Corporate tax
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Corporate tax refers to a tax levied by various jurisdictions on the profits made by companies or associations.
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Tax base
The measure of taxable profits varies from country to country. In some countries, for example the United States, the taxable profits are calculated according to a quite different set of rules from those used in the calculation of profits in the financial statements. The amounts that can be deducted for capital expenditure and for interest payments vary substantially from country to country.
In many countries, depreciation of capital assets calculated in the financial statements ("book depreciation") is not deductible, and a deduction is given for tax depreciation calculated on a different basis. In the United States, tax depreciation is generally calculated by a method known as MACRS. In the United Kingdom, where the main corporate tax is called corporation tax, tax depreciation, known as "capital allowances", is allowed instead of book depreciation, usually at the rate of 25% per annum (20% from 1 April 2008) on a reducing balance basis. In France depreciation is allowable, within certain rates per classes of asset set down by statute.
- See also: Dividend tax
An issue in corporate taxation is the taxation of shareholders who receive dividends or distributions from a company out of profits which have already been taxed. This contrasts with a partnership or sole proprietorship, where the owner of the business is usually taxed only on the profits of the business and not on distributions of profits. Different solutions are adopted for this problem:
- The company may not be taxed, and instead the shareholders are taxed on the profits of the business, not on distributions. This method is adopted by the United States, but only for companies owned by a small number of shareholders, so-called S corporations.
- Under an imputation tax system, some or all of the tax paid by the company may be attributed pro rata to the shareholders by way of a tax credit to reduce the income tax payable on a distribution. Australia and New Zealand have imputation systems. From 1973 to 1999, the UK operated a partial imputation system, with shareholders able to claim a tax credit reflecting advance corporation tax (ACT) paid by a company when a distribution was made. A company could set off ACT against the company's annual corporation tax liability.
- Distributions such as dividends may be fully or partially exempt from tax.
- Austria and Germany operate a "double income" system on distributions, where only half the distribution is subject to tax, or, equivalently, the tax rate is halved.
- The Netherlands operates a participation exemption under which certain distributions are exempt from tax.
- In Canada, dividends taxable in the hands of eligible shareholders may qualify for a dividend tax credit to compensate for taxes already paid by the corporation.
- In the United States, dividend income from C corporations (companies which are not S corporations) is generally taxed at a lower rate than other income. Dividend income received by other corporations is wholly or partially exempt (the "Dividend Received Deduction").
If none of these methods is used, a form of double taxation results.
Tax rates
Tax rates around the world vary considerably both in their statutory rates, and in their effective rates after all offsets are considered, preventing any straightforward comparisons of tax rates between countries. In some countries, for example, the United States, Canada and Switzerland, subnational governments also collect taxes, which further complicates the calculation of the tax rate.
In the United States, the top marginal federal corporate rate for income over $18.3 million is 35% (it can be as low as 15% for income under $50,000). Most states also tax companies,[1] but the state tax is a deductible expense in calculating federal tax, so the overall tax rate is not simply the sum of the two tax rates.
The UK main rate of Corporation Tax was reduced on 1 April 2008 from 30% to 28%. This applies to companies with a taxable profit greater than £1.5m. Companies with taxable profits under £300,000 pay tax at the lower rate of 21%, with a sliding scale rate for profits up to £1.5m. Profits are taxed dependant on which bracket the company falls into, i.e. a company with profits of £2m would pay tax on all profits at 28%.
Ireland has the lowest corporate tax rate (12.5%) in the developed world.
Detailed data is available for the world's most developed economies, i.e. those in the Organisation for Economic Co-operation and Development.
See also
- Corporate welfare
- Excess profit tax
- United Kingdom corporation tax
- United Kingdom corporation tax loss relief
- Republic of Ireland corporation tax
- Corporate tax in the United States
- Income tax
References
- ↑ Interactive map of state corporate tax rates, LawServer