Texas still has room to simplify its sales tax code further. In addition, lawmakers should consider using the revenue raised from expanding the sales tax base to pay for a lower overall tax rate.
Texas already requires Amazon to pay sales taxes, but these bills would simplify the system so it could capture revenue from any company making more than $500,000 in online sales occurring in the state of Texas, according to the Austin Business Journal.
To clarify the complex issue of internet sales taxes, the 2018 Supreme Court case South Dakota v. Wayfair outlined several items for state taxes to include in order to remain constitutional when collecting taxes from marketplace sellers:
- A safe harbor for sellers who have limited transactions in the state
- No retroactive collection
- Single state-level administration of all sales taxes in the state
- Uniform definitions of products and services
- Appropriate software to levy the tax
- Exoneration for sellers with errors stemming from the use of state-provided software
When the Wayfair decision was first made, we noted that Texas was not in line with the above checklist, and needed to make legislative changes before it could use that particular revenue stream. Although the state would do well to accept uniform definitions for products and services, these bills would put Texas in a good position to start collecting internet sales taxes.
The state’s complex network of local sales taxes was one of the main issues with Texas’ compliance. SB 70 solves this problem. It creates uniform state and local sales tax rates of 6.25 percent and 1.75 percent for internet sellers, vastly simplifying the tax process for companies. If not for this provision, sellers would have to deal with the state’s 1,594 sales tax jurisdictions—which would not only be complicated for vendors but would put Texas on shaky legal ground. The local online rate will change from year to year, matching the average local sales tax rate in the preceding fiscal year.
SB 890 defines terms and clarifies that local revenue from the tax would go to the jurisdictions to which an item was shipped.
Texas previously created a safe harbor for infrequent and low-profit sellers by setting a minimum requirement of $500,000 in sales in the previous 12 months, as explained by the comptroller’s office. This protects one-time sales and small companies whose tax-filing process would be excessively onerous when compared to their profits. The state will not pursue any retroactive application, as Texas Comptroller Glenn Hegar said in a statement directly following the Wayfair decision.
The state revenue department estimates that the bills, effective this September 1, would capture $300 million a year in revenue. While the state has not declared how the money will be used, revenue gained by expanding the sales tax base should be used to lower existing tax rates.
To further simplify its internet and other sales taxes, Texas would do well to consider complying with the Streamlined Sales and Use Tax Agreement (SSUTA), a multistate effort to increase uniformity and simplicity in sales tax collections and definitions. While Texas has its own set of definitions, aligning with other states would make the taxation process simpler for out of state marketplace sellers.
Although these bills do not create a perfect system, SB 70 and 890 set the stage for Texas to start collecting taxes from marketplace sellers, thanks to unified state and local taxes and clarity in how revenue will be distributed.
Source: Tax Policy – Texas Would Check off Wayfair Requirements with New Bills
Tax Policy – Government Revenues, Outlays, and Deficit as a Share of GDP
Over the next 10 years, if existing laws remain unchanged, the Congressional Budget Office (CBO) projects that federal budget deficits will fluctuate between 4.1 percent and 4.7 percent of gross domestic product (GDP). This is above the average observed over the last 50 years.
The charts below show CBO data on historical and projected government spending, revenues, and deficits/surpluses, covering years 1969 through 2029. Generally, surpluses have occurred alongside economic expansions while deficits have occurred alongside economic downturns. Over the past five decades, revenues have averaged 17.4 percent of GDP while outlays have averaged 20.3 percent of GDP. This has resulted in an average deficit of 2.9 percent of GDP over the same period.
In 2018, revenues were below the 50-year average, at 16.4 percent, while spending was on par with its 50-year average. The 2018 deficit was 3.9 percent of GDP, above its 50-year average. The CBO states:
Over the 2020–2029 period, deficits are projected to average 4.4 percent of GDP, totaling $11.6 trillion. Such deficits would be significantly larger than the 2.9 percent of GDP that deficits averaged over the past 50 years. Revenues and outlays are both projected to rise in relation to GDP, but the gap between them is projected to persist, resulting in large deficits and rising debt.
By 2029, spending as a share of GDP is projected to rise above its 50-year average, reaching 23 percent. Meanwhile, revenues are also expected to rise above their 50-year average, reaching 18.3 percent of GDP in 2029. This will result in a deficit of 4.7 percent of GDP in 2029, well above the 50-year average of 2.9 percent.
Importantly, these projections assume that the existing laws related to taxes and spending remain the same. If lawmakers were to make provisions like tax extenders or the temporary parts of the Tax Cuts and Jobs Act permanent, revenue projections would not look the same. Likewise, if lawmakers enacted new programs, the spending side of the equation would be different. In all, the CBO expects deficits as a share of the economy to continue increasing in size over the next decade under current law.
Source: Tax Policy – Government Revenues, Outlays, and Deficit as a Share of GDP
IRS Tax News – Final rules issued on penalty for nondisclosure of reportable transactions
The IRS issued final regulations under Sec. 6707A, which imposes a penalty on taxpayers who fail to disclose a reportable transaction on their tax returns.
Source: IRS Tax News – Final rules issued on penalty for nondisclosure of reportable transactions