Corporate tax

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.[2] More of the burden probably falls on capital in large open economies such as the US.[3] Some studies place the burden more on labor.[4][5][6] According to one study: "Regression analysis shows that a one-percentage-point increase in the marginal state corporate tax rate reduces wages 0.14 to 0.36 percent."[7] There have been other studies.[8][9][10][11][12][13] According to the Adam Smith Institute, "Clausing (2012), Gravelle (2010) and Auerbach (2005), the three best reviews we found, basically conclude that most of the tax falls on capital, not labour."

A 2022 meta-analysis found that the impact of corporate taxes on economic growth was exaggerated and that it could not be ruled out that the impact of corporate taxation on economic growth was zero.[14]

A corporate tax is a tax imposed on the net profit of a corporation that is 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 the 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 the 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".

Most jurisdictions tax corporations on their income, like the United Kingdom[17] or the United States.[16] The United States taxes most types of corporate income at 21%.[16]

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.[18]

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.

Share of U.S. Federal Revenue from Different Tax Sources (Individual, Payroll, and Corporate) 1950–2010

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.[24]

The corporate income tax rates differ between US states and range from 2.5% to 11.5%.[25]

The Canadian system imposes tax at different rates for different types of corporations, allowing lower rates for some smaller corporations.[26]

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

General government revenue, in % of GDP, from Corporate Income Taxes. For this data, the variance of GDP per capita with purchasing power parity (PPP) is explained in 2 % by tax revenue. Years 2014-17.

Examples of corporate tax rates for a few English-speaking countries include:

• Australia: 28.5%, however some specialized entities are taxed at lower rates.[28]
• Canada: Federal 11%, or Federal 15% plus provincial 1% to 16%. Note: the rates are additive.[29]
• Hong Kong: 16.5%[22]
• Ireland: 12.5% on trading (business) income, and 25% on non-trading income.[30]
• New Zealand: 28%
• Singapore: 17% from 2010, however a partial exemption scheme may apply to new companies.[31]
• United Kingdom: 19% for 2017–2022.[32]
• United States: Federal 21%.[33] 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.[34]

Corporate tax rates across the Organisation for Economic Co-operation and Development (OECD) are shown in the table.

Country	Corporate Income Tax rate (2019)[35]	Dividend Tax rate (2019)[35]	Integrated Corporate Tax rate (2019)[35]
Ireland	12.5%	51.0%	57.1%
South Korea	27.5%	40.3%	56.7%
Canada	26.8%	39.3%	55.6%
France	32.0%	34.0%	55.1%
Denmark	22.0%	42.0%	54.8%
Belgium	29.6%	30.0%	50.7%
Portugal	31.5%	28.0%	50.7%
United Kingdom	19.0%	38.1%	49.9%
Israel	23.0%	33.0%	48.4%
Germany	29.9%	26.4%	48.4%
United States	21.0%	29.3%	47.6%
Australia	30.0%	24.3%	47.0%
Norway	22.0%	31.7%	46.7%
Austria	25.0%	27.5%	45.6%
Sweden	21.4%	30.0%	45.0%
Japan	29.7%	20.3%	44.0%
Italy	24.0%	26.0%	43.8%
Netherlands	25.0%	25.0%	43.8%
Finland	20.0%	28.9%	43.1%
Spain	25.0%	23.0%	42.3%
Mexico	30.0%	17.1%	42.0%
Luxembourg	24.9%	21.0%	40.7%
Slovenia	19.0%	25.0%	39.3%
Greece	28.0%	15.0%	38.8%
Switzerland	21.1%	21.1%	37.8%
Iceland	20.0%	22.0%	37.6%
Chile	25.0%	13.3%	35.0%
Turkey	22.0%	17.5%	35.0%
Poland	19.0%	19.0%	34.4%
New Zealand	28.0%	6.9%	33.0%
Czech Republic	19.0%	15.0%	31.2%
Lithuania	15.0%	15.0%	27.8%
Slovak Republic	21.0%	7.0%	26.5%
Hungary	9.0%	15.0%	22.7%
Estonia	20.0%	0.0%	20.0%
Latvia	20.0%	0.0%	20.0%

The corporate tax rates in other jurisdictions include:

Country	Corporate Income Tax rate	Dividend Tax rate	Integrated Corporate Tax rate
Bulgaria	10.0%	5.0%	14.5%
India	22% (2019) 15% (for newly incorporated manufacturing companies)[36]
Russia	20% (2015)[37]
Singapore	17%, with significant exemptions for resident companies (2015)[38]
United Arab Emirates	0 percent for taxable income up to AED 375,000 (December, 2022) [39]	9 percent for taxable income above AED 375,000 (December, 2022) [40]

In October 2021 some 136 countries agreed to enforce a corporate tax rate of at least 15% from 2023 after the talks on a minimum rate led by OECD for a decade.[41]

Most systems that tax corporations also impose income tax on shareholders of corporations when earnings are distributed.[42] 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.[43]

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).[44] A distribution to a shareholder is considered to be from earnings and profits to the extent thereof unless an exception applies.[45] 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.

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 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.[50]

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.[51]

Most jurisdictions tax foreign corporations differently from domestic corporations.[52] 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.[53]

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.[54]

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.[55] 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.[56] Most jurisdictions allow such deductions only in subsequent periods. Some jurisdictions impose time limitations as to when loss deductions may be utilized.

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.[57] 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.

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.

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.[58]

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.

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.

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,[59] a computed amount of assets less liabilities[60] or quantity of shares outstanding.[61] In some jurisdictions, capital based taxes are imposed in addition to the income tax.[60] In other jurisdictions, the capital taxes function as alternative taxes.

Mexico imposes an alternative tax on corporations, the IETU. The tax rate is lower than the regular rate, and there are adjustments for salaries and wages, interest and royalties, and depreciable assets.

Most systems require that corporations file an annual income tax return.[62] Some systems (such as the Canadian, United Kingdom and United States systems) require that taxpayers self assess tax on the tax return.[63] Other systems provide that the government must make an assessment for tax to be due. Some systems require certification of tax returns in some manner by accountants licensed to practice in the jurisdiction, often the company's auditors.[64]

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.[65] 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, an eight-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[66] 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.[67] In self-assessment systems, payment of taxes is generally due no later than the normal due date, though advance tax payments may be required.[68] Canadian corporations must pay estimated taxes monthly.[69] In each case, final payment is due with the corporation tax return.

• Corporate tax rates in Canada
• Corporate tax in the United States
• United Kingdom corporation tax
• Corporation tax in the Republic of Ireland
• List of Tax rates of Europe
• List of Tax rates around the world

U.S.

• Bittker, Boris I. and Eustice, James S.: Federal Income Taxation of Corporations and Shareholders: paperback ISBN 978-0-7913-4101-8, subscription service
• Kahn & Lehman. Corporate Income Taxation
• Healy, John C. and Schadewald, Michael S.: Multistate Corporate Tax Course 2010, CCH, ISBN 978-0-8080-2173-5 (also available as a multi-volume guide, ISBN 978-0-8080-2015-8)
• Hoffman, et al.: Corporations, Partnerships, Estates and Trusts, ISBN 978-0-324-66021-0
• Momburn, et al.: Mastering Corporate Tax, Carolina Academic Press, ISBN 978-1-59460-368-6
• Watson, Garrett and William McBride, "Evaluating Proposals to Increase the Corporate Tax Rate and Levy a Minimum Tax on Corporate Book Income," FISCAL FACT (Tax Foundation, No. 751 Feb. 2021)

United Kingdom

• Tolley's Corporation Tax, 2007-2008 ISBN 978-0-7545-3273-6
• Watterson, Juliana M.: Corporation Tax 2009/2010, Bloomsbury Professional, ISBN 978-1-84766-327-6

Canada

• CRA main website
• CRA gateway for corporations
• CRA gateway to T2 returns

United Kingdom

• HMRC main website
• HMRC Introduction to Corporation Tax

United States

• IRS main website
• IRS gateway for corporations
• IRS Publication 542, Corporations