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Tax exemption is the reduction or removal of a liability to make a compulsory payment that would otherwise be imposed by a ruling power upon persons, property, income, or transactions. Tax-exempt status may provide complete relief from taxes, reduced rates, or tax on only a portion of items. Examples include exemption of
charitable organizations A charitable organization or charity is an organization whose primary objectives are philanthropy Philanthropy consists of "private initiatives, for the Public good (economics), public good, focusing on quality of life". Philanthropy contrasts ...
from
property taxes A property tax or millage rate is an ad valorem tax on the value of a property.In the OECD classification scheme, tax on property includes "taxes on immovable property or Wealth tax, net wealth, taxes on the change of ownership of property thr ...
and
income taxes An income tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law, a legal person is any person A person (plural people or persons) is a being that has c ...
, veterans, and certain cross-border or multi-jurisdictional scenarios. Tax exemption generally refers to a statutory exception to a general rule rather than the mere absence of taxation in particular circumstances, otherwise known as an exclusion. Tax exemption also refers to removal from taxation of a particular item rather than a deduction. International duty free shopping may be termed "tax-free shopping". In tax-free shopping, the goods are permanently taken outside the jurisdiction, thus paying taxes is not necessary. Tax-free shopping is also found in ships, airplanes and other vessels traveling between countries (or tax areas). Tax-free shopping is usually available in dedicated
duty-free shop Duty-free stores at Ben Gurion Airport in Tel Aviv, Israel in Oslo, Norway A duty-free shop (or store) is a retailing, retail outlet whose goods are exempt from the payment of certain local or national taxes and duty (tax), duties, on the requ ...
s. However, any transaction may be duty-free, given that the goods are presented to the customs when exiting the country. In such a scenario, a sum equivalent to the tax is paid, but reimbursed on exit. More common in Europe, tax-free is less frequent in the United States, with the exception of Louisiana. However, current
European Union The European Union (EU) is a political and economic union of member states that are located primarily in Europe Europe is a which is also recognised as part of , located entirely in the and mostly in the . It comprises the wester ...

European Union
rules prohibit most intra-EU tax-free trade, with the exception of certain
special territories
special territories
outside the tax area.


Specific monetary exemptions

Some jurisdictions allow for a specific monetary reduction of the tax base, which may be referred to as an exemption. For example, the U.S. Federal and many state tax systems allow a deduction of a specified dollar amount for each of several categories of "personal exemptions". Similar amounts may be called "personal allowances". Some systems may provide thresholds at which such exemptions or allowances are phased out or removed.


Exempt organizations

Some governments grant broad exclusions from all taxation for certain types of organization. The exclusions may be restricted to entities having various characteristics. The exclusions may be inherent in definitions or restrictions outside the tax law itself.


Approaches for exemption

There are several different approaches used in granting exemption to organizations. Different approaches may be used within a jurisdiction or especially within sub-jurisdictions. Some jurisdictions grant an overall exemption from taxation to organizations meeting certain definitions. The United Kingdom, for example, provides an exemption from rates (property taxes), and income taxes for entities governed by the Charities Law. This overall exemption may be somewhat limited by limited scope for taxation by the jurisdiction. Some jurisdictions may levy only a single type of tax, exemption from only a particular tax. Some jurisdictions provide for exemption only from certain taxes. The United States exempts certain organizations from Federal income taxes, but not from various excise or most employment taxes.


Charitable and religious organizations

Many tax systems provide complete exemption from tax for recognized charitable organizations. Such organizations may include religious organizations (temples, mosques, churches, etc.), fraternal organizations (including social clubs), public charities (e.g., organizations serving homeless persons), or any of a broad variety of organizations considered to serve public purposes. The U.S. system exempts from Federal and many state income taxes the income of organizations that have qualified for such exemption. Qualification requires that the organization be created and operated for one of a long list of tax exempt purposes, which includes more than 28 types of organizations and also requires, for most types of organizations, that the organization apply for tax exempt status with the Internal Revenue Service, or be a religious or apostolic organization. Note that the U.S. system does not distinguish between various kinds of tax exempt entities (such as educational versus charitable) for purposes of granting exemption, but does make such distinctions with respect to allowing a
tax deduction Tax deduction is a reduction of income that is able to be tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law, a legal person is any person A person (plural p ...

tax deduction
for contributions. The UK generally exempts public charities from
business rates Rates are a tax on property in the United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the Un ...
, corporation tax, income tax, and certain other taxes.


Governmental entities

Most systems exempt internal governmental units from all tax. For multi-tier jurisdictions, this exemption generally extends to lower tier units and across units. For example, state and local governments are not subject to Federal, state, or local income taxes in the U.S.


Pension schemes

Most systems do not tax entities organized to conduct retirement investment and pension activities for employees of one or more employers or for the benefit of employees. In addition, many systems also provide tax exemption for
personal pension scheme A personal pension scheme (PPS), sometimes called a personal pension plan (PPP), is a United Kingdom, UK tax-privileged individual investment vehicle, with the primary purpose of building a capital sum to provide retirement benefits, although it wil ...
s.


Educational institutions

Some jurisdictions provide separate total or partial tax exemptions for educational institutions. These exemptions may be limited to certain functions or income.


Other not-for-profit entities

Some jurisdictions provide tax exemption for other particular types of organizations not meeting any of the above categories.


Reciprocal exemptions

Some jurisdictions allow tax exemption for organizations exempt from tax in certain other jurisdictions. For example, most U.S. states allow tax exemption for organizations recognized for Federal tax purposes as tax exempt.


Sales tax

Most states and localities imposing sales and use taxes in the United States exempt resellers from sales taxes on goods held for sale and ultimately sold. In addition, most such states and localities exempt from sales taxes goods used directly in the production of other goods (i.e., raw materials). :''See also
Sales taxes in the United States Sales taxes in the United States are taxes placed on the sale or lease of goods and services in the United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country ...
,
tax-free shopping Tax-free shopping (TFS) is the buying of goods in a foreign country and obtaining a refund of the sales tax which has been collected by the retailer on those goods. The sales tax may be variously described as a sales tax A sales tax is a tax pa ...
,
tax holiday A tax holiday is a temporary reduction or elimination of a tax. It is synonymous with tax abatement, tax subsidy or tax reduction. Governments usually create tax holidays as incentives for business investment. Tax relief can be provided in the fo ...
.''


Exempt individuals

Certain classes of persons may be granted a full or partial tax exemption within a system. Common exemptions are for veterans, clergymen or taxpayers with children (who can take "dependency exemption" for each qualifying dependent who has lived with the taxpayer. The dependent can be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and is usually under age 19, a full-time student under age 24, or have special needs).Presti and Naegele Newsletter
February , 2012.
The exemption granted may depend on multiple criteria, including criteria otherwise unrelated to the particular tax. For example, a property tax exemption may be provided to certain classes of veterans earning less than a particular income level. Definitions of exempt individuals tend to be complex. In in the
Hebrew Bible The Hebrew Bible or Tanakh (; Hebrew Hebrew (, , or ) is a Northwest Semitic languages, Northwest Semitic language of the Afroasiatic languages, Afroasiatic language family. Historically, it is regarded as the language of the Israelites ...

Hebrew Bible
, King
Saul Saul (; he, , translit=Šāʾūl; gr, Σαούλ; ), according to the Hebrew Bible, was the first monarch of the Kingdom of Israel (united monarchy), United Kingdom of Israel. His reign, traditionally placed in the late 11th century BCE, suppose ...

Saul
includes tax exemption as one of the rewards on offer to whoever comes forward to defeat the
Philistine The Philistines were an ancient people who lived on the south coast of Canaan from the 12th century BC until 604 BC, when their polity, after having already been subjugated for centuries by Assyria, was finally destroyed by King Nebuchadnezzar I ...
giant
Goliath Goliath ( ) ''Goləyāṯ''; ar, جُليات ''Ǧulyāt'' (Christian term) or (Quranic term). is described in the biblical Book of Samuel as a Philistines, Philistine giant defeated by the young David in single combat. The story signified Sau ...

Goliath
. In the Ottoman Empire, tax breaks for descendents of Muhammad encouraged many people to buy certificates of descent or forge genealogies; the phenomenon of ''teseyyüd'' – falsely claiming noble ancestry – spread across ethnic, class, and religious boundaries. In the 17th century, an Ottoman bureaucrat estimated that there were 300,000 impostors; In 18th-century Anatolia, nearly all upper-class urban people claimed descent from Muhammad. The number of people claiming such ancestry – which exempted them from taxes such as
avarız Avarız was a property tax in the Ottoman Empire The Ottoman Empire (; ota, دولت عليه عثمانيه ', literally "The Sublime Ottoman State"; Modern Turkish: ' or '; french: Empire ottoman) (''Osmanean Têrut´iwn'', meaning "Ottom ...
and
tekalif-i orfiye Tekalif-i orfiye was a type of taxation in the Ottoman Empire The Ottoman Empire (; ota, دولت عليه عثمانيه ', literally "The Sublime Ottoman State"; Modern Turkish: ' or '; french: Empire ottoman) (''Osmanean Têrut´iwn'', me ...
– became so great that tax collection was very difficult.


Exempt income

Most income tax systems exclude certain classes of income from the taxable income base. Such exclusions may be referred to as exclusions or exemptions. Systems vary highly. Among the more commonly excluded items are: *Income earned outside the taxing jurisdiction. Such exclusions may be limited in amount. *Interest income earned from subsidiary jurisdictions. *Income consisting of compensation for loss. *The value of property inherited or acquired by gift. Some tax systems specifically exclude from income items that the system is trying to encourage. Such exclusions or exemptions can be quite specific or very general. Among the types of income that may be included are classes of income earned in specific areas, such as special economic zones, enterprise zones, etc. These exemptions may be limited to specific industries. As an example, India provides SEZs where exporters of goods or providers of services to foreign customers may be exempt from income taxes and customs duties.


Exempt property

Certain types of property are commonly granted exemption from property or transaction (such as sales or value added) taxes. These exemptions vary highly from jurisdiction to jurisdiction, and definitions of what property qualifies for exemption can be voluminous. Among the more commonly granted exemptions are: *Property used in manufacture of other goods (which goods may ultimately be taxable) *Property used by a tax exempt or other parties for a charitable or other not for profit purpose *Property considered a necessity of life, often exempted from
sales taxes in the United States Sales taxes in the United States are taxes placed on the sale or lease of goods and services in the United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country ...
*Personal residence of the taxpayer, often subject to specific monetary limitations


Conditions imposed on exemptions

Exemption from tax often requires that certain conditions be met.


Multi-tier jurisdictions

Many countries that impose tax have subdivisions or subsidiary jurisdictions that also impose tax. This feature is not unique to federal systems, like the U.S., Switzerland and Australia, but rather is a common feature of national systems.See, e.g., Japan's prefecture taxes, UK local rates, etc.. The top tier system may impose restrictions on both the ability of the lower tier system to levy tax as well as how certain aspects of such lower tier system work, including the granting of tax exemptions. The restrictions may be imposed directly on the lower jurisdiction's power to levy tax or indirectly by regulating tax effects of the exemption at the upper tier.


Cross-border agreements

Jurisdictions may enter into agreements with other jurisdictions that provide for reciprocal tax exemption. Such provisions are common in an income
tax treaty Many countries have entered into tax treaties (also called double tax agreements, or DTAs) with other countries to avoid or mitigate double taxation Double taxation is the levying of tax by two or more jurisdictions on the same income (in the case ...
. These reciprocal tax exemptions typically call for each contracting jurisdiction to exempt certain income of a resident of the other contracting jurisdiction. Multi-jurisdictional agreements for tax exemption also exist. 20 of the U.S. states have entered into th
Multistate Tax Compact
that provides, among other things, that each member must grant a full credit for sales and use taxes paid to other states or subdivisions. The European Union members are all parties to the EU multi-countr
VAT harmonisation rules


See also

*
Tax resistance Tax resistance is the refusal to pay tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law, a legal person is any person A person (plural people or persons) is a ...
*
Tax shelter Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments. The methodology can vary depending on local and international taxation, internatio ...


References


External links

*United States: **IR
Publication 557
Tax-Exempt Status for Your Organization **IR

*UK:



{{Authority control Exemption Tax terms