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From Wikipedia, the free encyclopedia

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.

YouTube Encyclopedic

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  • Corporate Tax Avoidance: How it happens, how it is changing, and what to do about it
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  • Topic 8: Corporate Taxation Part 1 | Economics 2450A: Public Economics
  • How to Save Corporate Taxes in Canada


Hi Everyone! My name is Scott Dyreng. I am Associate Professor of Accounting and have been at Fuqua since 2008. I am excited to be a part of the Fuqua Faculty Conversations series, and to chat with you about some of my research. Most of my research focuses on corporate taxation. Whether we like it or not, we are all affected by the tax system, and corporate taxes in particular have been a frequent topic in the popular press and policy circles as of late. As I am sure you have noticed, there have been many articles in major newspapers and other publications over the past several years that have argued the corporate tax system is broken. Most of these articles use one or two high-profile firms as anecdotes to illustrate variations on the common theme of a broken, non-competitive corporate tax system. Exactly why the tax system is broken, however, is sometimes less clear, and often the articles have directly opposing views about what makes the system flawed, and how to correct it. I find these articles scary, quite frankly. I am concerned that our policy-makers could make long-lasting, growth damaging changes to our tax system unless great care is taken to first understand what is “broken” with our system, and what we want to fix about it. Prescribing tax policies based on extreme anecdotes that sell newspapers might be like setting construction requirements for door frames based on the height of NBA players, the danger being that the cost of implementing those policies might outweigh the benefits if the policies are based on unusual or extreme examples. So, what are some commonly held beliefs about corporate taxes, and what do the data actually tell us about those conceptions? I’ll spend the next few minutes discussing three beliefs that I often hear recited. The first commonly held belief is that large U.S. multinational companies pay very low, or even no, corporate income tax. This idea comes from a number of articles that have appeared over the past several years in the popular press. Some of the most widely circulated articles publicized Google’s 2.4% tax rate, or GE’s 1.8% tax rate, or even Caterpillar’s $2.4 billion in tax savings. These articles were adorned with the names of common tax haven countries like Bermuda, Cayman Islands, Switzerland, and Ireland. They described tax savings strategies with fascinating code-names, like the Double Irish, or the Dutch Sandwich. So, just how common is it for a company to pay a tax rate below 5%? Well, it turns out that the average publicly traded U.S. company pays about 28 cents of every pre-tax dollar it earns in income taxes to governments around the world. Of course, there are some that pay very low rates, like those highlighted in the articles you have probably seen. But there are also companies that pay very high tax rates. In fact, about a fourth of publicly traded U.S. companies pay more than 35 cents of every pre-tax dollar in taxes to governments around the world! How do Google, GE, and other companies manage to pay such low tax rates? There are volumes of research, some of which I have worked on, that examine this question. And the major takeaway is that we don’t have a very good understanding of the causes of variation in corporate effective tax rates. But, we do know that many of these firms have substantial earnings in foreign countries and have lots of intangible property like patents and trademarks. They also take advantage of tax credits for research and development, manufacturing, and energy, and they have sophisticated, sometimes very creative tax departments. Why do we have a tax system that gives tax credits and is fraught with so many loopholes? While your gut reaction might be to exclaim that the system is “broken”, a more complete answer is definitely more complex. The objectives of the tax system are multifold. It is true that one objective is to raise revenue. But it is also the case that the government uses the tax system to encourage investment in certain types of assets or in specific industries. The government also uses the tax system as a tool to stimulate economic growth and to achieve social goals like wealth redistribution. So, observing that some firms pay low tax rates, while other firms pay high tax rates, is not a smoking gun suggesting the tax system is broken, as some commentators suggest, but instead could simply be the result of 30 years of legislation designed to achieve objectives other than collecting revenue and filling government coffers. The second commonly held belief is that the U.S. has the highest corporate tax rate in the world. It turns out that this is mostly accurate. It is true that the statutory U.S. corporate tax rate, at 35%, plus around 5% state corporate tax rate, is higher than most other developed countries in the world, including most European countries. We have arrived at this position, not because the U.S. has raised corporate tax rates, but because the rest of the world has steadily reduced corporate tax rates over the last 30 years. But, even though our statutory rates have remained essentially constant for almost 30 years, the effective corporate tax rates, or the fraction of income tax paid on each pre-tax dollar of earnings has steadily declined over time. In fact, between 1988 and 2012, effective tax rates, or the rates that companies actually pay, dropped about a half a percentage point each year. Some point to this as evidence that our tax system is not really broken, but is indeed competitive with tax systems around the world. Others argue that making firms jump through loopholes to achieve a competitive tax rate is inefficient. Whichever opinion you hold, the fact remains that the average U.S. corporation has a lower effective tax rate today than 25 or 30 years ago when the tax system was last reformed. The third commonly held belief is that the U.S. tax system encourages U.S. companies to invest overseas instead of here in the U.S. In theory, the U.S. tax system is designed to achieve capital export neutrality, meaning that U.S. firms should be indifferent (in terms of taxation) between investing a dollar in the U.S., and investing a dollar abroad. Thus, in theory, firms should invest their marginal dollar in the country where it can most efficiently provide a return on capital, with taxes playing a minimal role. But, in practice, U.S. companies can defer paying U.S. taxes on foreign earnings until they need the cash in the U.S. If the U.S. tax rate is expected to drop in the future, because of tax reform, or a tax holiday, then U.S. companies will face lower taxes on foreign earnings than domestic earnings. Moreover, there is an accounting benefit to foreign earnings. As long as those earnings are determined to be “indefinitely reinvested”, then there is no requirement to record a tax liability for those earnings, even though the firm may in fact owe tax to the U.S. in the future. This quirk in U.S. accounting rules can provide a boost to bottom-line earnings for multinational U.S. firms. So, while there is no explicit tax provision written to encourage offshore investment, once all the nuances of our current system are understood, there is some incentive to recognize earnings in relatively low-tax foreign countries, especially if those earnings can be classified as indefinitely reinvested, and the cash left abroad. What, then, can tax reform accomplish? Will tax reform raise more revenue? While this might be possible, most proposals are “revenue neutral”, and won’t fill government coffers any more than the current system. Will tax reform tighten the distribution of effective tax rates so that there are fewer companies paying very low rates, and fewer companies paying very high rates? This could be achieved, but even in 1986, the last time the tax system was reformed, there was still significant variation in the rates companies paid. It seems that politicians don’t have a strong appetite for making the system fair. Instead, they each want something that benefits their respective constituents, which tends to lead to a tax system riddled with idiosyncratic provisions that benefit a few firms here, and a few firms there, creating winners and losers. Will tax reform encourage investment in the U.S. instead of abroad? Maybe the system can be refined to help, but the fact of the matter is that most of the world’s untapped markets are outside of the U.S., and there is nothing in the tax system that can change the fact that the fundamental driver of foreign investment is growth in foreign countries. Could tax reform encourage repatriation of foreign earnings? Yes, if tax reform were properly executed, it could mitigate or even remove the incentive firms currently have to leave their foreign earnings abroad. But recent research suggests that even if those earnings were repatriated to the United States, we might not see massive new investments in domestic projects. Instead, it is more likely that we would see dividend payouts or share repurchases. And if earnings are ultimately returned to shareholders, then shareholders can make decisions about the most efficient redeployment of their capital. In sum, many believe our corporate tax system is broken and have issued calls to fix it. But very few seem to understand what it means to have a “broken” system, or what a “repaired” system might accomplish. The research we are undertaking here at Duke, and at other institutions around the country is helping to shape this debate in a way that we hope will result in meaningful, effective tax reform. Clearly, a 10-minute video is only sufficient to touch the surface of the corporate tax system. I look forward to the opportunity to chat with you in a few weeks where we can engage in meaningful discussion about the current state of our corporate tax system, and possible directions for future change. I hope to see you then!


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.


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]


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.

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][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 had 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.


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  

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.


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]


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.


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.


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.[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,[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.[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.[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.[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.[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[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[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


  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". 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 -". Retrieved 2018-10-13.
  13. ^ "Corporation Tax Explained". Peach Wilkinson Accountants.
  14. ^ "Company tax rates". 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". Retrieved 2012-10-08.
  17. ^ "Corporation Tax". 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". Retrieved 2012-10-08.
  20. ^ "26 USC § 11 – Tax imposed | LII / Legal Information Institute". 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.
  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[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.
  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[citation needed]
  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[citation needed]
  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)". 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". 2012-01-04. Retrieved 2012-10-08.

Further reading

United Kingdom

External links

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