Corporate tax

A corporate tax, also called corporation tax or company tax, is a direct tax* imposed by a jurisdiction on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at state or local levels. The taxes may also be referred to as income tax or capital tax. Partnerships are generally not taxed at the entity level. A country's corporate tax may apply to:

Company income subject to tax is often determined much like taxable income for individual taxpayers. Generally, the tax is imposed on net profits. In some jurisdictions, rules for taxing companies may differ significantly from rules for taxing individuals. Certain corporate acts, like reorganizations, may not be taxed. Some types of entities may be exempt from tax.

Countries may tax corporations on its net profit and may also tax shareholders when the corporation pays a dividend. Where dividends are taxed, a corporation may be required to withhold tax before the dividend is distributed.

Economists disagree as to how much of the burden of the corporate tax falls on owners, workers consumers and landowners, and how the corporate tax affects economic growth and economic inequality.[1]

Note:*Considered indirect because the cost of the tax can transferred to the consumer.

Legal framework

A corporate tax is a tax imposed on the net profit of a corporation that are taxed at the entity level in a particular jurisdiction. Net profit for corporate tax is generally the financial statement net profit with modifications, and may be defined in great detail within each country's tax system. Such taxes may include income or other taxes. The tax systems of most countries impose an income tax at the entity level on certain type(s) of entities (company or corporation). The rate of tax varies by jurisdiction. The tax may have an alternative base, such as assets, payroll, or income computed in an alternative manner.

Most countries exempt certain types of corporate events or transactions from income tax. For example, events related to formation or reorganization of the corporation, which are treated as capital costs. In addition, most systems provide specific rules for taxation of the entity and/or its members upon winding up or dissolution of the entity.

In systems where financing costs are allowed as reductions of the tax base (tax deductions), rules may apply that differentiate between classes of member-provided financing. In such systems, items characterized as interest may be deductible, perhaps subject to limitations, while items characterized as dividends are not. Some systems limit deductions based on simple formulas, such as a debt-to-equity ratio, while other systems have more complex rules.

Some systems provide a mechanism whereby groups of related corporations may obtain benefit from losses, credits, or other items of all members within the group. Mechanisms include combined or consolidated returns as well as group relief (direct benefit from items of another member).

Many systems additionally tax shareholders of those entities on dividends or other distributions by the corporation. A few systems provide for partial integration of entity and member taxation. This may be accomplished by "imputation systems" or franking credits. In the past, mechanisms have existed for advance payment of member tax by corporations, with such payment offsetting entity level tax.

Many systems (particularly sub-country level systems) impose a tax on particular corporate attributes. Such non-income taxes may be based on capital stock issued or authorized (either by number of shares or value), total equity, net capital, or other measures unique to corporations.

Corporations, like other entities, may be subject to withholding tax obligations upon making certain varieties of payments to others. These obligations are generally not the tax of the corporation, but the system may impose penalties on the corporation or its officers or employees for failing to withhold and pay over such taxes. A company has been defined as a juristic person having an independent and separate existence from its shareholders. Income of the company is computed and assessed separately in the hands of the company. In certain cases, distributions from the company to its shareholders as dividends are taxed as income to the shareholders.

Corporations property tax, payroll tax, withholding tax, excise tax, customs duties, value added tax, and other common taxes, are generally not referred to as “corporate tax.”

Definition of corporation

Characterization as a corporation for tax purposes is based on the form of organization, with the exception of United States Federal[2] and most states income taxes, under which an entity may elect to be treated as a corporation and taxed at the entity level or taxed only at the member level.[3] See Limited liability company, Partnership taxation, S corporation, Sole proprietorship.

Types

Most jurisdictions tax corporations on their income, like the United Kingdom[4] or the United States.[3] The United States taxes all types of corporate income for a given company at the same rate, but provide different rates of tax depending on income levels or size of the company.[3]

The United States taxes corporations under the same framework of tax law as individuals, with differences related to the inherent natures of corporations and individuals or unincorporated entities. Individuals are not formed, amalgamated, or acquired; and corporations do not incur medical expenses except by way of compensating individuals.[5]

Most systems tax both domestic and foreign corporations. Often, domestic corporations are taxed on worldwide income while foreign corporations are taxed only on income from sources within the jurisdiction.

Taxable income

The United States defines taxable income for a corporation as all gross income, i.e. sales plus other income minus cost of goods sold and tax exempt income less allowable tax deductions, without the allowance of the standard deduction applicable to individuals.[6]

The United States' system requires that differences in principles for recognizing income and deductions differing from financial accounting principles like the timing of income or deduction, tax exemption for certain income, and disallowance or limitation of certain tax deductions be disclosed in considerable detail for non-small corporations on Schedule M-3 to Form 1120.[7]

The United States taxes resident corporations, i.e. those organized within the country, on their worldwide income, and nonresident, foreign corporations only on their income from sources within the country.[8] Hong Kong taxes resident and nonresident corporations only on income from sources within the country.[9]

Rates

Share of Federal Revenue from Different Tax Sources (Individual, Payroll, and Corporate) 1950 - 2010
Share of Federal Revenue from Different Tax Sources (Individual, Payroll, and Corporate) 1950 - 2010.
Comparison of Corporate Income Taxes
As a Percentage of GDP
For OECD Countries, 2008[10]
Country Tax/GDP Country Tax/GDP
Norway 12.5 Switzerland 3.3
Australia 5.9 Netherlands 3.2
Luxembourg 5.1 Slovak Rep. 3.1
New Zealand 4.4 Sweden 3.0
Czech Rep. 4.2 France 2.9
South Korea 4.2 Ireland 2.8
Japan 3.9 Spain 2.8
Italy 3.7 Poland 2.7
Portugal 3.6 Hungary 2.6
UK 3.6 Austria 2.5
Finland 3.5 Greece 2.5
Israel 3.5 Slovenia 2.5
OECD avg. 3.5 Germany 1.9
Denmark 3.4 Iceland 1.9
Belgium 3.3 Turkey 1.8
Canada 3.3 US 1.8

Corporate tax rates generally are the same for differing types of income, yet the US graduated its tax rate system where corporations with lower levels of income pay a lower rate of tax, with rates varying from 15% on the first $50,000 of income to 35% on incomes over $10,000,000, with phase-outs.[11]

The Canadian system imposes tax at different rates for different types of corporations, allowing lower rates for some smaller corporations.[12]

Tax rates vary by jurisdiction and some countries have sub-country level jurisdictions like provinces, cantons, prefectures, cities, or other that also impose corporate income tax like Canada, Germany, Japan, Switzerland, and the United States.[13] Some jurisdictions impose tax at a different rate on an alternative tax base.

GDP per capita PPP vs CIT 2016
General government revenue, in % of GDP, from Corporate Income Taxes. For this data, the variance of GDP per capita with purchasing power parity (PPP) is explained in 2 % by tax revenue. Years 2014-17.

Examples of corporate tax rates for a few English-speaking countries include:

  • Australia: 28.5%, however some specialized entities are taxed at lower rates.[14]
  • Canada: Federal 11%, or Federal 15% plus provincial 1% to 16%. Note: the rates are additive.[15]
  • Hong Kong: 16.5%[16]
  • Ireland: 12.5% on trading (business) income, and 25% on non-trading income.[17]
  • New Zealand: 28%
  • Singapore: 17% from 2010, however a partial exemption scheme may apply to new companies.[18]
  • United Kingdom: 20% to 21% for 2014–2015.[19]
  • United Kingdom: 20% for 2016
  • United States: Federal 15% to 35%.[20] States: 0% to 10%, deductible in computing Federal taxable income. Some cities: up to 9%, deductible in computing Federal taxable income. The Federal Alternative Minimum Tax of 20% is imposed on regular taxable income with adjustments.

International corporate tax rates

Corporate tax rates vary widely by country, leading some corporations to shield earnings within offshore subsidiaries or to redomicile within countries with lower tax rates.

In comparing national corporate tax rates one should also take into account the taxes on dividends paid to shareholders. For example, the overall U.S. tax on corporate profits of 35% is less than or similar to that of European countries such as Germany, Ireland, Switzerland and the United Kingdom, which have lower corporate tax rates but higher taxes on dividends paid to shareholders.[21]

Corporate tax rates across the Organisation for Economic Co-operation and Development (OECD) are shown in the table. Rates within the OECD vary from a low of 8.5% in Switzerland to a high of 34.43% in France, since the United States has recently decreased corporation tax to 22%. The OECD average is 22%.[22] The first column in the table below represents corporate income tax rates mandated by the central government. The second column lists total combined tax rates which, in addition to the government tax rate, may also include various provincial, state and local taxes. For example, the 2015 provincial corporate tax rates in Canada range from 11.5% to 16% in addition to the federal tax rate of 15%, unless taxable profits of small corporations are low enough to qualify for a lower tax rate.[23]

Corporate tax rates of OECD member countries
Country Corporate income
tax rate (2016)
Combined corporate
tax rate (2016)
 Australia 30.00% 30.00%
 Austria 25.00% 25.00%
 Belgium 33.00% 33.99%
 Canada 15.00% 26.80%
 Chile 24.00% 24.00%
 Czech Republic 19.00% 19.00%
 Denmark 22.00% 22.00%
 Estonia 20.00% 20.00%
 Finland 20.00% 20.00%
 France 34.43% 34.43%
 Germany 15.83% 30.18%
 Greece 29.00% 29.00%
 Hungary 19.00% 19.00%
 Iceland 20.00% 20.00%
 Ireland 12.50% 12.50%
 Israel 25.00% 25.00%
 Italy 24.00% 31.29%
 Japan 23.40% 29.97%
 South Korea 22.00% 24.20%
 Luxembourg 22.47% 29.22%
 Mexico 30.00% 30.00%
 Netherlands 25.00% 25.00%
 New Zealand 28.00% 28.00%
 Norway 25.00% 25.00%
 Poland 19.00% 19.00%
 Portugal 21.00% 22.50%
 Slovakia 22.00% 22.00%
 Slovenia 17.00% 17.00%
 Spain 25.00% 25.00%
 Sweden 22.00% 22.00%
  Switzerland 8.50% 21.15%
 Turkey 20.00% 20.00%
 United Kingdom 19.00% 19.00%
 United States 35.00% 38.92%

The corporate tax rates in other jurisdictions include:

Country 2015 Corporate tax rate
India 29.00% (2016)
Russian Federation 20%[24]
Singapore 17%, with significant exemptions for resident companies[25]

Distribution of earnings

Most systems that tax corporations also impose income tax on shareholders of corporations when earnings are distributed.[26] Such distribution of earnings is generally referred to as a dividend. The tax may be at reduced rates. For example, the United States provides for reduced amounts of tax on dividends received by individuals and by corporations.[27]

The company law of some jurisdictions prevents corporations from distributing amounts to shareholders except as distribution of earnings. Such earnings may be determined under company law principles or tax principles. In such jurisdictions, exceptions are usually provided with respect to distribution of shares of the company, for winding up, and in limited other situations.

Other jurisdictions treat distributions as distributions of earnings taxable to shareholders if earnings are available to be distributed, but do not prohibit distributions in excess of earnings. For example, under the United States system each corporation must maintain a calculation of its earnings and profits (a tax concept similar to retained earnings).[28] A distribution to a shareholder is considered to be from earnings and profits to the extent thereof unless an exception applies.[29] Note that the United States provides reduced tax on dividend income of both corporations and individuals.

Other jurisdictions provide corporations a means of designating, within limits, whether a distribution is a distribution of earnings taxable to the shareholder or a return of capital.

Example

The following illustrates the dual level of tax concept:

C Corp earns 100 of profits before tax in each of years 1 and 2. It distributes all the earnings in year 3, when it has no profits. Jim owns all of C Corp. The tax rate in the residence jurisdiction of Jim and C Corp is 30%.

Year 1 Cumulative Pre-tax income Taxes
Taxable income 100 100
Tax 30 30  
Net after tax 70
Jim's income & tax 0
Year 2
Taxable income 100 200
Tax 30 60  
Net after tax 70
Jim's income & tax 0
Year 3:
Distribution 140
Jim's tax 42 102  
Net after Jim's tax 98
Totals 200 102  
51%

Other corporate events

Many systems provide that certain corporate events are not taxable to corporations or shareholders. Significant restrictions and special rules often apply. The rules related to such transactions are often quite complex.

Formation

Most systems treat the formation of a corporation by a controlling corporate shareholder as a nontaxable event. Many systems, including the United States and Canada, extend this tax free treatment to the formation of a corporation by any group of shareholders in control of the corporation.[30] Generally, in tax free formations the tax attributes of assets and liabilities are transferred to the new corporation along with such assets and liabilities.

Example: John and Mary are United States residents who operate a business. They decide to incorporate for business reasons. They transfer the assets of the business to Newco, a newly formed Delaware corporation of which they are the sole shareholders, subject to accrued liabilities of the business in exchange solely for common shares of Newco. Under United States principles, this transfer does not cause tax to John, Mary, or Newco. If on the other hand Newco also assumes a bank loan in excess of the basis of the assets transferred less the accrued liabilities, John and Mary will recognize taxable gain for such excess.[31]

Acquisitions

Corporations may merge or acquire other corporations in a manner a particular tax system treats as nontaxable to either of the corporations and/or to their shareholders. Generally, significant restrictions apply if tax free treatment is to be obtained.[32] For example, Bigco acquires all of the shares of Smallco from Smallco shareholders in exchange solely for Bigco shares. This acquisition is not taxable to Smallco or its shareholders under U.S. or Canadian tax law if certain requirements are met, even if Smallco is then liquidated into or merged or amalgamated with Bigco.

Reorganizations

In addition, corporations may change key aspects of their legal identity, capitalization, or structure in a tax free manner under most systems. Examples of reorganizations that may be tax free include mergers, amalgamations, liquidations of subsidiaries, share for share exchanges, exchanges of shares for assets, changes in form or place of organization, and recapitalizations.[33]

Interest deduction limitations

Most jurisdictions allow a tax deduction for interest expense incurred by a corporation in carrying out its trading activities. Where such interest is paid to related parties, such deduction may be limited. Without such limitation, owners could structure financing of the corporation in a manner that would provide for a tax deduction for much of the profits, potentially without changing the tax on shareholders. For example, assume a corporation earns profits of 100 before interest expense and would normally distribute 50 to shareholders. If the corporation is structured so that deductible interest of 50 is payable to the shareholders, it will cut its tax to half the amount due if it merely paid a dividend.

A common form of limitation is to limit the deduction for interest paid to related parties to interest charged at arm's length rates on debt not exceeding a certain portion of the equity of the paying corporation. For example, interest paid on related party debt in excess of three times equity may not be deductible in computing taxable income.

The United States, United Kingdom, and French tax systems apply a more complex set of tests to limit deductions. Under the U.S. system, related party interest expense in excess of 50% of cash flow is generally not currently deductible, with the excess potentially deductible in future years.[34]

The classification of instruments as debt on which interest is deductible or as equity with respect to which distributions are not deductible can be complex in some systems.[35]

Foreign corporation branches

Most jurisdictions tax foreign corporations differently from domestic corporations.[36] No international laws limit the ability of a country to tax its nationals and residents (individuals and entities). However, treaties and practicality impose limits on taxation of those outside its borders, even on income from sources within the country.

Most jurisdictions tax foreign corporations on business income within the jurisdiction when earned through a branch or permanent establishment in the jurisdiction. This tax may be imposed at the same rate as the tax on business income of a resident corporation or at a different rate.[37]

Upon payment of dividends, corporations are generally subject to withholding tax only by their country of incorporation. Many countries impose a branch profits tax on foreign corporations to prevent the advantage the absence of dividend withholding tax would otherwise provide to foreign corporations. This tax may be imposed at the time profits are earned by the branch or at the time they are remitted or deemed remitted outside the country.[38]

Branches of foreign corporations may not be entitled to all of the same deductions as domestic corporations. Some jurisdictions do not recognize inter-branch payments as actual payments, and income or deductions arising from such inter-branch payments are disregarded.[39] Some jurisdictions impose express limits on tax deductions of branches. Commonly limited deductions include management fees and interest.

Nathan M. Jenson argues that low corporate tax rates are a minor determinate of a multinational company when setting up their headquarters in a country. Nathan M. Jenson: Sinha, S.S. 2008, "Can India Adopt Strategic Flexibility Like China Did?", Global Journal of Flexible Systems Management, vol. 9, no. 2/3, pp. 1.

Losses

Most jurisdictions allow interperiod allocation or deduction of losses in some manner for corporations, even where such deduction is not allowed for individuals. A few jurisdictions allow losses (usually defined as negative taxable income) to be deducted by revising or amending prior year taxable income.[40] Most jurisdictions allow such deductions only in subsequent periods. Some jurisdictions impose time limitations as to when loss deductions may be utilized.

Groups of companies

Several jurisdictions provide a mechanism whereby losses or tax credits of one corporation may be used by another corporation where both corporations are commonly controlled (together, a group). In the United States and Netherlands, among others, this is accomplished by filing a single tax return including the income and loss of each group member. This is referred to as a consolidated return in the United States and as a fiscal unity in the Netherlands. In the United Kingdom, this is accomplished directly on a pairwise basis called group relief. Losses of one group member company may be “surrendered” to another group member company, and the latter company may deduct the loss against profits.

The United States has extensive regulations dealing with consolidated returns.[41] One such rule requires matching of income and deductions on intercompany transactions within the group by use of “deferred intercompany transaction” rules.

In addition, a few systems provide a tax exemption for dividend income received by corporations. The Netherlands system provides a “participation exception” to taxation for corporations owning more than 25% of the dividend paying corporation.

Transfer pricing

A key issue in corporate tax is the setting of prices charged by related parties for goods, services or the use of property. Many jurisdictions have guidelines on transfer pricing which allow tax authorities to adjust transfer prices used. Such adjustments may apply in both an international and a domestic context.

Taxation of shareholders

Most income tax systems levy tax on the corporation and, upon distribution of earnings (dividends), on the shareholder. This results in a dual level of tax. Most systems require that income tax be withheld on distribution of dividends to foreign shareholders, and some also require withholding of tax on distributions to domestic shareholders. The rate of such withholding tax may be reduced for a shareholder under a tax treaty.

Some systems tax some or all dividend income at lower rates than other income. The United States has historically provided a dividends received deduction to corporations with respect to dividends from other corporations in which the recipient owns more than 10% of the shares. For tax years 2004–2010, the United States also has imposed a reduced rate of taxation on dividends received by individuals.[42]

Some systems currently attempt or in the past have attempted to integrate taxation of the corporation with taxation of shareholders to mitigate the dual level of taxation. As a current example, Australia provides for a “franking credit” as a benefit to shareholders. When an Australian company pays a dividend to a domestic shareholder, it reports the dividend as well as a notional tax credit amount. The shareholder utilizes this notional credit to offset shareholder level income tax.

A previous system was utilised in the United Kingdom, called the Advance Corporation Tax (ACT). When a company paid a dividend, it was required to pay an amount of ACT, which it then used to offset its own taxes. The ACT was included in income by the shareholder resident in the United Kingdom or certain treaty countries, and treated as a payment of tax by the shareholder. To the extent that deemed tax payment exceeded taxes otherwise due, it was refundable to the shareholder.

Alternative tax bases

Many jurisdictions incorporate some sort of alternative tax computation. These computations may be based on assets, capital, wages, or some alternative measure of taxable income. Often the alternative tax functions as a minimum tax.

United States federal income tax incorporates an alternative minimum tax. This tax is computed at a lower tax rate (20% for corporations), and imposed based on a modified version of taxable income. Modifications include longer depreciation lives assets under MACRS, adjustments related to costs of developing natural resources, and an addback of certain tax exempt interest. The U. S. state of Michigan previously taxed businesses on an alternative base that did not allow compensation of employees as a tax deduction and allowed full deduction of the cost of production assets upon acquisition.

Some jurisdictions, such as Swiss cantons and certain states within the United States, impose taxes based on capital. These may be based on total equity per audited financial statements,[43] a computed amount of assets less liabilities[44] or quantity of shares outstanding.[45] In some jurisdictions, capital based taxes are imposed in addition to the income tax.[44] In other jurisdictions, the capital taxes function as alternative taxes.

Mexico imposes an alternative tax on corporations, the IETU. The tax rate is lower than the regular rate, and there are adjustments for salaries and wages, interest and royalties, and depreciable assets.

Tax returns

Most systems require that corporations file an annual income tax return.[46] Some systems (such as the Canadian and United States systems) require that taxpayers self assess tax on the tax return.[47] Other systems provide that the government must make an assessment for tax to be due. Some systems require certification of tax returns in some manner by accountants licensed to practice in the jurisdiction, often the company's auditors.[48]

Tax returns can be fairly simple or quite complex. The systems requiring simple returns often base taxable income on financial statement profits with few adjustments, and may require that audited financial statements be attached to the return.[49] Returns for such systems generally require that the relevant financial statements be attached to a simple adjustment schedule. By contrast, United States corporate tax returns require both computation of taxable income from components thereof and reconciliation of taxable income to financial statement income.

Many systems require forms or schedules supporting particular items on the main form. Some of these schedules may be incorporated into the main form. For example, the Canadian corporate return, Form T-2, an 8-page form, incorporates some detail schedules but has nearly 50 additional schedules that may be required.

Some systems have different returns for different types of corporations or corporations engaged in specialized businesses. The United States has 13 variations on the basic Form 1120[50] for S corporations, insurance companies, Domestic international sales corporations, foreign corporations, and other entities. The structure of the forms and imbedded schedules vary by type of form.

Preparation of non-simple corporate tax returns can be time consuming. For example, the U.S. Internal Revenue Service states in the instructions for Form 1120 that the average time needed to complete form is over 56 hours, not including record keeping time and required attachments.

Tax return due dates vary by jurisdiction, fiscal or tax year, and type of entity.[51] In self-assessment systems, payment of taxes is generally due no later than the normal due date, though advance tax payments may be required.[52] Canadian corporations must pay estimated taxes monthly.[53] In each case, final payment is due with the corporation tax return.

See also

References

  1. ^ "Who benefits from corporate tax cuts? Evidence from local US labour markets | Microeconomic Insights". Microeconomic Insights. 2017-11-02. Retrieved 2017-11-22.
  2. ^ See United States tax regulations at 26 CFR 301.7701-2 and -3.
  3. ^ a b c 26 USC 11.
  4. ^ United Kingdom Income and Corporation Taxes Act of 1988 as amended (UK ICTA88) section 6
  5. ^ United States itemized deductions for individuals and special deductions for corporations.
  6. ^ "26 U.S. Code § 63 - Taxable income defined". LII / Legal Information Institute. Retrieved 2018-10-13.
  7. ^ United States Internal Revenue Service. "M-3 to Form 1120" (PDF). United States Internal Revenue Service.
  8. ^ "26 U.S. Code Subpart B - Foreign Corporations". LII / Legal Information Institute. Retrieved 2018-10-13.
  9. ^ "Profits Tax". Ird.gov.hk. Retrieved 2012-10-08.
  10. ^ Bartlett, Bruce (31 May 2011). "Are Taxes in the U.S. High or Low?". New York Times. Retrieved 19 September 2012.
  11. ^ "26 U.S. Code § 11 - Tax imposed". LII / Legal Information Institute. Retrieved 2018-10-13.
  12. ^ Canada Revenue Agency. "Type of corporation - Canada.ca". www.canada.ca. Retrieved 2018-10-13.
  13. ^ "Corporation Tax Explained". Peach Wilkinson Accountants. Archived from the original on 2016-10-06. Retrieved 2016-10-04.
  14. ^ "Company tax rates". Ato.gov.au. 2012-07-24. Archived from the original on 2013-07-09. Retrieved 2012-10-08.
  15. ^ "Corporation tax rates". Canada Revenue Agency. 2012-04-03. Retrieved 2012-10-08.
  16. ^ "Profits Tax". Ird.gov.hk. Retrieved 2012-10-08.
  17. ^ "Corporation Tax". Revenue.ie. 2008-02-04. Retrieved 2012-10-08.
  18. ^ "Tax rates & tax exemption schemes". IRAS. 2012-02-17. Retrieved 2012-10-08.
  19. ^ "HM Revenue & Customs: Corporation Tax rates". Hmrc.gov.uk. Retrieved 2012-10-08.
  20. ^ "26 USC § 11 – Tax imposed | LII / Legal Information Institute". Law.cornell.edu. Retrieved 2012-10-08.
  21. ^ "OECD iLibrary" (PDF). OECD i-Library. Organisation for Economic Co-operation and Development.
  22. ^ "Table II.1. Corporate income tax rate". OECD. Archived from the original on 2017-07-02.
  23. ^ Taxpayer Services and Debt Management Branch, Taxpayer Services [Directorate]. "Corporation tax rates". Canada Revenue Agency. Government of Canada. Retrieved 2016-02-07.CS1 maint: Multiple names: authors list (link)
  24. ^ Tax Code of the Russian Federation, Part II, Chapter 25, Article 284
  25. ^ Singapore Corporate Tax Guide
  26. ^ See, e.g., 26 USC 61(a)(7).
  27. ^ See 26 USC 1(h)(11) for the reduced rate of tax for individuals, and 26 USC 243 (a)(1) and (c) for a deduction for dividends received by corporations.
  28. ^ "26 U.S. Code § 312 - Effect on earnings and profits". LII / Legal Information Institute. Retrieved 2018-10-13.
  29. ^ "26 U.S. Code § 316 - Dividend defined". LII / Legal Information Institute. Retrieved 2018-10-13.
  30. ^ 26 USC 351. For a discussion of U.S. principles, see Bittker & Eustice, below, Chapter 3.
  31. ^ 26 USC 357 and 26 CFR 1.367-1(b) Example.
  32. ^ See, e.g., 26 USC 368 defining events qualifying for reorganization treatment, including certain acquisitions.
  33. ^ See 26 USC 354 for tax effect on shareholders of reorganizations as defined in 26 USC 368.
  34. ^ "26 U.S. Code § 163 - Interest". LII / Legal Information Institute. Retrieved 2018-10-13.
  35. ^ See, e.g., 26 USC 385. The Internal Revenue Service had proposed complex regulations under this section (see TD 7747, 1981-1 CB 141) which were soon withdrawn (TD 7920, 1983-2 CB 69). An article in Tax Notes, a publication of Tax Analysts in 1986 identified 26 factors the U.S. courts have used to classify instruments as debt or equity. Also see article by Englebrecht, et al.
  36. ^ Contrast tax on domestic corporations under 26 USC 11 and 26 USC 63 with tax on foreign corporations under 26 USC 881-885.
  37. ^ "26 U.S. Code § 882 - Tax on income of foreign corporations connected with United States business". LII / Legal Information Institute. Retrieved 2018-10-13.
  38. ^ "26 U.S. Code § 884 - Branch profits tax". LII / Legal Information Institute. Retrieved 2018-10-13.
  39. ^ For example, the Internal Revenue Service states in its Publication 515, “The payee of a payment made to a disregarded entity is the owner of the entity.”
  40. ^ "26 U.S. Code § 172 - Net operating loss deduction". LII / Legal Information Institute. Retrieved 2018-10-13.
  41. ^ "26 CFR 1.1502-0 - Effective dates". LII / Legal Information Institute. Retrieved 2018-10-13.
  42. ^ 26 USC 1(h)(11). Note that distributions from an S corporation, Regulated Investment Company (mutual fund), or Real Estate Investment Trust are not treated as dividends.
  43. ^ Switzerland
  44. ^ a b New York
  45. ^ Delaware
  46. ^ "26 U.S. Code § 6012 - Persons required to make returns of income". LII / Legal Information Institute. Retrieved 2018-10-13.
  47. ^ "26 U.S. Code § 6151 - Time and place for paying tax shown on returns". LII / Legal Information Institute. Retrieved 2018-10-13.
  48. ^ See, e.g., India
  49. ^ See, e.g., UK Form CT600, which requires the attachment of audited or statutory accounts as filed with the Companies House.
  50. ^ "Forms and Instructions (PDF)". Irs.gov. 2012-07-17. Retrieved 2012-10-08.
  51. ^ Examples: U.S. corporations must file Federal income Form 1120 by the 15th day of the third month following the end of the tax year (March 15 for calendar years); but Form 1120-IC-DISC returns are not due until the 15th day of the ninth month; Canadian corporations must file T-2 by June 30.
  52. ^ U.S. Corporations must pay estimated taxes for each quarter or face penalties under 26 USC 6655.
  53. ^ "Instalment due dates". Cra-arc.gc.ca. 2012-01-04. Retrieved 2012-10-08.

Further reading

U.S.
  • Bittker, Boris I. and Eustice, James S.: Federal Income Taxation of Corporations and Shareholders: paperback ISBN 978-0-7913-4101-8, subscription service
  • Kahn & Lehman. Corporate Income Taxation
  • Healy, John C. and Schadewald, Michael S.: Multistate Corporate Tax Course 2010, CCH, ISBN 978-0-8080-2173-5 (also available as a multi-volume guide, ISBN 978-0-8080-2015-8)
  • Hoffman, et al.: Corporations, Partnerships, Estates and Trusts, ISBN 978-0-324-66021-0
  • Momburn, et al.: Mastering Corporate Tax, Carolina Academic Press, ISBN 978-1-59460-368-6
United Kingdom
  • Tolley's Corporation Tax, 2007-2008 ISBN 978-0-7545-3273-6
  • Watterson, Juliana M.: Corporation Tax 2009/2010, Bloomsbury Professional, ISBN 978-1-84766-327-6

External links

Canada
United Kingdom
United States
Base erosion and profit shifting

Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to "shift" profits from higher–tax jurisdictions to lower–tax jurisdictions, thus "eroding" the "tax–base" of the higher–tax jurisdictions.The Organisation for Economic Co-operation and Development (OECD) define BEPS strategies as also: "exploiting gaps and mismatches in tax rules"; however, academics proved corporate tax havens (e.g. Ireland, the Caribbean, Luxembourg, the Netherlands, Singapore, Switzerland, and Hong Kong), who are the largest global BEPS hubs, use OECD–whitelisted tax structures and OECD–compliant BEPS tools. Corporate tax havens offer BEPS tools to "shift" profits to the haven, and additional BEPS tools to avoid paying taxes within the haven (e.g. Ireland's "Green Jersey"). BEPS tools are mostly associated with U.S. technology and life science multinationals. Tax academics showed use of the BEPS tools by U.S. multinationals, via tax havens, maximised long–term U.S. exchequer receipts and shareholder return, at the expense of others. Initiatives to curb BEPS by the OECD, and by the Trump Administration have failed.

Common Consolidated Corporate Tax Base

The Common Consolidated Corporate Tax Base (CCCTB) is a proposal for a common tax scheme for the European Union developed by the European Commission and first proposed in March 2011 that provides a single set of rules for how EU corporations calculate EU taxes, and provide the ability to consolidate EU taxes. Corporate tax rates in the EU would not be changed by the CCCTB, as EU countries would continue to have their own corporate tax rates.The original proposal stalled, largely due to objections from countries such as Ireland and the UK. In June 2015, the Commission announced they will submit a relaunched CCCTB proposal in 2016, featuring two key changes compared to the initial proposal: First it would become mandatory (not voluntary) for corporations to apply the CCCTB regime, and second the "consolidation part" will be postponed for a later follow-up proposal.

Conduit and Sink OFCs

Conduit OFC and Sink OFC is an empirical quantitative method of classifying corporate tax havens, offshore financial centres and tax havens.

Rather than analyzing taxation and legal structures, called base erosion and profit shifting (BEPS) tools, to identify and classify potential tax havens (the preferred EU, IMF, and OECD route), this approach analyses the ownership chains of 98 million global companies (a purely empirical, or outcomes–based, route), relative to the size of countries of their incorporation. The technique gives both a method of classification and a method of understanding the relative scale – but not absolute scale – of corporate tax havens/offshore financial centers.

The results were formally published by the University of Amsterdam's CORPNET Group in July 2017, and identify two major classifications:

24 global Sink OFCs: jurisdictions in which a disproportional amount of value disappears from the economic system (i.e. the traditional tax havens).(See the table below for the list of Sinks)

5 global Conduit OFCs: jurisdictions through which a disproportional amount of value moves toward sink OFCs (i.e. modern corporate tax havens).(Conduits are: Netherlands, United Kingdom, Switzerland, Singapore and Ireland)Our findings debunk the myth of tax havens as exotic far–flung islands that are difficult, if not impossible, to regulate. Many offshore financial centers are highly developed countries with strong regulatory environments.

The CORPNET report has been praised, and in March 2017, the EU has adopted its approach into some of their policy frameworks. Research by Gabriel Zucman (et alia) published in June 2018, showed using Orbis database connections, underestimates Ireland, which the Zucman–Tørsløv–Wier 2018 list shows is the largest corporate Conduit OFC in the world. However, CORPNET's Conduits and Sinks, still reconcile closely with the world's top ten tax havens.

Corporate haven

A corporate haven, corporate tax haven, or multinational tax haven, is a jurisdiction that multinational corporations find attractive for establishing subsidiaries or incorporation of regional or main company headquarters, mostly due to favourable tax regimes (not just the headline tax rate), and/or favourable secrecy laws (such as the avoidance of regulations or disclosure of tax schemes), and/or favourable regulatory regimes (such as weak data-protection or employment laws).

Modern corporate tax havens (such as Ireland, the Netherlands, and Singapore), differ from traditional corporate tax havens (such as Bermuda, the Cayman Islands and Jersey), in their ability to maintain OECD compliance, while using OECD–whitelisted § IP–based BEPS tools and § Debt–based BEPS tools, which don't file public accounts, to enable the corporate to avoid taxes, not just in the corporate haven, but in all operating countries that have tax treaties with the haven.

While the "headline" corporate tax rate in corporate havens is always above zero (e.g. Netherlands at 25%, U.K. at 19%, Singapore at 17%, and Ireland at 12.5%), the "effective" tax rate (ETR) of multinational corporations, net of the BEPS tools, is closer to zero. Estimates of lost annual taxes to corporate havens range from $100 to $250 billion. To increase respectability, and access to tax treaties, some havens like Singapore and Ireland require corporates to have a "substantive presence", equating to an "§ Employment tax" of circa 2–3% of profits shielded via the haven (if these are real jobs, the tax is mitigated).

In § Corporate tax haven lists, CORPNET's "Orbis connections", ranks the Netherlands, U.K., Switzerland, Ireland, and Singapore as the world's key corporate tax havens, while Zucman's "quantum of funds" ranks Ireland as the largest global corporate tax haven. In § Proxy tests, Ireland is the largest recipient of U.S. tax inversions (the U.K. is third, the Netherlands is fifth). Ireland's double Irish BEPS tool is credited with the largest build-up of untaxed corporate offshore cash in history. Luxembourg and Hong Kong and the Caribbean "triad" (BVI-Cayman-Bermuda), have elements of corporate tax havens, but also of traditional tax havens.

Unlike traditional tax havens, modern corporate tax havens reject they have anything to do with near-zero effective tax rates, due to their need to encourage jurisdictions to enter into bilateral tax treaties which accept the haven's BEPS tools. CORPNET show each corporate tax haven is strongly connected with specific traditional tax havens (via additional BEPS tool "backdoors" like the double Irish, the dutch sandwich, and single malt). Corporate tax havens promote themselves as "knowledge economies", and IP as a "new economy" asset, rather than a tax management tool, which is encoded into their statute books as their primary BEPS tool. This perceived respectability encourages corporates to use havens as regional headquarters (i.e. Google, Apple, and Facebook use Ireland/U.K. in EMEA over Luxembourg, and Singapore in APAC over Hong Kong/Taiwan; none use the BVI–Cayman–Bermuda "triad" as a regional headquarters).

Smaller corporate havens meet the IMF–definition of an offshore financial centre, as the untaxed accounting flows from the BEPS tools, artificially distorts the economic statistics of the haven (e.g. Ireland's 2015 leprechaun economics GDP, Luxembourg's 70% GNI to GDP ratio, most § Ten major tax havens are in the top 15 § GDP-per-capita tax haven proxy list). The distortion can lead to over-leverage in the haven's economy (and property bubbles), making them prone to severe credit cycles.

Corporate tax in the United States

Corporate tax is imposed in the United States at the federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Since January 1, 2018, the nominal federal corporate tax rate in the United States of America is a flat 21% due to the passage of the Tax Cuts and Jobs Act of 2017. State and local taxes and rules vary by jurisdiction, though many are based on federal concepts and definitions. Taxable income may differ from book income both as to timing of income and tax deductions and as to what is taxable. The corporate Alternative Minimum Tax was also eliminated by the 2017 reform, but some states have alternative taxes. Like individuals, corporations must file tax returns every year. They must make quarterly estimated tax payments. Groups of corporations controlled by the same owners may file a consolidated return.

Some corporate transactions are not taxable. These include most formations and some types of mergers, acquisitions, and liquidations. Shareholders of a corporation are taxed on dividends distributed by the corporation. Corporations may be subject to foreign income taxes, and may be granted a foreign tax credit for such taxes.

Shareholders of most corporations are not taxed directly on corporate income, but must pay tax on dividends paid by the corporation. However, shareholders of S corporations and mutual funds are taxed currently on corporate income, and do not pay tax on dividends.

Corporate welfare

Corporate welfare is often used to describe a government's bestowal of money grants, tax breaks, or other special favorable treatment for corporations. It highlights how wealthy corporations are less in need of such treatment than the poor.The definition of corporate welfare is sometimes restricted to direct government subsidies of major corporations, excluding tax loopholes and all manner of regulatory and trade decisions, which in practice could be worth much more than any direct subsidies.

Dhammika Dharmapala

Dhammika Dharmapala (born 1969/1970) is an economist who is the Julius Kreeger Professor of Law at the University of Chicago Law School. He is known for his research into corporate tax avoidance, corporate use of tax havens, and the corporate use of base erosion and profit shifting ("BEPS") techniques.

Dutch Sandwich

Dutch Sandwich is a base erosion and profit shifting ("BEPS") corporate tax tool, used mostly by U.S. multinationals to avoid incurring EU withholding taxes on untaxed profits as they were being moved to non-EU tax havens (such as the Bermuda black hole). These untaxed profits could have originated from within the EU, or from outside the EU, but in most cases were routed to major EU corporate-focused tax havens, such as Ireland and Luxembourg, by the use of other BEPS tools. The Dutch Sandwich was often used with Irish BEPS tools such as the Double Irish, the Single Malt and the Capital Allowances for Intangible Assets ("CAIA") tools. In 2010, Ireland changed its tax-code to enable Irish BEPS tools to avoid such withholding taxes without needing a Dutch Sandwich.

Gabriel Zucman

Gabriel Zucman (born 30 October 1986) is a French economist known for his research on tax havens and corporate tax havens from his 2015 book The Hidden Wealth of Nations: The Scourge of Tax Havens. Zucman is also known for his work on the quantification of the financial scale of base erosion and profit shifting ("BEPS") tax avoidance techniques employed by multinationals in corporate tax havens, through which he identified Ireland as the world's largest corporate tax haven in 2018. Zucman showed that the leading corporate tax havens are all OECD–compliant, and that tax disputes between high–tax locations and havens are very rare. Zucman's papers are some of the most cited papers on research into tax havens and corporate tax havens. In 2018, Zucman was the recipient of the Prize for the Best Young Economist in France, awarded by the Cercle des économistes and Le Monde in recognition of his research on tax evasion and avoidance and their economic consequences.

List of countries by tax rates

A comparison of tax rates by countries is difficult and somewhat subjective, as tax laws in most countries are extremely complex and the tax burden falls differently on different groups in each country and sub-national unit. The list focuses on the main indicative types of taxes: corporate tax, individual income tax, and sales tax, including VAT and GST.

Some other taxes (for instance property tax, substantial in many countries, such as the United States) and payroll tax are not shown here. The table is not exhaustive in representing the true tax burden to either the corporation or the individual in the listed country. The tax rates displayed are marginal and do not account for deductions, exemptions or rebates. The effective rate is usually much lower than the marginal rate, but sometimes much higher. The tax rates given for federations (such as the United States and Canada) are averages and vary depending on the state or province. Territories that have different rates to their respective nation are in italics.

Mihir A. Desai

Mihir A. Desai is an American economist currently the Mizuho Financial Group Professor of Finance at Harvard Business School and Professor at Harvard Law School. He graduated from Brown University with a bachelor's degree of history and economics in 1989, earned an MBA (Baker Scholar) from Harvard Business School in 1993 and a PhD in Political Economy from Harvard University. Desai teaches at Harvard Business School in the Leading with Finance program.

Desai has testified to Joint Committees in Washington on international corporate taxation, as is quoted in the main financial papers on US corporate tax.His professional experiences include working at CS First Boston (1989-1991), McKinsey & Company (1992), and advising a number of firms and governmental organizations. He is also on the Advisory Board of the International Tax Policy Forum and the Centre for Business Taxation at Oxford University.

Offshore magic circle

Offshore magic circle is the set of the largest multi-jurisdictional law firms who specialise in tax havens (especially the Caribbean triad of Bermuda–Cayman–BVI, and the Channel Islands duo of Jersey–Guernsey), and increasingly in modern corporate tax havens (especially Dublin, Singapore and Luxembourg).

Tax evasion

Tax evasion is the illegal evasion of taxes by individuals, corporations, and trusts. Tax evasion often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned, or overstating deductions.

Tax evasion is an activity commonly associated with the informal economy. One measure of the extent of tax evasion (the "tax gap") is the amount of unreported income, which is the difference between the amount of income that should be reported to the tax authorities and the actual amount reported.

In contrast, tax avoidance is the legal use of tax laws to reduce one's tax burden. Both tax evasion and avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that intend to subvert a state's tax system, although such classification of tax avoidance is not indisputable, given that avoidance is lawful, within self-creating systems.

Tax haven

A tax haven is generally defined as a country or place with very low "effective" rates of taxation for foreigners ("headline" rates may be higher). In some traditional definitions, a tax haven also offers financial secrecy. However, while countries with high levels of secrecy but also high rates of taxation (e.g. the United States and Germany in the Financial Secrecy Index ("FSI") rankings), can feature in some tax haven lists, they are not universally considered as tax havens. In contrast, countries with lower levels of secrecy but also low "effective" rates of taxation (e.g. Ireland in the FSI rankings), appear in most § Tax haven lists. The consensus around effective tax rates has led academics to note that the term "tax haven" and "offshore financial centre" are almost synonymous.Traditional tax havens, like Jersey, are open about zero rates of taxation, but as a consequence have limited bilateral tax treaties. Modern corporate tax havens have non-zero "headline" rates of taxation and high levels of OECD–compliance, and thus have large networks of bilateral tax treaties. However, their base erosion and profit shifting ("BEPS") tools enable corporates to achieve "effective" tax rates closer to zero, not just in the haven but in all countries with which the haven has tax treaties; putting them on tax haven lists. According to modern studies, the § Top 10 tax havens include corporate-focused havens like Ireland, the Netherlands, Singapore, and the U.K., while Switzerland, Luxembourg, Hong Kong, and the Caribbean (the Caymans, Bermuda, and the British Virgin Islands), feature as both major traditional tax havens and major corporate tax havens. Corporate tax havens often serve as "conduits" to traditional tax havens.Use of tax havens results in a loss of tax revenues to countries which are not tax havens. Estimates of the § Financial scale of taxes avoided vary, but the most credible have a range of USD 100–250 billion per annum. In addition, capital held in tax havens can permanently leave the tax base (base erosion). Estimates of capital held in tax havens also vary: the most credible estimates are between USD 7–10 trillion (up to 10% of global assets). The harm of traditional and corporate tax havens has been particularly noted in developing nations, where the tax revenues are needed to build infrastructure.Over 15% of countries are tax havens. Tax havens are mostly successful and well-governed economies, and being a haven has brought prosperity. The top 10–15 GDP-per-capita countries, excluding oil and gas exporters, are tax havens. Because of § Inflated GDP-per-capita (due to accounting BEPS flows), havens are prone to over-leverage (international capital misprice the artificial debt-to-GDP). This can lead to severe credit cycles and/or property/banking crises when international capital flows are repriced. Ireland's Celtic Tiger, and the subsequent financial crisis in 2009–13, is an example. Jersey is another. Research shows the § U.S. as the largest beneficiary, and use of tax havens by U.S corporates maximised long-term U.S. exchequer receipts;The focus on combating tax havens (e.g. OECD–IMF projects) has been on common standards, transparency and data sharing. The rise of OECD-compliant corporate tax havens, whose BEPS tools are responsible for most of the lost taxes, has led to criticism of this approach, versus actual taxes paid. Higher-tax jurisdictions, such as the United States and many member states of the European Union, departed from the OECD BEPS Project in 2017–18, to introduce anti-BEPS tax regimes, targeted raising net taxes paid by corporations in corporate tax havens (e.g. the U.S. Tax Cuts and Jobs Act of 2017 ("TCJA") GILTI–BEAT–FDII tax regimes and move to a hybrid "territorial" tax system, and proposed EU Digital Services Tax regime, and EU Common Consolidated Corporate Tax Base).

Tax inversion

Tax inversion, or corporate inversion, is the practice of relocating a corporation's legal domicile to a lower-tax country, while retaining its material operations (including management, functional headquarters and majority shareholders) in its higher-tax country of origin. In practice, it means replacing the existing parent company with a foreign-based parent company, thus making the original company a subsidiary of the new foreign-based parent.

Taxation in Albania

Taxes in Albania are grouped into three main categories:

(a) indirect taxes (VAT, excise,gambling and other indirect taxes),

(b) direct taxes (income tax, personal income taxes, taxes on capital);

(c) local taxes, and

(d) social and health security contributions.

National Taxes, administered by the Central Tax Administration and Customs Administration

include:

1. Indirect taxes

a. Value added tax;

b. Excise tax (since 2012 is administered by Custom administration);

c. Taxes on gambling, casinos and hippodromes;

2. Direct taxes

d. Income tax;

e. National taxes;

f. Other taxes, which are defined as such by special law, and

g. Customs taxes.

3. Social and health security contributions, as defined in the social insurances law

4. Local taxes and tariffs administered by Local Tax Administration include:

a. Tax on immovable property, which includes tax on buildings and agricultural land;

b. Tax on hotel accommodation;

Tax on impact of new constructions upon infrastructure;

d. Tax on transfer of ownership right on real estate;

e. Annual tax for vehicle registration;

f. Tax for occupation of public space;

g. Advertising tax;

h. Temporary taxes

i. Registration tariff for various activities;

j. Fee on infrastructure of education;

k. Vehicle parking tariff;

l. Tariff for services.

In Albania, taxes are levied by both federal and local governments. Most important revenue sources, include the income tax, social security, corporate tax and the value added tax, which are all applied on the federal level. The Albanian Taxation Office is the revenue service of Albania.

As of 2014, income tax is progressive, with three brackets.

Earlier, Albania had a flat tax of 10%, which was implemented in 2008. Value-Added Tax is levied at two different rates of 20% as standard rate, and 10% on medicinal products.Social security and health insurance contributions are paid on employment, civil and management income. Contributions is paid on a monthly income, from a minimum of 22,000 to a maximum amount of 95,130. The employees contribution is 9.5% while the employer pays 15%. Health insurance is levied at 1.7% for both employee and employer. The self-employed pay 23% for social security and 7% for health insurance.Corporate tax in Albania is levied at a flat rate of 15%. Businesses with a turnover of less than 8 million is exempt from corporate tax. A business is tax resident when the company has been incorporated in Albania or has a permanent establishment or the management and control is exercised in Albania.

Taxation in Bangladesh

In Bangladesh, the principal taxes are Customs Duties, Value-Added-Tax (VAT), Supplementary Duty and personal income taxes and corporate income taxes.

Taxation in Italy

Taxation in Italy is levied by the central and regional governments and is collected by the Italian Agency of Revenue (Agenzia delle Entrate). Total tax revenue in 2012 was 44.4% of the GDP. The total tax receipts in 2013 were €782 billion. The most important revenue sources are income tax, social security, corporate tax and value added tax, which are all applied at the national level. Personal income taxation in Italy is progressive.

Taxation in the Netherlands

Taxation in the Netherlands is defined by the income tax (Wet op de inkomstenbelasting 2001), the wage withholding tax (Wet op de loonbelasting 1964), the value added tax (Wet op de omzetbelasting 1968) and the corporate tax (Wet op de vennootschapsbelasting 1969).

Aspects of corporations

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