Professional Documents
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3
Returns to Alternative Savings Vehicle
Slide 1-2
Slide 1-3
I II III IV V VI
Ordinary Ordinary
Capital gains
Exempt Ordinary
I.(1+R)n
[I.(1t)].(1+R)n (1t)
or I.(1+R)n
Slide 1-4
Example in the USA Money Market Funds Single premium deferred annuity Mutual Fund Foreign corporations
I II III IV
No No No No
V
VI
No
Yes
Never
Deferred
Exempt
Ordinary
Insurance Policy
Pension
Slide 1-5
I II III IV
No No No No
V
VI
No
Yes
Never
Deferred
Exempt
Ordinary
Insurance Policy
--------
***Income of the mutual fund of the person issuing such mutual fund is exempted u/p 30, Part A, 6th Sch.
Slide 1-6
III
No
***Reduced tax rate (5%-15%) for initial 5-6 years allowed to prescribed new industries
established between 1.7.2009 to 30.6.2012 (vide SRO No. 172-Ain/Aykar/2009, dt. 1.7.2009).
[Tax Rates: 5% for first 2 years; 10% for next 2 years; 15% for next 1 year (industries in Dhaka and Chittagong Divisions except for Rangamati, Bandarban and Khagrachari hill districts) and 5% for first 3 years; 10% for next 3 years (industries in other areas)].
Savings Vehicle
Tax-deductibility of investment
Frequency of taxation
Example in Bangladesh
VI
Yes
Deferred
Ordinary
--------***
*** Employers contributions towards Approved Pension Fund are tax-deductible [para 5(2), Part A, 1st Sch of ITO] Income of the Fund (interest, dividend or capital gains) are exempted from tax [u/p 5(1)] Pension received by employee is exempted u/p 8, Part A, 6th Sch.
Slide 1-7
t = 30% n=10 1.61 1.68 1.78 1.82 1.97 n=20 2.60 3.01 3.18 3.44 3.87
I II III IV V
12.88
I.(1+R)n
[I.(1t)].(1+R)n (1t)
14.97
VI
1.07
1.40
1.97
3.87
14.97
867.72
or I.(1+R)n
Slide 1-8
n=5
I II III IV V VI
Slide 1-9
I II
1.05 1.05
Comparison: For investment horizons of only one period (n=1), Vehicle I and Vehicle II are equivalent.
Except for n=1, the after-tax accumulation in Vehicle II always exceeds that in Vehicle I. The longer the holding period, the greater the difference in accumulation.
Slide 1-10
R = 7%
n=5
(r)
I II
[F I]1/n 1 [F I]1/n 1
4.90 4.90
4.90 5.09
4.90 5.31
4.90 5.66
4.90 6.12
4.90 6.62
Comparison: All the after-tax annualized rates of return (r) are 4.9% in Vehicle I. But these rates increase in Vehicle II with the number of holding periods.
In fact, in case of Vehicle II, as the number of periods becomes large, the after-tax rate of return per period approaches the before tax rates of return (R) of 7%.
Slide 1-11
n=5 1.28
II III II III
5.31 5.95
5.66 5.95
6.12 5.95
6.62 5.95
Comparison: Vehicle II may be more attractive than Vehicle III depending on n and tcg. For example, if tcg =0, Vehicle III always dominates Vehicle II, even for n=1 If 0<tcg<t, Vehicle III dominates Vehicle II for shorter n, but Vehicle II dominates for longer n.
Slide 1-12
Savings Vehicle IV
(Intertemporally Constant Tax Rates)
Savings Vehicle I II III IV After-tax accumulation I.[1+R(1t)]n I.(1+R)n (1t)+t.I I.[1+R(1tcg)]n I.(1+R)n (1tcg)+tcg.I I = Tk. 1 n=1 1.05 1.05 1.06 1.06 R = 7% n=5 1.27 1.28 1.34 1.34 t = 30% n=10 1.61 1.68 1.78 1.82 n=20 2.60 3.01 3.18 3.44 tcg = 15% n=40 6.78 10.78 10.09 12.88 n=100 119.55 607.70 323.67 737.71
I
II III IV
4.90
4.90 5.95 5.95
4.90
5.09 5.95 6.06
4.90
5.31 5.95 6.18
4.90
5.66 5.95 6.37
4.90
6.12 5.95 6.60
4.90
6.62 5.95 6.83
Comparison: Accumulation in Vehicle IV is similar to that for Vehicle II except that income from Vehicle IV is taxed at more favourable tcg. Vehicle IV is superior to Vehicles II & III except for special cases: tcg= 0 and tcg= t.
Savings Vehicle V
(Intertemporally Constant Tax Rates)
Savings Vehicle I After-tax accumulation I.[1+R(1t)]n I = Tk. 1 n=1 1.05 R = 7% n=5 1.27 t = 30% n=10 1.61 n=20 2.60 n=40 6.78
Slide 1-13
II
III IV V I II III IV V
I.(1+R)n (1t)+t.I
I.[1+R(1tcg)]n I.(1+R)n (1tcg)+tcg.I I.(1+R)n
1.05
1.06 1.06 1.07 4.90 4.90 5.95 5.95 7.00
1.28
1.34 1.34 1.40 4.90 5.09 5.95 6.06 7.00
1.68
1.78 1.82 1.97 4.90 5.31 5.95 6.18 7.00
3.01
3.18 3.44 3.87 4.90 5.66 5.95 6.37 7.00
10.78
10.09 12.88 14.97 4.90 6.12 5.95 6.60 7.00
607.70
323.67 737.71 867.72 4.90 6.62 5.95 6.83 7.00
After-tax rate of return After-tax rate of return After-tax rate of return After-tax rate of return After-tax rate of return
Comparison: Accumulation in Vehicle V dominates that for Vehicle I through IV as long as the tcg is not 0%. If tcg = 0, Vehicles III & IV generate exactly the same after-tax accumulations as in Vehicle V.
Savings Vehicle V
(Intertemporally Constant Tax Rates)
Savings Vehicle After-tax accumulation I = Tk. 1 n=1 R = 7% n=5 t = 30% n=10 n=20 n=40 14.97 14.97
Slide 1-14
V VI V VI
I.(1+R)n
[I.(1t)].(1+R)n (1t)
1.07 1.07
1.40 1.40
1.97 1.97
3.87 3.87
867.72 867.72
or I.(1+R)n
After-tax rate of return
7.00
7.00
7.00
7.00
7.00
7.00
7.00
7.00
7.00
7.00
7.00
7.00
In Vehicle VI, the investment is tax-deductible; and investment earnings are tax deferred. Comparison: When tax rates are constant over time, Vehicles V and VI are equivalent. Hence, Accumulation in Vehicle VI dominates that for Vehicle I through IV as long as the tcg is not 0%. If tcg = 0, Vehicles III & IV generate exactly the same after-tax accumulations as in Vehicle VI.
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Slide 1-18
Thank you.