CREDIT SYSTEM

The credit-financial system of a country performs two central functions: it creates different financial assets and liabilities and provides specific financial services. This system is a set of markets and institutions embracing: a payments mechanism; the borrowing and lending of funds; the creation of financial assets and liabilities with different characteristics with respect to marketability, maturity, liquidity, etc.; the provision of specific financial services such as insurance, pension arrangements; markets to enable wealth holders to adjust the volumes and structure of their portfolio of assets and liabilities. Credit-financial systems can perform these roles in various ways, and they are done differently as between different countries and within the same country at different times.

All banking operations and the methods of controlling them are part of the credit system of the country. Banks and other financial institutions fulfill the role of financial intermediation between the savers and investors. The state of business activities in any country greatly depends on the credit system.

Credit is trust in the borrower's promise to repay a loan; or transferring ownership from one party to another, or buying goods today but paying for them sometime in the future.

There are different classes of credit:

Commercial credit (businesses give to one another to finance production, trade and distribution). This class of credit is sometimes called trade credit. This means that a business is able to buy goods and services today and pay for them sometime in future. When a firm buys goods, it receives an invoice (proforma-invoice, bill). It often contains terms such as «2/10, net 30» This means that the buyer can take a 2 percent discount for paying within 10 days. The total invoice is due in 30 days if the discount is not taken. It is important for the finance manager to pay attention to such discounts, because the firm would lose 2 percent for every 20-day period if it doesn't pay its bills earlier (36 percent a year);

Investment credit (businesses use to finance their construction, equipment, bonds issue);

Bank credit (secured and unsecured loans, overdrafts, factoring, credit cards, so on);

Consumer or personal credit (buying goods and services for personal use). At present we notice a rapid growth in consumer credit – that is lending to people so they can buy things if they promise to repay the money later. This is done now by plastic money, or credit card. With a credit card you receive credit from a number of shops and department stores, just by filling in some simple forms.

Real-estate credit (buying or building property – mortgage). Mortgage is a loan for buying or building some property (e.g. a house) and the property itself is used as collateral for the lender. If the borrower fails to repay the loan the lender transfers the ownership for the property to itself;

Public or government credit (bonds issued by government). These bonds are considered to be the conservative ones, as they are backed (secured) by the government, their interest rate is stable and they are attractive to businesses;

International credit (is given by other governments or by international banks such as the International Bank for Reconstruction and Development).

Credit is made for a price, known as interest. Interest rate is changeable; it depends on the risk, demand and supply of credit.

Vocabulary:

assets and liabilities – активи і пасиви

to provide services – надавати послуги

to embrace – охоплювати

to lend (lent; lent) – надавати в кредит

with respect to – по відношенню до...

marketability – реалізованість, товарність

maturity – строковість, строк погашення

to fulfill – виконувати

intermediation – посередник

commercial credit – комерційний кредит, підтоварний кредит

invoice – рахунок-фактура

discount – знижка

construction – будівництво

secured/unsecured loan – забезпечена/незабезпечена позика

overdraft – дебетове сальдо, технічний кредит

factoring – факторинг, комерційні операції за дорученням

rapid growth – швидке зростання

mortgage – позика під заставу нерухомого майна

collateral – забезпечення, застава, гарантія щодо позички

bond – державна облігація

interest – відсоток

interest rate – відсоткова ставка

Questions:

1. What two central functions does the credit-financial system of a country perform?

2. What does this system embrace?

3. Who fulfills the role of financial intermediation between the savers and investors?

4. What is credit? What types/classes of credit do you know?

5. What are the peculiarities of commercial credit?

6. What is the difference between bank credit and real-estate credit?

7. What is interest? Is interest rate changeable?

TAXES & TAXATION

Taxation is a system of compulsory contributions levied by a government on persons (people), businesses, and property used as a source for government expenses and other public services.

For many years, the government tries to raise taxes to fund more and more social and defence programmes. Besides, government at every level is financed through the collection of taxes. Under state and local laws organizations and individuals are required to compute their tax liability, complete the necessary forms, and pay the taxes due. Many features of taxation, both in the imposition and collection of taxes, are the same in many countries. Governments’ expenses are growing, so, their need in money is big.

Under state and local laws, businesses and individuals pay many kinds of taxes: state and city income taxes (individuals pay graduated income taxes), social insurance and other payroll taxes, employment taxes, real-estate taxes. Businesses pay taxes on profits and capital, turnover taxes, export/import taxes, excise taxes and, of course, value-added taxes.

Managing taxes means tax implications of all financial transactions. Every business tries to minimize its taxes, so tax accounting has developed into one of the most important branches of accounting throughout the world. Many businesses pay over 50% of their net income to the state government in the form of income taxes, and the rest taxes cover the next 30-40%. So, careful planning designed to decrease the tax liability to the lowest level is thus a major concern of a business. On the other hand, tax computation is under strict scrutiny of Tax Administration.

The fiscal system of Ukraine includes taxes, other compulsory payments to the budget and state purpose oriented funds. The system of taxes includes general state and local taxes and duties. General state taxes: payments with the same mechanism of performance all over the territory of Ukraine (single dates of payment, benefits, and rates). They include value-added tax, excise duty, income tax of citizens, enterprise income tax, land tax, fiscal licence tax, tax on the owners of vehicles; compulsory state pension insurance, charges to state innovation fund, etc. Each council (Rada) possesses the right to independently determine benefits, rates and dates of local payments. The local taxes and duties include advertising tax, rates, hotel duties, parking tax, tax for issuing a release for location of trade and service objects, tax for the right to use local symbolism.

It has been announced by legislation that the fiscal system of Ukraine is based on the following principles: the promotion of production business activities; liability (act under state compulsion); equality; stability; principle of social justice; equivalence and proportionality; compensation. The value-added tax (VAT) is an indirect tax added to the price of goods, works, or services for sale on the territory of Ukraine, import or export.

Managing taxes is made possible by various provisions in the tax laws that offer alternative methods for handling particular transactions or accounting procedures. One alternative way thus has a significant tax advantage over another, resulting in a tax saving.

A well-known saying holds that nothing is certain but death and taxes. Unhappily, governments are often responsible for the former, but they are virtually always the source of the latter.

Vocabulary:

taxation – оподаткування

compulsory – обов’язковий, примусовий

to levy – стягувати, збирати (податки)

under the law – згідно з законом

graduated tax – прогресивний податок

income tax – податок на прибуток

payroll tax – податок на фонд заробітної плати

employment tax – податок на працевлаштування

real-estate tax – податок на нерухомість/на землю

excise tax – акциз

value-added tax (VAT) – ПДВ (податок на додану вартість)

net income – „чистий” прибуток

tax liability – податкові зобов’язання

to be under strict scrutiny of – бути під суворим наглядом

purpose oriented fund – цільовий фонд

duty – мито

vehicle – транспортний засіб

legislation – законодавство

to be responsible for sth – бути відповідальним за...

the former – перший (з двох)

the latter – останній (з двох)

Questions:

1. What is taxation?

2. Why does the government try to raise taxes?

3. What taxes do businesses and individuals pay?

4. What does managing taxes mean? Why is it important?

5. What taxes does the fiscal system of Ukraine include?

6. What general state taxes and local taxes and duties do you know?

7. What principles is the fiscal system of Ukraine based on?

8. How is managing taxes made possible?

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