Corporate tax

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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:

Though the actual definitions vary between jurisdictions, in general, a direct tax is a tax imposed upon a person or property as distinct from a tax imposed upon a transaction, which is described as an indirect tax. The term may be used in economic and political analyses, but does not itself have any legal implications. However, in the United States, the term has special constitutional significance because of a provision in the U.S. Constitution that any direct taxes imposed by the national government be apportioned among the states on the basis of population. In the European Union direct taxation remains the sole responsibility of member states.

An income tax is a tax imposed on individuals or entities (taxpayers) that varies with respective income or profits. Income tax generally is computed as the product of a tax rate times taxable income. Taxation rates may vary by type or characteristics of the taxpayer.

Partnership Arrangement in which parties agree to cooperate to advance their mutual interests

A partnership is an arrangement where parties, known as partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations. Organizations may partner to increase the likelihood of each achieving their mission and to amplify their reach. A partnership may result in issuing and holding equity or may be only governed by a contract.

Contents

Incorporation (business) the forming of a new corporation

Incorporation is the formation of a new corporation. The corporation may be a business, a nonprofit organization, sports club, or a government of a new city or town.

A permanent establishment (PE) is a fixed place of business which generally gives rise to income or value-added tax liability in a particular jurisdiction. The term is defined in many income tax treaties and in most European Union Value Added Tax systems. The tax systems in some civil-law countries impose income taxes and value-added taxes only where an enterprise maintains a PE in the country concerned. Definitions of PEs under tax law or tax treaties may contain specific inclusions or exclusions.

The criteria for residence for tax purposes vary considerably from jurisdiction to jurisdiction, and "residence" can be different for other, non-tax purposes. For individuals, physical presence in a jurisdiction is the main test. Some jurisdictions also determine residency of an individual by reference to a variety of other factors, such as the ownership of a home or availability of accommodation, family, and financial interests. For companies, some jurisdictions determine the residence of a corporation based on its place of incorporation. Other jurisdictions determine the residence of a corporation by reference to its place of management. Some jurisdictions use both a place-of-incorporation test and a place-of-management test.

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.

Dividend payment made by a corporation to its shareholders, usually as a distribution of profits

A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, the corporation is able to re-invest the profit in the business and pay a proportion of the profit as a dividend to shareholders. Distribution to shareholders may be in cash or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or share repurchase. When dividends are paid, shareholders typically must pay income taxes, and the corporation does not receive a corporate income tax deduction for the dividend payments.

A withholding tax, or a retention tax, is an income tax to be paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require withholding tax on payments of interest or dividends. In most jurisdictions, there are additional withholding tax obligations if the recipient of the income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent or even the sale of real estate. Governments use withholding tax as a means to combat tax evasion, and sometimes impose additional withholding tax requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common.

The tax incidence is uncertain.

Economics

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] More of the burden probably falls on capital in large open economies such as the US. [2] Some studies place the burden more on labor. [3] [4] [5] According to one study: "Regression analysis shows that a one-percentage-point increase in the marginal state corporate tax rate reduces wages 0.14 to 0.36 percent." [6] There have been other studies. [7] [8] [9] [10] [11] [12] According to the Adam Smith Institute, "Clausing (2012), Gravelle (2010) and Auerbach (2005), the three best reviews we found, basically conclude that most of the tax falls on capital, not labour."

Adam Smith Institute organization

The Adam Smith Institute (ASI) is a neoliberal think tank and lobbying group based in the United Kingdom and named after Adam Smith, a Scottish moral philosopher and classical economist. The libertarian label was officially changed to neoliberal on 10 October 2016. The Institute advocates free market and classical liberal ideas, primarily via the formation of radical policy options with regard to public choice theory, which political decision makers seek to develop upon. ASI President Madsen Pirie has sought to describe the activity of the organisation as "[w]e propose things which people regard as being on the edge of lunacy. The next thing you know, they're on the edge of policy".

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.

Corporation Separate legal entity that has been incorporated through a legislative or registration process established through legislation

A corporation is an organization, usually a group of people or a company, authorized to act as a single entity and recognized as such in law. Early incorporated entities were established by charter. Most jurisdictions now allow the creation of new corporations through registration.

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.

Interest fee paid by the debtor to the creditor for temporarily borrowed capital

Interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum, at a particular rate. It is distinct from a fee which the borrower may pay the lender or some third party. It is also distinct from dividend which is paid by a company to its shareholders (owners) from its profit or reserve, but not at a particular rate decided beforehand, rather on a pro rata basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned exceeds the total costs.

The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. Closely related to leveraging, the ratio is also known as risk, gearing or leverage. The two components are often taken from the firm's balance sheet or statement of financial position, but the ratio may also be calculated using market values for both, if the company's debt and equity are publicly traded, or using a combination of book value for debt and market value for equity financially.

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 [13] 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. [14] See Limited liability company, Partnership taxation, S corporation, Sole proprietorship.

Types

Most jurisdictions tax corporations on their income, like the United Kingdom [15] or the United States. [14] 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. [14]

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. [16]

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. [17]

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. [18]

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. [19] Hong Kong taxes resident and nonresident corporations only on income from sources within the country. [20]

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.gif
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 [21]
CountryTax/GDPCountryTax/GDP
Norway12.5Switzerland3.3
Australia5.9Netherlands3.2
Luxembourg5.1Slovak Rep.3.1
New Zealand4.4Sweden3.0
Czech Rep.4.2France2.9
South Korea4.2Ireland2.8
Japan3.9Spain2.8
Italy3.7Poland2.7
Portugal3.6Hungary2.6
UK3.6Austria2.5
Finland3.5Greece2.5
Israel3.5Slovenia2.5
OECD avg.3.5Germany1.9
Denmark3.4Iceland1.9
Belgium3.3Turkey1.8
Canada3.3US1.8

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. [22]

The Canadian system imposes tax at different rates for different types of corporations, allowing lower rates for some smaller corporations. [23]

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. [24] Some jurisdictions impose tax at a different rate on an alternative tax base.

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. GDP per capita PPP vs CIT 2016.svg
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:

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. [32] [ dead link ]

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%. [33] 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. [34]

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

The corporate tax rates in other jurisdictions include:

Country2015 Corporate tax rate
India29.00% (2016)
Russian Federation20% [35]
Singapore17%, with significant exemptions for resident companies [36]

Distribution of earnings

Most systems that tax corporations also impose income tax on shareholders of corporations when earnings are distributed. [37] 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. [38]

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). [39] A distribution to a shareholder is considered to be from earnings and profits to the extent thereof unless an exception applies. [40] 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 1CumulativePre-tax incomeTaxes
Taxable income100100
Tax3030  
Net after tax70
Jim's income & tax0
Year 2
Taxable income100200
Tax3060  
Net after tax70
Jim's income & tax0
Year 3:
Distribution140
Jim's tax42102  
Net after Jim's tax98
Totals200102  
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. [41] 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. [42]

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. [43] 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. [44]

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. [45]

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. [46]

Foreign corporation branches

Most jurisdictions tax foreign corporations differently from domestic corporations. [47] 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. [48]

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. [49]

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. [50] 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. [51] 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. [52] 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. [53]

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.[ citation needed ]

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, [54] a computed amount of assets less liabilities [55] or quantity of shares outstanding. [56] In some jurisdictions, capital based taxes are imposed in addition to the income tax. [55] In other jurisdictions, the capital taxes function as alternative taxes.

Mexico imposes an alternative tax on corporations, the IETU.[ citation needed ] 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. [57] Some systems (such as the Canadian and United States systems) require that taxpayers self assess tax on the tax return. [58] Other systems provide that the government must make an assessment for tax to be due.[ citation needed ] Some systems require certification of tax returns in some manner by accountants licensed to practice in the jurisdiction, often the company's auditors. [59]

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. [60] 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 [ permanent dead link ], 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 [61] 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. [62] In self-assessment systems, payment of taxes is generally due no later than the normal due date, though advance tax payments may be required. [63] Canadian corporations must pay estimated taxes monthly. [64] In each case, final payment is due with the corporation tax return.

See also

Related Research Articles

A dividend tax is the tax imposed by a tax authority on dividends received by shareholders (stockholders) of a company.

Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and credits. The difference between deductions, exemptions and credits is that deductions and exemptions both reduce taxable income, while credits reduce tax.

United Kingdom corporation tax corporate tax levied in the United Kingdom on the profits made by UK-resident companies and on the profits of entities registered overseas with permanent establishments in the UK

In the United Kingdom, corporation tax is a corporate tax levied in the United Kingdom on the profits made by UK-resident companies and on the profits of entities registered overseas with permanent establishments in the UK.

Controlled foreign corporation (CFC) rules are features of an income tax system designed to limit artificial deferral of tax by using offshore low taxed entities. The rules are needed only with respect to income of an entity that is not currently taxed to the owners of the entity. Generally, certain classes of taxpayers must include in their income currently certain amounts earned by foreign entities they or related persons control.

The retained earnings of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. At the end of that period, the net income at that point is transferred from the Profit and Loss Account to the retained earnings account. If the balance of the retained earnings account is negative it may be called accumulated losses, retained losses or accumulated deficit, or similar terminology.

Tax exemption is a monetary exemption which reduces taxable income. Tax exempt status can provide complete relief from taxes, reduced rates, or tax on only a portion of items. Examples include exemption of charitable organizations from property taxes and income taxes, veterans, and certain cross-border or multi-jurisdictional scenarios.

S corporation

An S corporation, for United States federal income tax, is a closely held corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S corporations do not pay any income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.

C corporation

A C corporation, under United States federal income tax law, refers to any corporation that is taxed separately from its owners. A C corporation is distinguished from an S corporation, which generally is not taxed separately. Most major companies are treated as C corporations for U.S. federal income tax purposes. C corporations and S corporations both enjoy limited liability, but only C corporations are subject to corporate income taxation.

Income tax in the United States form of taxation in the USA

Income taxes in the United States are imposed by the federal, most state, and many local governments. The income taxes are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allowable deductions. Income is broadly defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income. Partnerships are not taxed, but their partners are taxed on their shares of partnership income. Residents and citizens are taxed on worldwide income, while nonresidents are taxed only on income within the jurisdiction. Several types of credits reduce tax, and some types of credits may exceed tax before credits. An alternative tax applies at the federal and some state levels.

Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that some types of income are not taxable and some expenditures not deductible in computing taxable income. Some systems base tax on taxable income of the current period, and some on prior periods. Taxable income may refer to the income of any taxpayer, including individuals and corporations, as well as entities that themselves do not pay tax, such as partnerships, in which case it may be called “net profit”.

International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries, or the international aspects of an individual country's tax laws as the case may be. Governments usually limit the scope of their income taxation in some manner territorially or provide for offsets to taxation relating to extraterritorial income. The manner of limitation generally takes the form of a territorial, residence-based, or exclusionary system. Some governments have attempted to mitigate the differing limitations of each of these three broad systems by enacting a hybrid system with characteristics of two or more.

Tax consolidation, or combined reporting, is a regime adopted in the tax or revenue legislation of a number of countries which treats a group of wholly owned or majority-owned companies and other entities as a single entity for tax purposes. This generally means that the head entity of the group is responsible for all or most of the group's tax obligations. Consolidation is usually an all-or-nothing event: once the decision to consolidate has been made, companies are irrevocably bound. Only by having less than a 100% interest in a subsidiary can that subsidiary be left out of the consolidation.

Income taxes in Canada constitute the majority of the annual revenues of the Government of Canada, and of the governments of the Provinces of Canada. In the fiscal year ending 31 March 2018, the federal government collected just over three times more revenue from personal income taxes than it did from corporate income taxes.

Tax deferral refers to instances where a taxpayer can delay paying taxes to some future period. In theory, the net taxes paid should be the same. Taxes can sometimes be deferred indefinitely, or may be taxed at a lower rate in the future, particularly for deferral of income taxes.

A company is said to be thinly capitalised when the level of its debt is much greater than its equity capital, i.e. its gearing, or leverage, is very high. An entity's debt-to-equity funding is sometimes expressed as a ratio. For example, a gearing ratio of 1.5:1 means that for every $2 of equity the entity has $3 of debt.

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.

A foreign tax credit (FTC) is generally offered by income tax systems that tax residents on worldwide income, to mitigate the potential for double taxation. The credit may also be granted in those systems taxing residents on income that may have been taxed in another jurisdiction. The credit generally applies only to taxes of a nature similar to the tax being reduced by the credit and is often limited to the amount of tax attributable to foreign source income. The limitation may be computed by country, class of income, overall, and/or another manner.

The dividends-received deduction, under U.S. federal income tax law, is a tax deduction received by a corporation on the dividends it receives from other corporations in which it has an ownership stake.

References

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  14. 1 2 3 26 USC 11.
  15. United Kingdom Income and Corporation Taxes Act of 1988 as amended (UK ICTA88) section 6
  16. United States itemized deductions for individuals and special deductions for corporations.
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  35. Tax Code of the Russian Federation, Part II, Chapter 25, Article 284
  36. Singapore Corporate Tax Guide
  37. See, e.g., 26 USC 61(a)(7).
  38. 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.
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  41. 26 USC 351. For a discussion of U.S. principles, see Bittker & Eustice, below, Chapter 3.
  42. 26 USC 357 and 26 CFR 1.367-1(b) Example.
  43. See, e.g., 26 USC 368 defining events qualifying for reorganization treatment, including certain acquisitions.
  44. See 26 USC 354 for tax effect on shareholders of reorganizations as defined in 26 USC 368.
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  46. 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 [ citation needed ] identified 26 factors the U.S. courts have used to classify instruments as debt or equity. Also see article [ permanent dead link ] by Englebrecht, et al.
  47. Contrast tax on domestic corporations under 26 USC 11 and 26 USC 63 with tax on foreign corporations under 26 USC 881-885.
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  49. "26 U.S. Code § 884 - Branch profits tax". LII / Legal Information Institute. Retrieved 2018-10-13.
  50. 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.”
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  52. "26 CFR 1.1502-0 - Effective dates". LII / Legal Information Institute. Retrieved 2018-10-13.
  53. 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.
  54. Switzerland [ citation needed ]
  55. 1 2 New York
  56. Delaware
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  58. "26 U.S. Code § 6151 - Time and place for paying tax shown on returns". LII / Legal Information Institute. Retrieved 2018-10-13.
  59. See, e.g., India [ citation needed ]
  60. See, e.g., UK Form CT600, which requires the attachment of audited or statutory accounts as filed with the Companies House.
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  63. U.S. Corporations must pay estimated taxes for each quarter or face penalties under 26 USC 6655.
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Further reading

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