Corporate tax

October 18, 2022

3025

This article has been written by Oishika Banerji of Amity Law School, Kolkata. This article discusses the concept of corporate tax, which is a tax on the profits of a corporation. With growing companies and corporate houses, the concept of a company or corporate tax remains much in discussion and that is why this article puts forth the same.

It has been published by Rachit Garg.

Table of Contents

Introduction

Corporate taxes are a charge levied against a company’s profits, with various rates applied to various levels of profits. These taxes are levied against profits made by firms during a specific tax period, and they are often applied to operating earnings after deducting costs like cost of goods sold (COGS), selling, general, and administrative (SG&A), and depreciation from revenues. Most governments at all levels impose corporate taxes (i.e., both at the federal and state level). As different governments and countries view business taxation differently, corporate tax rates and legislation vary considerably across the globe. For instance, proponents of lower corporate tax rates cite the potential for higher economic output in the event that businesses pay less in taxes. Corporations may be taxed in the same way as individuals because they are independent legal persons from their owners. So a company’s tax is the same as a natural person’s income tax. This article aims to provide an idea about corporate tax to its readers with the help of three countries, namely, the United States, the United Kingdom, and India.

What is corporate tax

A corporate tax is a tax on a corporation’s profits. Taxes are paid on a company’s taxable income, which is revenue less general and administrative (G&A), selling and marketing, Research & Development (R&D), depreciation, and other operating expenditures. Corporate tax rates vary greatly amongst nations, with some having extremely low rates and being labelled as tax havens. The effective corporate tax rate, or the rate a corporation actually pays, is typically lower than the statutory rate, which is the declared amount before any deductions, because corporate taxes can be reduced by a variety of deductions, government subsidies, and tax loopholes.

Taxes on income, wealth, and capital gains are some of the biggest taxes that Indian consumers have to pay. Both domestic and foreign corporate houses are supposed to pay taxes in order to operate their businesses. The corporate tax, often known as the company tax, is one of the several taxes that corporations are expected to pay to the Indian government.

Most nations exempt specific corporate activities or transactions from paying income tax. For instance, fees associated with the corporation’s establishment or restructuring are considered capital expenses. Additionally, the majority of systems offer explicit guidelines for the taxation of the entity and/or its constituents following the winding up or dissolution of the business. Rules that distinguish between different classes of member-provided financing may be in place in tax-base reduction systems where financing expenditures are permitted as tax deductions. In these systems, items classified as dividends are not deductible, but items classified as interest may be deductible with restrictions. Other systems have more complicated restrictions, while some systems limit deductions based on straightforward calculations, including a debt-to-equity ratio.

Some systems offer a way for groups of connected corporations to profit from the losses, credits, or other assets of all the group members. Mechanisms include group relief and combined or consolidated refunds (direct benefit from items of another member). Shareholders of those organisations are frequently subject to additional taxes on dividends and other distributions made by the corporation. A few systems allow for the partial integration of member and entity taxes. Franking credits or ‘imputation mechanisms’ could be used to do this. There have historically been methods in place for corporations to pay member taxes in advance, offsetting entity-level taxes in the process.

When making certain types of payments to others, corporations, like other businesses, may be required to withhold taxes. The system may impose fines on the corporation or its officers or employees for failing to withhold and pay such taxes, even though these duties are often not the corporation’s tax. A firm has been described as a legal entity existing independently and apart from its stockholders. The company calculates and evaluates each source of income separately. Dividend payments made by the corporation to its shareholders may occasionally be taxed by the shareholders as income.

Taxation of shareholders

The majority of income tax systems charge tax to both the corporation and the shareholder upon the distribution of earnings (dividends). As a result, there are two tax levels. Most systems demand that income tax be withheld on dividend payments made to foreign owners, and some also demand that tax be withheld from payments made to domestic shareholders. A tax treaty may allow a shareholder to have the rate of such withholding tax decreased. Part-tax systems charge lower rates on some or all dividend income than they do on other types.

In the past, the United States allowed corporations to deduct dividends received on dividends received from other corporations in which the beneficiary held more than 10% of the shares. The United States has also cut the rate at which dividends earned by individuals are taxed for tax years 2004 through 2010.

The United Kingdom uses a system known as Advance Corporate Tax (ACT). A certain amount of ACT was due from a firm each time it issued a dividend, and it used that money to offset its own taxes. The ACT was treated as a tax payment by the shareholder and was included in their income whether they were a resident of the United Kingdom or of another country with whom they had a treaty. It was refundable to the shareholder to the extent that the presumed tax payment exceeded the taxes that would otherwise be due.

Basis of alternative tax

Many jurisdictions use an alternative tax calculation of some kind. These calculations could be made using assets, capital, wages, or another type of taxable income metric. Alternative taxes frequently serve as minimal taxes.

An alternative minimum tax is included in the federal income tax in the United States. This tax is assessed based on a modified form of taxable income and is calculated at a reduced tax rate (20% for corporations). Longer depreciation lives for assets under MACRS, changes to the cost of producing natural resources, and the addition of certain tax-exempt interests are among the modifications. Previously, the American State of Michigan taxed companies using a different basis that did not permit employee compensation as a tax deduction but permitted a full deduction of the cost of production assets at the time of acquisition.

Some jurisdictions charge taxes based on capital, including some states in the United States and Swiss cantons. These may be determined using the complete equity as reported in the audited financial statements, the computed value of assets minus liabilities, or the number of outstanding shares. Capital-based taxes are often levied in addition to income taxes in some jurisdictions. Capital taxes serve as substitute taxes in other countries.

The Institute for the Ecology of Industrial Areas (IETU), is a substitute tax that is levied against corporations in Mexico. There are adjustments for salaries and wages, interest and royalties, and depreciable assets, and the tax rate is lower than the standard rate.

Tax returns

The majority of systems mandate that businesses submit an annual income tax return. Some tax systems (including the ones in Canada, the United Kingdom, and the United States) demand that taxpayers self-assess their taxes on their tax returns. In other systems, the government is required to make an assessment before a tax is owed. Some systems demand that tax returns be certified in some way by accountants who are allowed to practice in the country, frequently by the company’s auditors.

Many systems demand schedules or forms to support certain items on the main form. It’s possible that some of these schedules will be included in the main form. For instance, Form T-2, an eight-page corporate return from Canada, includes a few detailed schedules but also has approximately 50 additional schedules that may be needed.

Some systems feature varied returns for various corporate structures or firms running specialised industries. For S corporation, which is a closely held corporation (or, in some situations, an LLC or a partnership) that makes a lawful election, is to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code for purposes of US federal income tax. S corporations typically don’t pay any income taxes. Instead, the firm divides its profits and losses among its owners and passes those along to them. The income or loss must subsequently be disclosed by the shareholders on their individual income tax forms, insurance companies, domestic international sales businesses, foreign corporations, and other entities. The standard Form 1120 is available in 13 different forms in the United States. Each sort of form has a different structure and embedded schedules.

It might take a lot of time to prepare complex company tax filings. For instance, the U.S. Internal Revenue Service notes in the instructions for Form 1120 that, excluding record-keeping time and necessary attachments, the average amount of time required to complete the form is over 56 hours.

The due dates for filing taxes depend on the jurisdiction, the fiscal or tax year, and the type of company. Tax payments in self-assessment systems are typically due no later than the regular due date, though advance tax payments can be necessary. Canada requires businesses to make monthly anticipated tax payments. Final payment is required with each case’s company tax return.

Corporate tax in India

Corporate tax is the name for the tax imposed on businesses, domestic or foreign. It is to note that proprietary ships and joint ventures are excluded from the same. This tax is a direct one. The maximum effective rate for corporate income for domestic enterprises is referred to as the corporate income tax rate in India. Its amount is determined by the net profits businesses make from operating their businesses, often over the course of one fiscal year. The corporate tax rate is a significant source of money for the Indian Government.

Financial transaction taxes include the Minimum Alternate Tax (MAT), Fringe Benefits Tax (FBT), Dividend Distribution Tax (DDT), Banking Cash Transaction Tax (BCTT), Security Transaction Tax (STT), Share Buy Back Tax, and Wealth Tax, among others. The numerous taxes levied under corporate taxation include withholding taxes on royalties and fees for technical services. Customs duties, excise taxes, VAT, CST, entry taxes, R&D cess, and service taxes are the next in line. The government is now working on a direct tax code. With 80 nations, India has signed double taxation prevention agreements.

Taxes on income, wealth and capital gains are some of the biggest taxes that Indian consumers have to pay. Both domestic and foreign corporate houses must pay taxes in order to operate their businesses. The corporate tax, often known as the company tax, is one of the several taxes that corporations are expected to pay to the Indian government. Both domestic and foreign businesses must pay corporate tax in India. Businesses are required to pay a portion of their earned income as tax, just like everyone else who earns an income is required to do so. Corporate tax, corporation tax, or company tax are all terms for this tax.

India reduced corporate tax rates in 2019 from 30% to 22% for existing businesses and from 25% to 15% for new manufacturing businesses. One of the lowest tax rates in the world is applicable to new manufacturing businesses. The lowest corporation tax rate will be applied to new manufacturing units that start operations before March 31, 2023, according to Finance Minister Nirmala Sitharaman. With the surcharge, the effective tax rate for these businesses may be roughly 17%. The Productio n Linked Incentive (PLI) programme was introduced by the government in March 2020, and ten further programmes were introduced in November of the same year.

What is meant by the income of a company

Before understanding the rate of taxes and how the tax will be calculated on the income of the companies, one should learn about the types of income that a company earns, which have been provided hereunder:

Profits earned from the business.
Capital gains.
Income from renting property.
Income from other sources like dividends, interest, etc.

Corporate tax rate in India

A corporate entity’s net income or profit from its operations, whether domestic or international, is subject to a direct tax known as corporation tax or corporate tax. The corporate tax rate is the amount of tax levied in accordance with the terms of the Income Tax Act of 1961. Depending on the kind of business entity and the various revenues generated by each corporate entity, the corporate tax rate is based on a slab rate structure.

According to experts, the government’s intention to extend the 15% corporation tax rate incentive for newly registered manufacturing enterprises until March 2024 is expected to offer India the much-needed competitive edge. Further, according to tax specialists, many businesses wanted to choose the reduced tax rate in addition to the PLI plan. Due to the Covid-19 interruption, many businesses had requested an extension of the lower tax rate by one year.

Corporate tax for domestic companies

The companies which are already existing

Corporations with yearly revenues of up to Rs 400 crore who do not request any incentives or exemptions must pay 22% tax in addition to any relevant cess and surcharge, which comes under the new tax slab proposed by the Finance Ministry. The effective corporate tax rate now stands at 25.17%. However, since the new regulations went into effect, businesses are exempt from paying MAT, or minimum alternate tax.

New firms

Another new provision has been added by the government to the Income Tax Act, 1961 with effect from Financial Year (FY) 2019–20. This provision gives any new domestic company formed on or after October 1, 2019, making fresh investments in manufacturing, the option to pay income tax at the rate of 15%. The government is doing this to attract new investment in manufacturing and support its flagship “Make-in-India” initiative.

This benefit is accessible to businesses that start producing on or before March 31, 2023, but do not take advantage of any exemptions or incentives. These companies’ effective tax rate will be 17.01% including surcharge and cess, and they won’t have to pay a minimum alternate tax.

However, businesses that choose the standard tax system and take advantage of the tax incentive/exemption must continue to pay tax at the pre-amended rate of 30%. Furthermore, the rate of the Minimum Alternate Tax has been lowered from the previous 18.5% to 15% in order to provide relief to businesses that continue to take advantage of exemptions and incentives.

Corporate tax for foreign companies

The agreement between India and the nation where the company is headquartered determines the corporate tax rates for foreign corporations. Two parts of the rate are as follows:

The corporation must pay a tax rate of 50% if the income is reported as any royalties or fees for technical services obtained by a foreign company from an Indian concern or the Indian government under any agreement established before April 1, 1976, which is approved by the central government.
If the business has additional sources of income, an additional 40% tax will be levied against it. Additionally, if the income is between Rs 1 crore and Rs 10 crore, an additional 2% surcharge is applied. If it is more than Rs 10 crore, a 5% surcharge would be added.

Health and education cess

Prior to the health and education cess, 4% of the computed income tax and any applicable surcharge will be added to the amount that represents the entire tax obligation.

Minimum Alternate Tax (MAT)

For both domestic and international businesses, the MAT rate cannot be less than 15%. According to Section 115JB of the Act of 1961, this is based on the book earnings. A company that is a division of an international financial services centre and receives all of its revenue in convertible foreign currency is subject to MAT at a rate of 9 percent plus any relevant surcharge and cess.

Dividend Distribution Tax

A tax that businesses are required to pay on the dividends delivered to shareholders each year. This dividend is exempt in the hands of the shareholders up to Rs. 10 lakh. However, businesses only pay 20.56% in taxes.

Liability of Minimum Alternate Tax (MAT)

In addition to the surcharge, a corporation will be required to pay a token amount of tax in the form of MAT if the total applicable payable tax on the total income is less than 15% of the profit that is recorded in their books. However, adjustments can be made against normal tax and MAT can be carried forward. The MAT is transferable for ten further years.

Application and Exemption of Minimum Alternate Tax (MAT)

Every company must pay the MAT. Companies from other countries that derive revenue from India must also pay MAT. According to MAT regulations, there are a few exceptions. Companies that are established to conduct life insurance business are exempt from the MAT’s jurisdiction under Section 115B, while companies that derive their income from shipping are exempt from the MAT’s jurisdiction under Section 115V-O of the Act of 1961.

Filing of income tax returns by companies in India

Due date for filing Income tax return

Companies, even those that are international, are required to file their income tax returns annually by October 30. Even if the business was founded within the same fiscal year, it must still submit its income tax return for that time period by October 31.

Tax return forms to be filed by the company

All businesses must file their returns using Form ITR 6, with the exception of those who are claiming a deduction under Section 11 of the Income Tax Act, 1961.
All businesses registered under Section 8 of the Companies Act, 2013 must submit their returns using Form ITR 7.

Tax audit

An audit of a class of companies’ accounts is mandated by the income tax statute, which is recognised by the name of a tax audit, and they must submit the audit report to the IT department with their income tax return. Eligible enterprises must also submit this tax audit report by the deadline of September 30.

Tax rebates applicable on corporate tax in India

In addition to the different taxes assessed on corporate income, businesses are also eligible for a number of tax refund schemes. Below is a list of all of these rebates.

Domestic corporations may have the right to deduct dividends received from other domestic companies.
Venture capital firms and venture funds are subject to special rules.
In some circumstances, deductions are permitted for exports and new ventures.
There are certain deductions that apply to the setup of new infrastructure and power sources.
There is a provision that allows business losses to be carried over for a maximum of 8 years.
In certain circumstances, you can additionally deduct interest, capital gains, and dividends.

Tax disputes in the corporate world in India

The rationalisa t ion of corporation tax rates was a goal of recent changes to Indian tax law. Despite the goods and services tax, which transformed indirect tax, there are still certain operational issues that need to be resolved. The government’s intention to speed up dispute settlement is clearly demonstrated by the adoption of an electronic-based procedure for the dispute resolution system up to the tribunal stage in terms of direct taxes. However, constitutional objections to this electronic-based process have been made due to the abrupt and full absence of any human interaction, as well as other worries about how the Faceless Assessment Scheme operates. It is clear from the government’s circulars on monetary thresholds, where the thresholds for filing appeals against taxpayer-favourable decisions have been gradually raised, that it appears to have chosen a policy of focusing on high-value tax disputes. Certainty, stability, and swift conflict resolution continue to be crucial issues of concern. Some of such issues have been listed hereunder:

Nokia, based in Chennai, was issued a sore notice by the Income Tax authorities in 2013 for failing to pay TDS. The business claimed that the tax division was illegally taking its profits. When the court of law agreed to lift the freeze on the company’s sale to Microsoft in exchange for INR 2,250 crore being placed in an escrow account, the IT department suffered a setback. The company, which had its headquarters in Chennai, has shut down.
Vodafone was also detained by the tax authorities. The Indian tax agency had requested roughly 30 billion rupees in back taxes after charging Vodafone India Services for undervaluing shares in rights offering to its parent business. In a $490 million dispute, the Bombay High Court ruled in favour of Vodafone. In a multi-million dollar tax battle, the Bombay High Court also ruled in favour of Royal Dutch Shell Plc, rejecting the ITD’s argument that its stock was undervalued. The idea that excessively zealous tax authorities may stifle foreign investment in India has come under fire following a wave of high-value tax claims against foreign companies, including IBM Corp. and Copal Research Limited. The ITD gives the impression that it intends to make a lot of money from transfer pricing in the minds of international businesses.
The seven-year-old dispute that had damaged the nation’s reputation as an investment destination was resolved when the Indian Government paid Cairn Energy Plc INR 7,900 crore to repay the money it had collected to enforce a retrospective tax demand. In a statement, the business, which is now called Capricorn Energy PLC, claimed to have obtained “net profits of $1.061 billion,” of which roughly 70% will be distributed to shareholders. In order to collect INR 10,247 crore in taxes from Cairn, the tax department used a 2012 law that gave it the authority to go back 50 years and impose capital gains levies wherever ownership had changed hands abroad but commercial assets were in India. Cairn dropped all proceedings filed to obtain the tax refund that the international arbitration panel had ordered after rescinding the retrospective raising of demand as part of the agreement made with the government over the assessment of past taxes.

Corporate tax planning

Corporate tax planning can be summed up as organising one’s financial and company affairs in a way that maximises profit and reduces the amount of tax that must be paid while taking advantage of all permitted deductions, rebates, and exemptions. Tax administration is a risky and tricky business, hence the majority of corporations with significant financial investments use financial experts to handle their tax procedures. Numerous financial players offer corporate tax consulting and execution in India as well. Healthy tax planning requires diligence and complete awareness of all tax laws, as well as the accompanying norms and regulations.

Corporate tax may be a regulatory quagmire, with certain laws being issued midway through the tax year while others not taking effect until the next tax year. It implies that you may very well be paying more in taxes than you ought to. Implementing techniques that may lower your tax liability and increase your profitability are the goals of corporate tax planning. Some of the common corporate tax services have been provided hereunder:

Choosing the most tax-efficient business structure.
Educate yourself on the possibilities and provide guidance on how to take advantage of the tax breaks available.
Obtaining the most advantageous capital or revenue tax treatment.
Minimising your tax liability on disposals and utilising all acquisition-related tax breaks.
Using tax possibilities that are specific to a given industry.
Obeying all tax laws, particularly those relating to company tax and self-assessment.

Tax benefits for companies

For the purposes of income tax, a body corporate is considered a company if it is an Indian company, a body corporate incorporated under the laws of another country other than India, a body corporate or institution that has been assessed as a company under an earlier law that is still in effect, or a body corporate that has been declared a company by a general or special order of the Board for the duration of the declaration or order.

Additionally, for income tax reasons, businesses that are not domestic businesses are referred to as foreign businesses. Companies, which are artificial persons constituted by law and have independent legal identities, are known to fall under the concept of “person” for income tax purposes. So that, unless expressly excluded, all provisions that are applicable to a person would also apply to a company. Some of the significant benefits have been provided hereunder:

Provisions of the Minimum Alternate Tax (MAT) are made inapplicable to certain foreign companies

Foreign businesses that chose presumptive taxation are exempt from MAT’s restrictions. This is advantageous to foreign businesses involved in shipping, air transportation, oil exploration, and turnkey construction projects.

Transfer of certain capital assets not treated as a transfer for income tax purposes

Sale, renunciation, or extinction of ownership rights in assets would be regarded as a transfer of assets for income tax purposes. Additionally, any profits from such transfers to the individual who is transferring the capital assets are subject to capital gains tax. Some of the significant transactions specified in this regard are discussed as under:

A parent business transferring a capital asset to a wholly-owned Indian subsidiary.
A fully owned subsidiary business’s transfer of capital assets to its Indian holding company. As long as the prerequisites set forth in this regard are met.
Capital asset transfer in a merger plan from the merging firm to the Indian merging company.
Capital asset transfer in a merger plan from a demerged firm to the resulting Indian company.
Shares of the Indian merged firm are distributed to the shareholders of the merging company in lieu of their merger.
Capital assets are transferred from a private limited company or an unlisted public business to a limited liability partnership (or LLP) as part of the conversion process. The same would, however, be contingent on meeting certain requirements established in this regard.

Deduction on expenses incurred in relation to setting up/ extension of a business

Any costs incurred by a company for starting a business or expanding an existing one may be amortised and claimed as an expense over a period of five straight years, commencing with the year the firm was launched or the expansion was completed. This gives a company the ability to postpone the claim of costs incurred for the creation of project reports, feasibility reports, legal fees for drafting agreements, etc.

Deduction specific to the nature of the business of the company

Tax incentives are typically offered to encourage enterprises to enter particular industries that are important for the growth of the country’s economy. Any corporation operating the designated business would be qualified for a tax holiday or deduction in relation to the profits generated by the business for the duration of the applicable time period.

Deduction specific to contributions made

100% of any non-cash contributions made to political parties or electoral trusts are deductible by companies for tax purposes.

Reduced rate of tax on dividends received from certain companies:

Dividends from foreign corporations in which the company owns 26% or more shares are taxed at a lower rate of 15%. Additionally, the Dividend Distribution Tax (DDT) burden is minimised by deducting the dividends received from such entities from the dividends disbursed or payable.

Corporate tax reforms for ease of doing business in India

The basic corporation tax rate will drop from 30% to 25% under the current Indian government’s proposals. The following justifications are given for lowering the tax rate. The ratio of total corporate tax receipts to the nation’s GDP is known as the corporate tax to GDP percentage.
Despite having a 30% basic rate, the ratio of corporate taxes to GDP is only 7.30%. The rate is 15% in the case of Canada, and the contribution to GDP is 30.20%. The UAE has no corporate taxes and it contributes 7.20 percent of GDP, the same as India. Many economic activities are not covered by the Indian tax system. It permits several exemptions, which encourages sophisticated tax fraud and tax vacations, which reduce its competitiveness and productivity.
The overall tax rate in India is as high as 62.8%. There are up to 33 payments made under the categories of labour, profit, and other taxes, and it may take 243 hours to complete all necessary tax filings. It is important to expand the tax base.
Some claim that cutting the tax base and the corporate tax will result in a decline in government revenue. The money, however, will remain with the business and be reinvested by them, boosting their profit once more. Individual income tax will rise in tandem with an increase in share prices.
The different tax exemptions from exports, free trade zones, and technology parks should be lowered in order to increase the effectiveness of the tax system. The chamber also recommended that MAT be decreased to 15% because it initially started at 7.5% and gradually climbed to 18.5%.
To prevent ambiguity, tax policy must be clear. The definition of transfer pricing (TP) must be made explicit. Along with MAT and GAAR, the tax structure should be made mild and straightforward. Through the Finance Act of 2012, the government put in place the APA (Advance Pricing Agreement) to smooth the contentious TP and cut down on litigation’s expense and time commitment. By doing this, tax leakage brought on by double taxation would be reduced. However, the APA-related BAPA and MAPA take longer to complete.

Corporate tax in the United States

The income of entities that are classified as companies for tax purposes is subject to corporate tax in the United States at the federal, most state, and some local levels. The Tax Cuts and Jobs Act of 2017 were passed, and as of 1st January 2018, the nominal federal corporate tax rate in the United States of America is a flat 21%. Despite the fact that many are based on federal definitions and concepts, state and local taxes and regulations differ by jurisdiction. When it comes to the timing of income and tax deductions as well as what is taxable, taxable income can differ from book income.

The 2017 reform also eliminated the business Alternate Minimum Tax (AMT). However, certain states still impose alternative taxes. Corporations must annually submit tax returns just like individuals. They must pay their estimated taxes on a quarterly basis. Corporation groups under the same owners’ control may submit a consolidated return. Some business dealings are not taxable. These comprise the majority of formations as well as specific kinds of mergers, acquisitions, and liquidations. Dividends paid out by a corporation to its shareholders are subject to taxation. Corporations may be required to pay international income taxes and may be eligible for a foreign tax credit as well.

The majority of firms do not directly tax the income of their shareholders, but they do have to pay taxes on the dividends they pay. Shareholders of S corporations and mutual funds do not now pay tax on dividends; instead, they are taxed on corporate income. Current President Biden suggested to Congress in 2021 that the corporation tax rate be increased from 21% to 28%.

Subjects of corporate taxation in the United States

All entities treated as companies are subject to corporate income tax at the federal level, as well as in 47 states and the District of Columbia. Additionally, a corporate income tax is levied in several localities. All domestic corporations as well as international corporations with income or operations inside the jurisdiction are subject to corporate income tax. A domestic corporation is one that is recognised as a corporation for federal purposes and is formed in accordance with state law. Entities organised within a state are considered domestic for state purposes, whereas entities organised outside the state are considered foreign. Public Law (P.L.) 115-97, a piece of tax reform legislation passed in the US on December 22, 2017, transformed the country’s tax laws from ‘territorial’ to ‘global.’

No matter where the person resides, the tax will only be applied to the income that is earned within the country. This method was designed to do away with convoluted regulations like the Controlled Foreign Corporation (CFC or Subpart F) Regulations and the Passive Foreign Investment Company (PFIC) Regulations, which under certain circumstances subject foreign earnings to current U.S. taxation.

Consequently, P.L. (115-97) cut the resident corporate CIT rate from 35% to a flat rate of 21% for tax years starting after December 31, 2017. Net taxable income as defined by federal or state law is the basis for calculating corporate income tax. A corporation’s taxable income is often calculated as its gross income (i.e., business and perhaps non-business receipts less the cost of items sold) minus all allowable tax deductions. There are tax exemptions available for specific types of income and corporations. Additionally, there are restrictions on the number of tax deductions for interest and other expenses paid to linked parties.

Companies are free to select their tax year. A tax year must typically last 12 months or 52 or 53 weeks. As long as records are kept for the chosen tax year, the tax year does not have to match the financial reporting year or the calendar year. Corporations may alter their tax year, but doing so might require the Internal Revenue Service’s permission. The federal tax year and the majority of state income taxes have the same filing season.

At the federal level, groups of corporations are authorised to submit consolidated returns, also called single filings, for the members of a controlled group or unitary group, and are permitted or required to do so by several states. The consolidated return computes a combined tax and reports the total taxable income of the members. Related parties are governed by transfer pricing laws even if they do not submit a consolidated return in a given country. According to these regulations, connected party prices may be adjusted by tax authorities.

Taxable income in the United States

The federal government decides what is taxed and at what rate based on American tax law. Many states, but not all, include some elements of federal law in their tax laws. Gross income (gross receipts and other income less the cost of goods sold) minus tax deductions is the same as federal taxable income. Deductions for business expenses and a corporation’s gross income are calculated similarly to how they are for an individual.

A corporation must pay the same federal tax rate on all of its income. However, companies may deduct a net capital loss from other federal taxable income, and other deductions are more constrained. Only corporations are eligible for some deductions. These consist of amortising organisation expenses and deducting dividends that have been received. Some states tax a corporation’s business income differently from its non-business revenue.

The rules for recognising income and deductions can be different from those governing financial accounting. The timing of income or deductions, tax exemptions for certain types of income, and the denial or restriction of certain tax deductions are a few key areas of variation. According to IRS regulations, Schedule M-3 of Form 1120 for non-small businesses must report these discrepancies in great detail.

Filing returns by corporations in the United States

In every U.S. jurisdiction that levies an income tax, corporations are required to file tax returns. Such returns represent a tax self-assessment. At the federal level and in many states, corporate income tax is payable in advance instalments or projected payments. Corporations may be required to withhold taxes on some payments they make to third parties, such as wages and distributions that are treated as dividends. The system may impose fines on the corporation or its officers or employees for failing to withhold and pay over such taxes, even though these duties are often not the corporation’s tax. The Employer Identification Number (EIN) is the name given to the company number used by the tax administration in the United States.

Corporate tax avoidance and corruption in the United States

Corporate tax avoidance is the employment of legal strategies to lower an organisation’s required income tax payment. Claiming the most credits and deductions is one of the many viable methods to benefit from this strategy. According to an empirical study, corporate tax evasion and state-level corruption in the US are closely associated. State-level corruption is found to decrease Generally Accepted Accounting Principles (GAAP) tax expense, as measured by the average effect of an increase in the number of corporate corruption convictions.

Despite their rankings in social capital, money laundering, and corporate governance, the states with the lowest litigation risk also had the highest rates of corruption and corporate tax evasion. Therefore, increasing law enforcement will undoubtedly reduce the extent of corruption brought on by tax evasion. The quality of tax accruals, the disclosure of accounting restatements as evidence of false accounting, and earnings management predictions are not the same as corruption.

According to corruption metrics, companies with their main offices in corrupt states are more likely to engage in tax evasion. Increased organisational, financial, and legal complexity can lead to corruption, according to research on culture and tax evasion, and these same characteristics might affect a firm’s likelihood of engaging in corporate tax avoidance.

Corporation tax reform and recent developments in the United States

With the passage of US tax reform legislation on December 22, 2017 (P.L. 115-97), the US transitioned from a ‘global’ system of taxation to a ‘territorial’ system. For tax years beginning after December 31, 2017, Senate Bill 115-97 decreased the resident corporate CIT rate from 35% to a flat 21% rate permanently.
The corporation AMT was eliminated by P.L.115-97 with effect for tax years beginning after December 31, 2017, and also established a mechanism for the refund of prior-year corporate AMT credits by the end of 2021.
By amending the aforementioned clause, COVID-19 relief legislation (P.L. 116-136) mandated that all corporate AMT credits be returned by the end of 2019. In more detail, P.L. 116-136 hastened the process by which businesses might get their AMT credit refunds for tax years starting in 2019. In contrast, businesses might choose to use the entire refundable AMT benefit in tax years starting in 2018.

Corporate tax in the United Kingdom

The UK imposes a corporate tax known as corporation tax on the income made by businesses with UK residents as well as by foreign-registered businesses with permanent bases in the UK. Companies were subject to an additional profit tax in addition to the same income tax rates that applied to individual taxpayers prior to 1 April, 1965.

A single corporation tax, which derived its fundamental structure and regulations from the income tax system, superseded this arrangement for businesses and associations with the Finance Act of 1965. The UK’s Tax Law Rewrite Project began updating the country’s tax laws in 1997, beginning with income tax. As the statute imposing the corporate tax was also changed, the regulations controlling income tax and corporation tax now have different requirements. Before the Rewrite Project, the Income and Corporation Taxes Act of 1988 (as amended) controlled corporation tax.

The first significant change to corporation tax saw it switch to a dividend imputation system in 1973, under which an individual receiving a dividend became entitled to an income tax credit corresponding to the corporation tax already paid by the company paying the dividend. Corporation tax was initially introduced as a classical tax system, in which companies were subject to tax on their profits, and companies’ shareholders were also liable to income tax on the dividends that they received.

With the elimination of repayable dividend tax credits and advance corporation tax, the traditional system was reinstated in 1999. The single main tax rate was divided into three as part of another adjustment. The main corporation tax rate decreased as a result of tax competition across jurisdictions from 28% in 2008 to 2010 to a flat rate of 19% as of April 2021. The UK government encountered issues with its corporation tax structure, including rulings from the European Court of Justice that certain elements in the structure are in violation of EU treaties. Financial sector-marketed tax evasion strategies have also caused annoyance and have been met with complex anti-avoidance legislation.

Advance corporation tax in the United Kingdom

Up until 1973, when a partial imputation mechanism for dividend payments was adopted, the fundamental structure of the tax remained intact, with firm profits being taxed as profits and dividend payments being taxed as income. In contrast to the prior imputation method, the shareholder’s tax credit was lower than the amount of corporate tax paid (corporation tax was higher than the standard rate of income tax, but the imputation, or set-off, was only of standard rate tax). Companies also paid ACT when making distributions, which could be offset against the main corporation tax charge within specific parameters (the full amount of ACT paid could not be recovered if significantly large amounts of profits were distributed). A tax credit equal to the ACT paid was given to both individuals and businesses who received dividends from UK-based firms. The tax credit could be offset by an individual’s income tax liability.
ACT was initially fixed at 30% of the gross dividend (the actual amount paid plus the tax credit). A company would pay an advance corporate tax of £30 on a £70 dividend distribution to an individual. The shareholder would be given a cash payment of £70 plus a tax credit of £30. As a result, the person would be considered to have earned £100 and to have already paid tax on it in the amount of £30.
The company’s ACT payment would be deducted from its overall “mainstream” corporate tax liability. If the person’s tax on the dividend was less than the tax credit, such as if his income was too low to be taxed (below £595 in 1973-1974), he might claim all or part of the £30 tax that the firm had to pay. The firm would pay 52% tax (small businesses had lower rates, but they were still higher than the ACT rate), therefore there was only a partial set-off, making the individual’s £70 payment actually represent pre-tax profits of £145.83. Thus, just a portion of the double taxes was eliminated.
The ability of pension funds and other tax-exempt organisations to reclaim tax credits was eliminated with immediate effect for individuals starting in April 1999 by Gordon Brown’s summer budget in 1997. Usually ignoring the more important impact of the dot-com disaster, which caused the FTSE-100 to lose half of its value and fall from 6930 at the beginning of 2000 to merely 3490 by March 2003, this tax shift has been held responsible for the poor quality of British pension funding.
The hypothetical £1.5 million income indicated above would decrease to £1.2 million, a decline in income of 20%, as no tax would be reclaimable. Despite this, critics, including Member of Parliament Frank Field, branded it as a “hammer blow” and the Sunday Times as a fraud.
The ACT was discontinued on April 6, 1999, and the dividend tax credit was decreased to 10%. The basic income tax rate on dividends was lowered to 10% in line with this change, and a new higher rate of 32.5% was also implemented, making the entire effective dividend tax rate for higher-rate taxpayers 25%. (after setting this “notional” tax credit against the tax liability).
The 20% ACT, which had previously been deducted from the dividend before distribution, was no longer imposed, although non-taxpayers could no longer claim this amount from the Treasury (as opposed to taxpayers, who could deduct it from their tax bill).

Method of collection of corporate tax in the United Kingdom

Parliament must annually approve the authorization to collect company tax if it is to be done so. Subsequent finance legislation applies the fee for the fiscal year, which commences on April 1 of each year. The tax is assessed in relation to the company’s accounting period, which is typically the calendar year for which the company’s accounts are prepared. HM Revenue & Customs (HMRC) is in charge of managing corporation tax. The net profits of an organisation are subject to corporation tax. Except for specific life insurance businesses, the company is responsible for paying this direct tax.

No corporation tax was owed up until 1999 unless HMRC assessed a company. However, businesses had to provide HMRC with specific information in order for the correct amount to be calculated. For accounting periods that ended on or after 1 July 1999, when self-assessment was implemented, this was altered. Companies must evaluate themselves and assume full responsibility for that evaluation, which is known as self-assessment. The business may be held accountable for fines if the self-assessment was incorrect due to carelessness or neglect.

The tax due may then be determined by HMRC, who may wait until another six months have passed before issuing the determination, which cannot be challenged. The majority of a company’s claims and elections must also be included in its tax return, with a deadline of two years following the end of the accounting period. Due to the inability to make these claims and elections, a firm that files its return more than a year late suffers not simply from the late filing penalties.

Although HMRC receives notifications of new business registrations from Firms House, there is now a requirement for new companies to notify HM Revenue & Customs of their establishment. Following the conclusion of the company’s financial period, companies will subsequently receive an annual notice (CT603) instructing them to file an annual return. The company’s annual reports and, if necessary for particular companies, additional records like auditors’ reports must also be included.

Possible relief offered to companies from double taxation

Every time a business receives income that has already been taxed, there is a chance of double taxation. This might be considered dividend income, which was paid from another company’s after-tax profits and might have been subject to withholding tax. The corporation may have paid international taxes on its own, it may have received various sorts of foreign income, or it may have conducted some of its business through an overseas permanent establishment.

By exempting them from tax for the majority of companies, only dealers in shares pay tax on them, and UK dividends avoid double taxation. When double taxation occurs as a result of foreign taxes paid, there are two types of relief, namely, expense relief and credit relief.

The foreign tax might be recognised as a deductible item in the tax calculation thanks to expense relief. Credit relief is offered as a deduction from the amount of UK tax owed, but it is only valid for the UK tax that was paid on the overseas income. There is a system of onshore pooling that allows the overseas tax paid in high tax jurisdictions to be offset against taxable income earned in low tax jurisdictions. These double taxation provisions for non-UK dividends will be less frequently used in practice from 1 July 2009, when new rules were adopted to exempt the majority of non-UK dividends from corporation tax.

Corporation tax reform and recent developments in the United Kingdom

Several corporation tax reform suggestions have been made, but only a few have actually been implemented. The government released a technical note titled “A Review of Small Business Taxation” in March 2001 that looked at ways to simplify corporation tax for small businesses by bringing their profits for tax purposes more closely in line with those stated in their financial statements. The government also released a consultation paper titled “Large Business Taxation: the Government’s Strategy and Corporate Tax Reforms” in July of that same year. It outlined a plan for modernising corporate taxes as well as suggestions for capital gains tax relief on sizable company shareholdings.
Initial suggestions for doing away with the Schedular system were made in “Reform of Corporation Tax – A Consultation Document” in August 2002. In August 2003, a document titled “Corporation tax reform – Institute for Fiscal Studies” was released in response, in which it was further discussed whether the Schedular system should be eliminated as well as if the capital allowances (tax depreciation) system should be preserved. It also contained recommendations that the Finance Act of 2004 finally implemented.
“Corporation tax reform – a technical note” was issued in December 2004. It described the government’s decision to do away with the scheduling system and substitute two pools, one for trading and letting and another for “anything else,” instead of the multiple schedules and cases. Although there were certain modifications, largely impacting the leasing business, the government had decided that capital allowances would stay.
Large businesses (corporations and partnerships) will have to notify HMRC of “Uncertain Tax Treatments” (UTTs) starting on April 1, 2022, in partnership, corporation tax, VAT, and PAYE reports that must be submitted on or after that date.
From 1 April 2022, a residential property development sector tax (RPDT) will be in place in the UK. In order to be subject to corporation tax on trading profits from residential property development activity, it applies to a firm or corporate group that currently holds or has previously held interests in land or property as trading stock in the course of a trade. The tax is levied at a rate of 4% on profits that exceed GBP 25 million annually.
Redefining the corporation tax base, including elements of the OECD base erosion and profit shifting (BEPS) initiative, is one of the primary areas of tax reform being advanced by the UK government. The UK’s Pillar Two regulations will start to apply to accounting periods that begin on or after December 31, 2023, the government has declared, and the draft legislation will be released in the summer of 2022.

Conclusion

Along with significant increases in income tax and GST receipts, corporate tax collection, which was significantly hit by the Covid-19 pandemic in FY21, has increased by 85% this fiscal year from a low base. According to the Economic Survey for FY22 submitted to Parliament, the government collected 3.5 trillion pounds ($5.8 trillion) in company taxes from April through November of FY22 as opposed to 1.9 trillion pounds ($1.9 trillion) during the same period of FY21. The last tax year before the pandemic, April through November FY20, saw corporation tax collections of 2.9 trillion. Thus, the concept of corporate tax is extremely detailed in nature owing to the structure Parliament, along with the government, has decided for it, and it remains to be one of the prime sources of the government’s revenue.

References

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