PROFIT TAX
(Corporate income tax)
PhD. Anto Bajo
Faculty of Economics and Business,
University of Zagreb
Corporations
• Corporation – A state-chartered form of business organization, usually
with limited liability for shareholders (owners) and an independent
legal status
• Limited liability
• Corporations are “artificial legal persons”
Why Tax Corporations?
• Only real people can pay a tax
• Justifications
– Corporations are distinct entities
– Corporations receive special privileges from society
– Protects integrity of personal income tax
1
Structure
Revenue
- Expenses incurred earning revenues
Taxable Income
* Tax rate (15% - 35%)
Tax
- Credits
Total Tax
Alternative Minimum Tax
Treatment of Losses
Treatment of Dividends versus Retained
Earnings
• Double taxation
Effective Tax Rate on Corporate
Capital
• Statutory rate versus effective rate
– Interest deductibility
– Depreciation allowances
– Inflation
– Double taxation
• Gravelle [2004]
– Effective corporate rate = 32%; noncorporate rate = 18%
– Sensitivity of estimate
2
Incidence and Excess Burden
• A tax on corporate capital
– Incidence in a general equilibrium model
– Excess burden on a general equilibrium model
• A tax on economic profits
– Incidence and excess burden of a tax on economic profits
– Actual corporate profits versus economic profits
– Stiglitz [1973] model
Effects on Behavior – Total Physical
Investment
• Accelerator Model
• Neoclassical Model
• Cash Flow Model
Effects on Behavior-Type of Asset
• Tax system encourages purchase of assets that receive relatively
generous depreciation allowances
3
Effects on Behavior-Corporate Finance
• Why do firms pay dividends?
– Dividends as a signal of firm’s financial strength
– Clientele effect
• Effect of taxes on dividend policy
– Empirical evidence – Chetty and Saez [2004]
• Effect on savings
• Debt versus Equity Finance
• Did the tax system cause the corporate accounting scandals?
State Corporation Taxes
• State taxes have similar incidence and efficiency
problems as federal taxes
• Variation of tax rates across state lines
Taxation of Multinational
Corporations
• Structure
– U. S. corporations pay tax at standard rate on global taxable
income
– Credit for foreign taxes paid
• Subsidiary status
– Deferral of taxes on income from foreign enterprise
– Repatriation
• Income allocation
– Arm’s length system
– Transfer-pricing problem
4
Corporation Tax Reform
• Full Integration (Partnership Method)
• Issues
– Nature of the corporation
– Administrative feasibility
– Effects on efficiency
– Effects on saving
– Effect on distribution of income
Dividend Relief
• Allow corporation to deduct dividends
• Exclude dividends from individual taxation
• 2003 legislation – 15% max. tax rate on dividends
Profit tax calculation
Profit = revenue - expenditure
First step
+
=
items increase profits (reduce looses)
items reduce profits (increase looses)
Profit after increase and decrease
Profit after increase and decrease
Second step
=
transfered loss from previous years
TAX BASE
TAX BASE
Third step
*
=
Tax rate (20% )
Tax liability
Tax liability
Fourth step
=
Tax reliefs, incentives and exemptions
Final tax liabilitiy
5