TAXATION

1.
2.
3.
4.
5.
6.

Functions of taxation
Taxation Elements
Taxation Principles and Forms
Tax Rate Establishment and Tax Collection
Types of Taxes
The Taxation System of the RM

The Functions of Taxation

The functions of taxes are a manifestation of their essence; they are a means to represent
the characteristics of taxes. The functions of taxation illustrate its social purpose of the valuebased distribution and redistribution of income. Each of the functions fulfilled by the taxation
instrument is a manifestation of an internal feature, an indicator or trait or this economic
category.
There are five main functions of taxes: fiscal, redistributory, regulating, controlling, and
promoting.
1) The main function of taxation is the fiscal one. It is through fiscality that taxes play
their role in the formation of the state budget necessary for the realisation of national and
holistic state programmes. The fiscal function provides for the achievement of the main social
goal of taxationthe formation of the states financial resources necessary for executing the
role of the latter (defence, social, environmental protection, etc.)
2) The allocation function of taxation expresses their essence as a special centralised
instrument of allocation relations and consists of the social income redistribution among
various groups of citizens: from wealthy to deprived ones, which ultimately provides for the
assurance of the social stability of the population.
3) The regulatory function of taxation was initiated as soon as the state started to take
active part in the economic set-up of the society. This function is aimed at achieving specific
goals of the taxation policy through the taxation mechanism. Taxation regulation entails three
sub-functions:
a.
The stimulating sub-function is aimed at the development of special socioeconomic processes, and is implemented through a system of allowances, exemptions and
preference arrangements. The legislation in force stipulates the stimulation of a number of
taxpayer categories such as the owners of small enterprises, the agricultural producers, capital
investors, or charities.
b. The destimulating sub-function inhibits some socio-economic processes through
the conscious exaggeration of the taxation burden. As a rule, the effect of this sub-function is
related to the introduction of excessive tax rates. These are, for example, the protectionist
measures of the state, aimed at supporting local producers through prohibitive import custom
duties. It is important to keep in mind, nevertheless, that taxation relations, as any other
relations, must replicate continuously. Taxes must be collected today, tomorrow and always.
This is why the utilization of the destimulating sub-function should not lead to the weakening
of the taxation basis, to suppression, or even to liquidation of the tax source. Such an
exaggeration may result in a situation where there will be no income/processes to be taxed.
c.
The replication (regeneration) function is explained as follows: by taxing the
utilisation of natural resources, roads, mineral and primary resources, the state uses these
proceeds in order to regenerate the exploited resources.

4) The controlling function of taxationthrough taxation, the state controls the

financial-economic activity of juridical and natural persons. This also contributes to
controlling the sources of income and the directions of spending.
5) The incentive function stipulates special taxation arrangements for a certain group of
citizens, who are social achievers (participants in wars, etc.). This function of taxation has a
social facet.
Taxation Elements

The Subject and Object of Taxation

The unifying basis of all taxes in the RM and other countries are the taxation elements.
One of the main elements, typical for the taxation instrument as a whole, is the notion of
payer, i.e., the notion of the taxation subject.
The taxation subject is the individual or company, fulfilling taxation obligations in
accordance to the ownership of the taxation object. Every citizen of a state is a taxation
subject. If the state has the right to deduct a part of the income, this relates to the obligation of
each citizen to offer a part of his/her wealth to the state. In this context, one should not forget
about the distinction between the taxpayer and the tax carrier. The former is the entity that
initially pays the tax; the latter is the entity carrying the tax as a result of economic processes
and transfers. This takes place primarily at the deduction of secondary taxes. For example in
RM, taxation subjects are responsible for paying the VAT, yet the real carriers of the tax are
the consumers.
The taxation object is the object or phenomenon, which, according to the law, is being
taxed. Taxation objects can be classified in the following way: income (income tax), wealth
(real estate, land), wealth transfers (inheritance and gift tax), consumption (excises and VAT),
or the import and export of goods (customs duties). Income taxation is divided into the
taxation of earned and unearned income. Earned income tax relates to salaries, fees of people
engaged in freelance occupations, the income of individual juridical persons. Taxation of
unearned but legal income refers to dividends, interest revenue, capital expansion, land and
real estate rents. The taxation object materializes as a result of legal events (actions, events,
conditions), which affect the obligation of the subject to pay the tax: the sale of goods, works
and services; the transit of goods though a customs territory, ownership of wealth, the receipt
of inheritance rights, the receipt of revenue in one or another form.

Tax Allowances
A tax allowance is a full or partial reduction of the taxation burden in correspondence
with the legislation in force. In the international practice, the system of allowances and reliefs
has been formed a long time ago. Individual income is taxed only after it reaches a certain
level (which is the non-taxable income). Additional sums for the maintenance of each
dependant, expenditures for the support of infants and elderly, for medical services that cost
over a certain amount, for charitable donations and for education expenses are subtracted from
the taxed income.
It is possible to develop a certain systematisation of tax allowances. These can be
classified into permanent and temporary allowances. Temporary allowances are granted to
adolescents, refugees, foreigners, and people without a permanent residence in the given state
but who are there only temporarily. Permanent tax allowances are granted to people, who are
fulfilling other obligations or who have earned special merits with the state.

Tax allowances provide for the financial-economic stimulation of the economic activity
of the taxpayer through the reduction of the taxation burden obligations. Tax allowances form
an important element of the taxation policy and entail social and economic goals. For
example, in the sphere of international economic relations, tax allowances are widely used as
an incentive for exporters and foreign investors. Tax allowances are usually implemented
through the taxation obligation of the payer, but sometimes this is done through the extension
of the payment deadline, which is also a reduction in the taxation obligation. Tax allowances
include the following types:
1) The untaxed minimum
2) Exempting from taxation certain elements of the object
3) Exempting from the payment of taxes certain natural persons or categories of
payers
4) The reduction of the tax rate
5) Full tax relief, and others.
The tax amount can be reduced either partially or entirely, for a limited or unlimited
period of time. The exemption from tax for a certain period of time is called a tax break. The
process of appropriation removes certain objects from being covered by taxation.
Appropriation can be relevant permanently or temporarily, for all taxpayers and for certain
categories. Tax discounts are aimed at the reduction of the taxation basis. Depending on the
influence on the results of taxation, discounts can be divided into limited discounts (the size of
the discount is limited directly or indirectly) and unlimited discounts (the taxation basis can be
reduced up to the full amount of the payers expenditure).
Tax credits are allowances aimed at the reduction of the tax amount and of the taxed
sum. The tax credit takes the form of accounting for previously paid taxes and is used in order
to avoid double taxation (a credit for foreign tax). In this case the size of the sum accounted
for should not exceed the taxation sum payable in the Republic of Moldova.
Tax amnesty is the return of the paid tax sum, a part of it, or the exemption of the
taxpayer from financial sanctions for a certain period of time.
Preferences are a special (preferential) type of allowance offered by one state to another
on basis of reciprocity or unilaterally without impact on a third party. Most often this happens
in the form of discounts or relief from customs duties. Preferential regimes are established by
developed countries towards developing countries in the framework of the Global System of
Preferences.

Tax Rates
The tax rate is the size of the tax set per unity levied. There are fixed and percentage
rates. Percentage rates are classified can be proportional, progressive or regressive. It is
important to emphasize the notion of base (main) rate, i.e. the rate that does not take into
account the specific characteristics of the subject or the type of activity levied (ex. VAT 20%).
There is also the reduced rate, which takes account of the specific traits of the payer and
applies a reduced taxation burden, and the increased rate, which again takes into consideration
the specific activity type that leads to income creation and applies an increased rate. Tax rates
can also be classified as follows:
Value added ratesexpressed in percentages (income tax)
Specific ratesexpressed in a monetary form in conformity with the physical features
of the objects levied (ex. the land tax).
In terms of content, there are marginal, factual and economic rates. A marginal rate is
indicated directly in the taxation legislation (ex. income tax for a company of 28%). The
factual rate is defined as the relation between the paid tax amount and the total amount of
income received. The comparison of economic rates most adequately represents the
consequences of taxation.

The taxation basis is the part of the taxation object expressed in levied units, to which a
tax rate is applied in correspondence with the law. For example, when income is taxed, not all
of it will serve as the taxation basis, but only a part of itthe taxable income. In a number of
cases the taxation basis is factually a part of the object levied, to which the tax rate is applied.
But this is relevant only in the cases where the taxation object is directly conducive to and
allows for a calculation measure. Thus, the taxable profit can be expressed directly in
monetary units. In contrast, the majority of the taxation objects cannot be expressed directly in
taxation units. In order to measure the object, it is necessary to first select some physical
feature, i.e. to determine the measuring unit of taxation. For example, the taxation object for
car owners is the car itself. Different countries have various parameters of levying: in France it
is the power of the engine, in Hollandthe weight of the car, in Germanythe volume of the
operating cylinders of the engine. In these cases, the taxation basis cannot be determined as
the part of the taxation object.
Tax payment deadlines are dates indicated in the law, when payments have to be made
to the state or local budgets, as well as to extra-budgetary funds. Missing the deadline
automatically leads to penalties, irrespective of the identity of the taxpayer who missed the
deadline.
The source of tax payment is a resource used for paying the tax. The source is different
from the object and does not always correspond to the latter. Irrespective of the taxation
object, the source of the tax payment can only be the net income (profit) or the capital of the
taxpayer. Thus, the object of the land tax is land ownership and the taxed item is the specific
piece of land.

Taxation Principles and Forms

Classical Taxation Principles

A number of principles that characterize taxation in general and the taxation system more
specifically were set forth by A. Smith. These are:
1. The principle of justice, which promotes the universality of taxation and the evenness of
tax distribution among citizens in correspondence with their revenues (the subjects of
the state must participate in the maintenance of the government in correspondence with
the income that they make use of under the protection and with the help of the state).
This principle means that taxes must be deducted in conformity with the capacity of the
payer, who is obligated to take part in financing a corresponding share of the states
expenditures. In the international practice, there are two methods of implementing the
justice and equality principle. The first method entails insuring the benefit of the
taxpayer. According to this approach, taxes paid must correspond to the benefits received
by the taxpayer from the services of the state, i.e. the taxpayer receives back a part of the
tax paid through various transfers from the state budget covering compensations, the
financing of education, health protection, etc. Hence, in this case the approach is
connected to the structure of budget expenditures. The second approach depends on the
capacity of the taxpayer to pay taxes. Each entity must pay its share in accordance with
the capacity to pay. Usually these two approaches complement each other when a
taxation system is elaborated; this leads to the creation of the best possible conditions for
the implementation of this principle.
2. The principle of determination, which requires the exact determination of the sum
payable, the payment method and deadline (the tax, which each individual is obligated
to pay, must be determined exactly.) This implies that the main types of taxes and tax

rates are fixed for a number of years. On the other hand, the taxation system must be
flexible and should easily adapt to the dynamic socio-economic conditions.
3. The principle of convenience implies that the tax should be deducted in the manner and at
the time most convenient to the payer. The system and procedure of tax payment should
be comprehensible and convenient to the taxpayer.
4. The thrift principle implies the reduction of deductions from the tax amounts, in the
rationalization of taxation. The sums collected through each individual tax should
exceed the expenses for their collection and service (each tax must be conceived and
developed in such a way that it deducts from the pocket of the people as little as possible
in addition to what it brings to the state treasury.)
Modern Taxation Principles
The analysis of classical theories allows the formulation of principles that represent the
qualities and tendencies of the modern taxation system. They are:
1. The rational combination of direct and indirect taxes, which implies the utilization of
various types of taxes, taking into consideration both the wealth and the income of the
taxpayer. In periods of economic crisis it is better to have many sources of budget
revenue with a relatively low rate and a large taxation basis then to have 1-2 types of
income with high deduction rates.
2. The universalization of taxation which implies equivalent efficiency requirements to all
payers and an equivalent approach to the deduction of the tax amount irrespective of the
income source, type of activity, or economic sector. It is not acceptable to introduce
additional taxes, increased and differentiated rates, or tax allowances for different types
of ownership, organizational or juridical structure of the entity, citizenship of natural
persons or other factors. In addition, taxes should not be established or applied on basis
of political, economic, and ethnic factors, or other criteria of this type.
3.
One-time taxation implies that one object can only be taxed once through one tax type
for a specific period of time indicated in the law.
4. The scientific approach for the determination of the exact tax rate, which implies setting
the deduction rate at a level that would allow the subject to have an income necessary for
normal development. The magnitude of the tax burden should allow the normal
functioning of the taxpayer after paying the tax amount. It is not acceptable to set the tax
rates on basis of short-term interests of insuring state revenues and to the detriment of
economic development or to the interests of the taxpayer.
5. Stability, or the endurance of taxation for a long period of time and the simplicity of
deducting the payment. Tax rates should be determined by law and should not be revised
frequently.
6.
Differentiation of tax rates in accordance to the level of income, which should not
develop into an inhibitive progression (i.e. a significant increase in tax rates), nor should
it be transformed into an individualization of rates, which contradicts the basic principles
of the market.
7. The application of a tax allowances system, which would lead to an actual stimulation of
investments into entrepreneurship activities and would, at the same time, comply with
the principle of social justice, including the insurance of a minimum living standard of
the citizens. Allowances should not be established for certain payers onlythey should
be the same for everybody.

The Essence and Form of Taxation

Taxation is the entirety of economic (financial), organisational, and legal relations formed on
the basis of the objective redistribution process of value, preponderantly in monetary
form, and represents a unilateral unequivalent compulsory deduction though power of a
part of the individual or corporate income for the general use of the state.
Internationally, economies are divided as developed and developing. Taxation can also be
developed or developing. However, a developed taxation system of a country cannot be
transposed to other countries directly because taxation depends is basis-oriented and the
economic basis varies from one country to the other.
Taxation should comply with the following requirements:
1. Only factually created value should be included in the process of redistribution
2. The final goal of redistribution must be the maximum satisfaction of social needs
3. Redistribution should not only maintain but also increase the profitability of economic
sectors
4.
Redistribution should be implemented to the interests of all the participants in the
economy and with the strict recognition of the equality between the various types of
ownership with the purpose of creating a competitive economic environment.
There are three types of taxation: proportional, progressive, and regressive.

Fixed Rate and Proportional Taxation

Taxation rates can be represented in fixed sums or in percentages. In current conditions, we
usually face percentage rates. However, there are fixed sums rates (ex. excises or the
land tax), but taking into consideration the rate inflation, this approach is not acceptable.
This is the reason why such rates are related to the size of the minimum wage.
Percentage rates are divided into proportional, progressive and regressive rates. Proportional
rates are equal for all the levied objects, i.e. the rate does not change in accordance with
the object levied. Such a mechanism is used for VAT deduction. The advantages of this
method are:
1) The larger the taxation basis, the lower the rate that needs to be established by the state for
the collection of a certain tax.
2) A limited number of rates: it is well known that in the case of progressive taxation
multiple rates for one level makes high income unbeneficial and reduces the incentives
for income expansion.
3) The low rates applied through proportional taxation lead to a reduction in tax evasion.

Progressive and Regressive Tax Rates

Progressive rates increase with the increase in the taxation object, in accordance with a tax
rates ladder. Progressive taxation is related to the notion of discretionary, or free income.
Discretionary income is defined as the difference between the total amount of income
obtained by the payer and the untaxed minimum income. Progressive taxation is defined
through an increase in the tax rate in conformity with simple and complex progression.
With the simple progression method, an increase in income leads to an increased
taxation rate of the entire income. With the complex progression method, a specific
ladder taxation is applied, where the size of the rate is determined in accordance with the
rate of income increase, yet the increased rate does not apply to the entire income, but
only to the sum that exceeded a certain level (income tax for natural persons). Complex
progression is opportune for payers with high incomes; this is why it became very
popular.

A mixed taxation method is used in practice. This method implies using the progressive
method for one part of the object and the proportional method for the rest of the object
(ex. income tax in the RM).
Regressive taxation is the method where an increase in income (the taxation object) leads to a
decrease in the taxation burden (this applies to indirect taxes).

Tax Rate Establishment and Tax Collection

Tax Rate Establishment and Tax Collection Procedures

When introducing one or another type of tax, it is necessary to identify the taxpayer of the
given tax and the source to be levied (the cost or the profit). Then, the exact taxation
object is determined (income, wealth, sale of merchandise etc., it should be remembered
that one object cannot be taxed through multiple taxes or charges, except when indicated
in the law) together with the calculation method of the tax. The tax rate depends on the
sum that needs to be collected and the number payers. Next, the tax collection method is
established.
The taxation basis and the method of its determination, as well as the tax rates and payment
deadlines are determined for each tax or charge in the law on the given tax or charge.
Tax payment is the obligation of each taxpayer. The financial relations between the state and
the taxpayer are reflected in the tax obligation. The tax obligation is the condition that
obligates the taxpayer to pay the given tax or charge and grants the taxation authorities
the right to demand the fulfilment of this obligation by the taxpayer.
The fulfilment of the tax obligation is achieved through paying the established tax or charge
amount within the stipulated deadline. The fulfilment of the tax obligation is mandatory
and is executed irrespective of other obligations that the taxpayer may be subject to. This
obligation covers the entire wealth of the taxpayer. Full or partial tax evasion constitutes
sufficient grounds for applying a punishment to the taxpayer, which usually takes the
form of a fine.
The payment is executed in cash or through a bank account in the national currency. Surplus
payments or subtractions can be directed for upcoming taxes payable. It is acceptable to
exchange tax and state obligations between the state and a certain taxpayer. If the
payment deadline is missed, a penalty is applied. The methods of payment are cash, bank
transfers, or duty stamps.
If the taxpayer does not comply with the request of the taxation authority to pay the tax or
charge amount, the taxation authority has the right to block the operations of the
indebted person by freezing the bank accounts or by arresting the persons property, and
to unconditionally subtract the tax amount from the bank account funds or from the sale
of the arrested property.

Tax Collection Methods

There are three tax collection methods: cadastral, at the source (before the receipt of the
income) and through self-assessment (at the declaration of the income).
The cadastre method implies the use of the cadastre. The cadastre is a register of all the
typical objects (land, real estate) classified according to physical features and where the
average profitability of the object is determined. Physical features include: for the land
taxthe size of the land area, the distance from transportation ways and markets; for the

house taxthe number of windows, pipes, doors, the type of the building; for industry
taxthe number of employees and machines. The average profitability of the object,
which is based on physical features, may differ significantly from actual profitability;
this constitutes the main disadvantage of this method. In RM this method is used for land
tax.
Taxation at the source is calculated and deducted at the accounting unit of the company,
which pays the income of the taxation subject. In this way is deducted the tax from
wages and salaries. The tax is subtracted by an intermediarythe collector (tax agent)
before the receipt of the tax by the subject, which excludes the possibility of tax evasion.
Collection at the source is done for taxing income of employed personnel and for other
relatively fixed incomes. The same method is used in other countries for the income of
joint ventures. Tax collection at the source implies collection before the receipt of the
income by its owner.
Tax collection upon self-assessment represents the deduction of a part of the income after its
receipt and implies that the taxpayer submits to the taxation authorities a selfassessment, i.e. an official statement about the income received. Taxation authorities,
taking into consideration the size of the taxation object and the taxation rates, verify the
accuracy of tax calculations. This method is usually applied for the taxation of non-fixed
revenues and for the cases when the taxpayer has multiple income sources. Selfassessment collection is convenient for the taxpayers because it creates conditions for
tax evasion due to the weakness of the taxation apparatus and due to commercial
confidentiality.
This method entails a number of variations: 1) in advance payments during the taxation
period, when the state receives an approximate amount estimated on the basis of the
income earned during the previous period or on basis of the tax paid; 2) payment by the
taxpayer at the due date on basis of self-assessment at the time or after the presentation
of the income self-assessment: the tax payer independently subtracts the tax amount and
transfers it to the state; 3) additional payments determined by the tax authority required
after the examination or verification of the submitted self-assessment.

Types of Taxes

Principles of Tax Classification

The existing taxation system includes various types of taxes, which defer from one another in
form and content. In practice, tax classification is done according to various criteria:
I.
1.
2.
II.
1.
2.
3.
III.
1.
2.

In accordance with the collection method:

Direct taxes which are determined directly for the income or wealth (income tax, land,
individual tax, real estate tax, and others)
Indirect taxes which are applied to goods and services in the form of an addition to the
price or tariff (VAT, excises and the customs duty).
In accordance with the taxation object
Income tax (profit tax, income tax for natural persons)
Taxes on wealth (individual tax, real estate tax, inheritance and gift tax)
Consumption tax (VAT, excises, customs duties)
In accordance with the objectives set:
Fiscal, aimed at the formation of the state budget
Limiting (excises and customs duties)

IV.
V.
1.

In accordance with the taxation subjectindividual and corporate taxes

In accordance with the entity, which deducts the tax and disposes of it:
State taxes, determined by state legislation, transferred into the state budget and
applied in the same way for the entire territory: income tax, VAT, excises, customs
duties, individual tax and charges for the Road Fund.
2.
Local taxes collected by the local authorities of the corresponding territory and
transferred to the local budget: real estate tax, land tax, natural resources charges and
local charges.
VI. In accordance to the purpose of utilization:
1.
General taxes are amalgamated and transferred to a single state account; they are
directed for general state programmes. General taxes encompass the majority of the
taxes in any taxation system.
2.
Special (purpose) taxes have a strictly defined purpose and are aimed for a certain type
of expenditures (land tax, road tax, natural resources charges). As a rule, special extrabudgetary funds are created for the special purpose taxes and a special article for this
type of tax is introduced in the budget law itself.
Direct Tax Characteristics
Chronologically, the mechanisms for direct taxation appeared earlier tat those for indirect
taxation. The criterion for dividing taxes into direct and indirect ones is the possibility to
transfer them to the consumer. This criterion is based on the assumption that the final
payer of the direct tax is the owner of the taxed property or the earner of the taxed
income, while the final payer of the indirect tax is the consumer of the good, to the price
of which the tax is added. Direct taxes constitute the basis of the taxation system.
Historically, having appeared later than the direct taxes, indirect taxation mechanisms
are transformed into a more palpable channel for the provision of state budget revenues,
i.e. for covering the expenses of the state.
Direct taxes are divided into real and individual ones. Real taxes are applied to the sale,
purchase or ownership of wealth, and their deduction does not depend on the individual
financial capacity of the taxpayer (land tax, wealth tax, real estate tax). In contrast,
individual taxes take into consideration the financial status of the taxpayer and his/her
capacity to pay (profit tax, individual income tax, the tax for returns on capital).
There are two methods for distinguishing direct and indirect taxes:
1.
In correspondence with the payment indices: direct taxes are paid and carried by the
same entity, while indirect taxes are carried by one person and paid by another one.
2.
On economic basis: direct taxes are subtracted from the production of valuables, i.e.
from income or wealth, while indirect taxes are applied to the consumption of valuables.
Direct taxes are the most progressive form of taxation because their deduction takes into
consideration the income and family situation of the taxpayer. When paying direct taxes,
the payer can determine the exact tax amount, the tax rate, as well as the strictly applied
deadlines. Yet, for indirect taxation, the buyers of various goods usually do not know
exactly when and how much they are paying to the state through indirect taxes.
Direct taxes are divided into real and individual ones. Real taxes comprise the land, housing,
and industrial tax. Real taxes were widely used in the period when land was the main
form of wealth. This is when the land tax was introduced in Europe. Various methods
were used for the calculation of this tax, including the number of ploughs, the area of the
processed lands, and others. These criteria did not allow, however, an accurate
determination of the purchase price of land. In this context, the most important
development was the transition to taxing land profitability determined according to the
cadastre (the land register that accounted for land fertility).

With time, buildings became an important taxation form; this is why the house tax was
introduced. The size of this tax was determined on the basis of the following criteria:
number and purpose of rooms, number of doors, and windows. However, these criteria
could not insure the fairness of taxation, this is why the level of income and the family
situation started to be taken into consideration.
In the second half of the 19th century, a transition to individual taxes started to happen.
Individual taxes are income or wealth taxes collected at the source or on basis of a selfassessment. For the collection of individual taxes, objects are considered individually for
each payer. This involves taking into consideration the size of the income, family
situation and other factors. In the RM, direct taxes include the income tax, land tax, real
estate tax, road charges and the state tax.

Indirect Taxes Characteristics

The formation of the budget revenues entails the collection not only of direct, but also of
indirect taxes. In developed countries the relative weight of indirect taxes is usually
lower than that of direct ones, while in developing countriesthe opposite occurs.
Indirect taxes are applied to goods and services and take the form of an addition to its
price or tariff. The payers of indirect taxes are the buyers or the consumers. All the
citizens, independently of their income pay indirect taxes because they consume goods
and services necessary for survival and which are chargeable to indirect taxation.
Indirect taxes are the simplest to collect and are also difficult to evade by the taxpayer. These
taxes are also attractive to the government for the reason that their receipt does not
depend directly on the financial-economic activity of the taxation subject, and the fiscal
effect is achieved even in conditions of production downfalls and unprofitable periods of
enterprises.
At the same time, the state has to apply direct taxes as well such that taxation covers as many
activities of the taxpayer as possible: processes that create the material and technical
basis for economic activities, the wealth of enterprises, the work force, the resources
used in production, and the income. This creates a rather stable inflow of tax payments
and also increases the causality between the amount of taxes paid and the effectiveness
of the taxpayer.
Indirect taxes are divided into excises, state fiscal monopoly, and customs duties. Excises can
be either individual or universal. A good example of a universal excise is the VAT, which
is used in the world taxation system since the end of the 60-ies. Individual excises are
applied to certain types and groups of goods. Customs duties are applied in most
countries only to imported goods. Usually, exporting goods is not taxed through a
customs duty.
Fiscal monopoly taxes are applied for the state production of goods (ex. salt, matches, spirit).
Customs duties are classified into export, import and transit duties. In most countries import
taxes constitute the largest part of customs duties.
In the RM, indirect taxes include the VAT, excises, and customs duties. Indirect taxes make up
55% of the total budget revenue. The largest part of indirect taxes is transferred into the
state budget, while most of the direct taxes are transferred into the local budgets.
The advantages of indirect taxes include the following:
1) They increase the state revenue as a result of an increase in the population number or in its
wealth. This is most advantageous for the countries that face economic progress.
2) By influencing the consumption rate through increasing the price of one product or
another, the state limits the consumption of products that are dangerous for health.

3) Taxes are received as a payment for the good, as they are added to the price.
4) For the consumer, indirect taxes are convenient for the following reasons:

Insignificance of the amounts paid

Time convenience

The lack of a constraining factor

The lack of time requirements for making the payment

Does not require the accumulation of a certain sum.

The evolution of indirect taxes, according to many experts, is a general tendency covering
essential as well as luxury goods, or instead of taxing a large number of items it
concentrated on a selected few.

The Notion of a Taxation System. The Taxation System of the RM

The Concept of the Taxation System

The taxation system represents the totality of various types of taxes, the elaboration and
calculation of which relies on certain principles. The taxation systems of most countries
developed throughout centuries under the influence of various economic, political, and
social conditions. This is why it is natural that taxation systems of different countries
vary in the types of taxes used, according to the structure of taxes, to their rates, methods
of collection, fiscal authorities from various levels, according to the rate, magnitude and
quantity of allowances offered, as well as other indices. Yet, all the countries follow
some general principles, which allow the creation of optimal taxation systems.
Since the taxation system of the RM was built following the framework of developed
countries, it is necessary to make a review of these countries taxation systems of. The
existing taxation system of developed countries includes a large number of taxes and its
structure depends on the organization of the state. In unitary states the taxation system
includes two elements: state and local taxes. In federal governments the taxation system
includes three elements: state (federal) taxes, taxes related to the federation subjects
(regional taxes), and local taxes.
The main taxes, which result in the highest collections for the budget, are related to the state
budget. They include the income tax, corporation profit tax, VAT, excises and customs
duties.
The international experience has proven that the highest level of taxes is collected through the
income tax (from 25 to 45% of the state budget). This tax is collected by using
progressive rates, determined through the method of complex progression. There are two
systems of applying the income tax:
1. The schedule system (or the English system). This system has been applied for a long
period of time (1842-1973) in Great Britain and a number of other countries. This
taxation system involves taxation at the source of income not on the entire amount but
on parts of the income.
2. The global system, which represents an income tax, applied to the entire income of the
taxpayer. Currently in western countries, a global taxation system is applied.
For the income tax there is an untaxed minimum, i.e. a part of the taxpayers income is not
taxed. In most countries the income tax was introduced in the 20th century. In the
beginning, a large number of citizens did not pay this tax because the untaxed minimum
was set at a very high level. In the years of the World War II, however, income tax

became universal. And also, right after the war, very high tax rates were established (in
USA the maximum rate reached 91%). Then, in the beginning of the 80s, a taxation
reform was introduced, which led to a significant decrease of the tax rates.
In the last few decades a continuous decrease in the share of the profit tax in the budget
revenues can be noticed. This is related to the constant rise in tax allowances and to the
decrease of profit tax rates. The main tax allowances applied to corporation profits are
the fast track depreciation, charity expenditures deductions, scientific research
expenditures and capital investments.
Among indirect taxes, VAT and excises are the most important. VAT is used in all countries of
the EU, as well as in Norway, Israel and a few other countries. VAT is not implemented
in the USA. This tax constitutes 30 to 50% of all the indirect taxes. After the World War
II, the share of customs duties decreased significantly due to the GATT and WTO.
Taxation Legislation
Taxation legislation is the aggregation of all the legal financial documents including
legislation acts, presidential decrees, government resolutions, Ministry of Finance
letters, which regulate the taxations relations between enterprises and the population on
the one hand and the state on the other hand in the process of creating the budget
revenues. The taxation legislation of the Republic of Moldova consists of the National
Constitution and other legislative acts approved in correspondence with the constitution.
Normative acts approved by the government, Ministry of Finance, GNS on the basis of,
and in compliance with the Taxation Code cannot contradict its provisions and surpass
its frameworks. In case of divergence between the provisions of the Taxation Code and
those of other taxation legislative acts regarding the granting of real allowances, the
provisions of the Taxation Code are apply. If, for reasons of avoiding double taxation
through international agreements to which the Republic of Moldova is a party, other
provisions are stipulated, the rules of the international agreements apply.
The taxation legislation changes and adapts to market relations and new economic conditions.
In order to promote the legal functioning of the taxation system, in 1992 the Law on the
Basis of the Taxation System was adopted, and on 01.01.1998 the two first sections of
the TC came into force. These are General Provisions and the Income taxation
sections, while on 1.07.1998 the third section, dealing with the VAT entered into force.
In 2000, another two sections were approved: section 4Excises and section 6 Real
Estate Taxation. Entry into force of these sections was assigned for the years 2001 and
2005 respectively. These laws entail the principles of the taxation system, its structure,
rights, obligations and responsibilities of the taxpayers and taxation authorities, as well
as logistical matters of tax collections and payment control.

The Taxation System of the Republic of Moldova

The taxation system of the RM is the aggregation of taxes, principles, forms and methods of
their determination, modifications and annulments as well as measures for insuring
actual payment set forth in the Taxation Code. Taxes, duties and charges deducted in
accordance with the TC and with other normative acts constitute a part of the national
public budget. Taxes (duties) are mandatory, unrefundable payments unrelated to certain
actions of the authorised body or person in favour or in connection to the taxpayer.
Charges are the mandatory, unrefundable payments that are not taxes or duties.
In the RM there are national and local taxes, duties, and charges.
The system of national taxes includes:

Income tax

VAT
Excises
Individual tax
Customs duties
Charges for the Road Fund

The local taxation system comprises:

1. Real estate Tax
2. Natural resources charges
3. Spatial planning charges
4. Charges for the right to organise local auctions and lotteries
5. Hotel charges
6. Advertisement placement charges
7. Charges for the utilization of the local logo
8. Charges for the establishment of retail units
9. Market charges
10. Car parking charges
11. Resort charges
12. Dog ownership charges
13. Charges for the right to make television and film shoots
14. Charges for the right to cross the border
15. Charges for retail activity rights on the border zone
16. Charges for the right to transport passengers
17. Charges for the sanitary maintenance of the territory, for the utilization of containers, for
the disposal of solid household and industrial waste.
The Taxation Apparatus
A special taxation apparatus deals with taxation and tax collection issues. In accordance with
the law On the state taxation service from 1992, in the unitary State Taxation System
are included:

The General State Taxation Inspectorate (GSTI) adjoining the Ministry of Finance

The territorial taxation inspectorates

The main purpose of the taxation inspectorates of all levels is to verify the compliance with
the taxation legislation, the accuracy of calculations, the completeness and punctuality of
tax and other payments to the budget.
The GSTI of the Ministry of Finance fulfils the following functions:

Organises inspectorate subordinates in executing the work of verification the compliance

with the taxation legislation, the accuracy of calculations, the completeness and
punctuality of tax and other payments to the budget.

Verifies the work of subordinates of taxation inspectorates, examines letters, declarations,

and complaints and takes measures for increasing work effectiveness.

Organises awareness-building events and explains the legislation on taxation and other
payments to the state budget and extra-budgetary funds.
Territorial taxation inspectorates fulfil the following functions:
1. Insuring the completeness and punctuality of accounting by the payers of all types of taxes
and other payments
2. Executing the decisions of the local authorities regarding the calculations of the local
charges and granting of tax allowances
3. Verifying the accuracy of calculations, the completeness and punctuality of tax and other
payments to the budget.

4. Organizing the registration, evaluation and sale of goods that have been confiscated, were
unidentified or have been inherited by the state
5. Explaining the legislation on taxation and other types of payments to the budget and extrabudgetary funds, examines letters, declarations and complaints of payers of all types of
taxes and other payments.