Corporate Tax
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Governments may impose tax on corporations as separately from their owners. Most jurisdictions tax companies or corporations at the entity rather than the member level. Members of the corporate entity are generally not subject to tax on the entity’s earnings until such earnings are distributed. By contrast, most jurisdictions tax partnerships at the member level and not the entity level. Members of a partnership are generally subject to tax on the partnership’s earnings as they are earned rather than when they are distributed.
Taxation of corporations
Corporations may be taxed on their incomes, property, or existence by various jurisdictions. Many jurisdictions impose a tax based on the existence or equity structure of the corporation. For example, Maryland imposes a tax on corporations organized in that state based on the number of shares of capital stock issued and outstanding. Many jurisdictions instead impose a tax based on stated or computed capital, often including retained profits.
Most jurisdictions tax corporations on their income. Generally, this tax is imposed at a specific rate or range of rates on taxable income as defined within the system. Some systems have a separate body of law or separate provisions relating to corporate taxation. In such cases, the law may apply only to entities and not to individuals operating a trade. Such laws may differentiate between broad types of income earned by corporations and tax such types of income differently. Generally, however, most such systems tax all income of a corporation in the same manner.
Some systems (e.g., Canada and the United States) tax corporations under the same framework of tax law as individuals. In such systems, there are normally taxation differences related to differences between the inherent natures of corporations and individuals or unincorporated entities. For example, individuals are not formed, amalgamated, or acquired, and corporations do not generally incur medical expenses except by way of compensating individuals.
Many systems allow tax credits for specific items. Such direct reductions of tax are commonly allowed for foreign taxes on the same income and for withholding tax. Often these credits are the same as those available to individuals or for members of flow through entities such as partnerships.
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. Many jurisdictions imposing an income tax impose such tax income from a permanent establishment within the jurisdiction.
Corporations are also subject to property tax, payroll tax, withholding tax, excise tax, customs duties, value added tax, and other common taxes, generally in the same manner as other taxpayers. These, however, are rarely referred to as “corporate tax.”
Taxable income
Most systems impose income tax at a specified rate of tax times taxable income as defined in the system. Many systems define taxable income by reference to net income before income taxes per financial statements prepared under locally accepted accounting principles. Such income may be decreased for income subject to tax exemption. Other adjustments often apply.
Some systems define taxable income within the system. The United States system defines taxable income for a corporation as all gross income (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.
Principles for recognizing income and deductions may differ from financial accounting principles. Key areas of difference include differences in the timing of income or deduction, tax exemption for certain income, and disallowance or limitation of certain tax deductions. The United States system requires that these differences be disclosed in considerable detail for non-small corporations on Schedule M-3 to Form 1120.
Most systems tax resident corporations (generally those organized within the country) on their worldwide income, and nonresident corporations only on their income from sources within the country. A few systems, such as Hong Kong, tax resident and nonresident corporations only on income from sources within the country.
Corporate tax rates
Corporate tax rates generally are the same for differing types of income. However, many systems have graduated tax rate systems under which corporations with lower levels of income pay a lower rate of tax. Some systems impose tax at different rates for different types of corporations. Tax rates vary by jurisdiction. In addition, some countries have sub-country level jurisdictions that also impose corporate income tax. Some jurisdictions also impose tax at a different rate on an alternative tax base (see below). Note that some entities may be eligible for tax exemption on part or all of their income in some jurisdictions.
Examples of corporate tax rates for a few English-speaking countries include:
- Australia: 30%, however some specialized entities are taxed at lower rates.
- Canada: Federal 11% or 15% plus provincial 1% to 16%. Note: the rates are additive.
- Hong Kong: 16.5%
- Ireland: 12.5% on trading (business) income, and 25% on nontrading income.
- New Zealand: 28%
- Singapore: 17% from 2010, however a partial exemption scheme may apply to new companies.
- United Kingdom: 21% to 26% for 2009–2011.
- United States: Federal 15% to 35%. 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.
See also:
- Corporate tax rates in Canada
- Corporate tax in the United States
- List of Tax rates of Europe
- List of Tax rates around the world
Note: tax rates quoted above and in referenced Wikipedia articles may not be current or accurate.
Distribution of earnings
Most systems that tax corporations also impose income tax on shareholders of corporations when earnings are distributed. 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. By contrast, the United Kingdom provides for reduced amounts of tax only on dividends received by individuals.
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. For example, the United Kingdom permits a company to make dividend distributions only up to the balance of earnings available for distribution according to its last audited accounts. 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). A distribution to a shareholder is considered to be from earnings and profits to the extent thereof unless an exception applies. 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. For example, in Canada a corporation may designate a distribution to shareholders as a distribution of Paid Up Capital (PUC), and thus not taxable as a dividend, to the extent of remaining capital, or an eligible dividend.