Introduction
It can be concluded that corporate tax is one of the most important sources of revenues for governments all over the globe and it occupies a critical position in the modern global economy. It means the tax that is applied to the earnings or the capital of corporations. The nature and level of business taxes differ from one country to another.
The differences may affect corporate behaviors economic development and policies. Therefore this article seeks to discuss corporate taxes definition history computation positions in the global context effects on companies and the economy as well as trends and issues.
Use of Corporate Tax
Corporate tax is directly imposed on the specific business profits earned by the companies incorporated. These profits are most often defined as the revenue stream which in turn is given by sales and other income sources of a certain firm after deducting all of its costs. The main use of corporate tax is to raise revenue for the government to undertake its spending needs on public goods and services and other capital expenditures.
Also the second goal of corporate taxes is to contribute to economic stability and growth as well as to guarantee the proper distribution of income and to regulate the activity of corporations.
Revenue Generation
Corporation taxes are important forms of taxes that are collected by the governments. Such funds are employed in the funding of public sectors including health education defense and the building of infrastructures. Without this corporate tax the government will find it hard to continue with let alone improve on these services.
Economic Stability
Corporate taxes play a very crucial role in its stabilization through the redistribution of wealth in societies hence increasing the gap between the rich and the poor. This way governments extract resources from corporations and then use such cash flows to finance social policies and unemployment compensation hence attaining social justice.
Regulation of Corporate Behavior
Also known as business taxes corporate taxes can affect the way corporations behave in the economy by either promoting or discouraging specific activities. For example the tax policy in terms of offering tax relief to firms when they invest their capital in carrying out research and development activities is likely to result in innovation.
Beginnings of Corporate Taxation
The original idea of one of the principal forms of business taxation namely corporate profit taxation can be traced back to the beginning of the twentieth century. The first contemporary corporate tax was implemented early in the twentieth century in the United States of America. Originally it was just a taxation that was gradually becoming a major one in terms of the rates and the sophistication of the tax structure.
Evolution Over the Decades
As will be shown through the present text corporate tax systems changed during the twentieth century. Specifically global wars depressions and the spread of globalization affected shifts in tax systems. Governments incorporated new features in taxation to fit new economic developments technologies and the changing pattern of trade.
Recent Developments
Over the past few years many countries have engaged in the process of lowering the CIT rates in order to encourage FDI and economic growth. However this has also resulted in the formation of what is referred to as tax competition and profit shifting among countries as a result there have been efforts to harmonize tax policies.
Milestones in Corporate Taxation
Several key milestones have shaped the history of corporate taxation. The constitution of the United States was amended in order to include the income tax which later helped in taxing corporate profits.
After World War II most countries improved their economic condition. Many countries raised the corporate tax rate in order to raise money for reconstructing the affected areas.
Most of the developed countries experienced a wave of tax reforms that targeted the cutting of corporate tax and extending of the tax net.
New forms of flexible businesses due to digitization and globalization led to discussions on the sufficient efficiency of the corporate tax systems.
Calculation of Corporate Tax
Taxable Income
This is the net income of the corporation after the subtraction of all allowable expenses from the total revenues which qualifies for taxation. Many a time operating costs are allowed in the preparation of financial ratios such as cost of goods sold administrative and selling expenses wages and salaries depreciation charges and interest expenses among others. One interesting thing about taxes is that different countries have different laws on what or who can be considered a legitimate expense.
Tax Rates
The international difference is clearly seen in the corporate tax rates. It is pegged at a standard percentage but differs among countries and can also be progressive depending on the income. In addition to the national corporate taxes sometimes at the state or local level there can be corporate taxes.
Deductions and Credits
There are many deductions and credits that corporations can possibly use to legally lower their taxes. Some of the most standard deductions are business expenses depreciation of business assets and contributions to a retirement scheme. Some of the exemptions may include activities like research and development investment in renewable energy and employment of specified employees may attract tax credits.
Filing and Payment
Companies are supposed to submit their tax returns accompanied by records of their income expenditure and computation of tax at least once a year. The frequency of payments can also be different if maybe quarterly and some can allow an annual payment.
Depreciation and Amortization
Amortization and depreciation are critical parts of the computation of the core corporate tax system. Depreciation uses an agreed useful life of the tangible asset so that the cost can be spread over the useful life of the asset while amortization applies to intangible assets only. These deductions can noticeably lower the figure of taxable income.
Carry forward and Carryback
Some systems of taxation allow corporations to forward the losses to the future to decrease the future taxable income or backward to the past to decrease the previous taxable income. Such provisions can assist the firms to level out taxes over time especially if the firms are in the cyclical industries.
International Outlook for the Business Tax
United States
Corporate taxes involve a Federal rate and state rates in the United States of America making the system quite extensive. The Tax Cuts and Jobs Act lowered the federal corp. Tax rate from percent to percent with the objective of increasing the economic growth of the country with the help of which the status of the U. S. as a competitive country was strengthened.
European Union
Corporate taxation policy in EU members differs in policy rate from each other in equal measure. Some countries for instance Ireland have offered incentives to attract large companies that pay little taxes while other countries such as France and Germany have comparatively loud tax rates. To ensure that there is no shifting of the base and profit shifting the EU is in the process of implementing higher tax harmonization.
Asia
Asian countries also show a large range of corporate taxation values. The former has relatively high tariffs as compared to the latter although places like Singapore and Hong Kong have lower tariffs in order to lure foreign investment. Chinese corporate tax policies are dynamic because as it grows economically it also faces demands for revenues.
Developing Countries
As it has been seen corporate taxation is a very complicated subject so there are different issues related to corporate taxation that developing countries undergo. They usually experience hardships with the collection of taxes and depend more on corporate taxes. That’s why initiatives for instance the OECDs BEPS project are presented with the intention of helping developing countries build better tax systems.
Case Studies
Ireland has the corporate yet quite low at only % making it one of the most attractive locations for business. Thus creating a magnetic effect for multinational corporations to invest in the region’s economy but is not sans controversy and demands for corporate overhaul from other EU member states.
France remains among the countries with a relatively high corporate tax rate however the reforms in recent years targeted the decrease of this indicator and the simplification of the existing taxation system with the purpose of enhancement of the business environment. Singapore owes its low corporate tax and favorable policies that have seen many multinationals base their headquarters in the country.
Amazon the tax affairs of Amazon have also been a concern of the society and the laws where it has been accused of profit shifting as well as tax havens.
Apple the corporate taxation issue of Ireland is one of the most intricate and well publicized cases ever linked with Apple specifically.
Sociology of Corporate Tax on Businesses
Investment Decisions
Corporate tax rates have an important effect on business investment activities. They noted that reducing the tax levels can lead to an increase in the levels of investment in capital research and development when the levels are raised.
Profit Shifting
Large firms from various countries also indulge in tax evasion to exploit the various countries taxation systems. This entails moving profits to subsidiaries in countries with lower tax rates in a bid to minimize overall tax rates. It is as a result of this that profit shifting has attracted public attention and more so regulatory actions in different regions of the world.
Business Strategies
Corporate tax policies are also relevant in business planning and are related to location decisions legal structure and managerial actions. These earnings can be affected through their company incorporation in countries having favorable taxes or making use of some tax evasion techniques.
Compliance and Administration Costs
The business itself is very much aware of the fact that corporate tax compliance is often a difficult as well as an expensive process. Companies are faced with different taxation systems and requirements records must be kept virtually perfect. Much money is spent on taxes and tax consultation. Compliance costs are often higher and can burden the less established or the companies with a smaller market share.
Effects of Corporate Tax on Economy
Economic Growth
There is much literature on the link between corporate tax rates and the economic growth of nations. Lower tax rates on the other hand encourage investments and spending thus enhancing the economic activities within an economy but the flip side of such an occurrence is that it results in the generation of less revenues for the government and often leads to the emergence of budget deficits and a decrease in public spending.
Income Inequality
Corporation taxation is one of the indicators that determine income distribution. The progressive systems of corporate taxation seek to make enhanced and more lucrative organizations contribute to the government’s revenue. Though tax havens as a concept are a threat to such efforts and result in large income disparities.
Public Services and Infrastructure
The particular tax revenue is essential for financing the public service and construction of infrastructure. Cuts in corporate income taxes brought shortfalls in the state’s revenues and impacted the quality and access to public goods and services.
International Competitiveness
Taxes that are charged on business can determine the global competitiveness of a particular country. Lower rates encourage foreign investment flow and Multinational companies hence increasing the economic activities. However engaging in tax competition more specifically extreme tax competition can result in a race to the bottom whereby countries keep on reducing the rates of taxation thus reducing the potential tax base.
Economic Theories
Laffer Curve
The Laffer Curve shows how the level of taxes affects the total tax collected in the government’s coffers and more so shows that there is an optimal level of taxes that magnifies the level of tax collected without hampering business activities.
Keynesian Economics
The Keynesian approach focuses on the need for government interventions including the acts of spending and taxation for regulation of economic cycles instance during a period of recession taxation should be slashed.
Digital Economy
This is especially the case now that the modern world is characterized by the existence and growth of the digital economy. With the tax rights allocation a digital business can be established in different countries without having its physical place. More about the evolution of new rules of tax in the context of the features of the digital economy. Another one is the Base Erosion and Profit Shifting (BEPS).
Another project initiated by the OECD is BEPS which stands for Base Erosion and Profit Shifting which targets the outstanding practices that are utilized to avoid taxes through the inversion of tax laws. The measures proposed within the framework of the project include increasing the transparency of the application of the legislation combating the abuse of treaties and taxing profits in places where related economic operations take place.
Tax Competition
Competition and tax havens are factors that are still dominating countries and their international cooperation. Hence while low rates do encourage investment in a manner they encourage unhealthy practices of taxation and low tax revenues for the government. Global organization and cooperation are imperative in order to deal with these problems.
Environmental Taxes
Analyzing the experience of developed countries interest in using corporate tax systems to support environmental sustainability has increased. Sanctionary taxes like carbon taxes on the other hand charge business entities an amount of tax in an attempt to discourage them from emitting greenhouse gases in their production processes. Most often the dual objectives of maintaining environmental stewardship and economic vitality pose the major issue.
Tax Transparency
Greater tax transparency is now on the agenda of many governments as well as international organizations. Proposed measures that include country reporting and publishing of the tax information report also strive to increase the accountability on the part of companies on the issue of tax.
Future of Corporate Taxation
The future of corporate taxation will likely be shaped by several key trends and challenges
Globalization
The world economy becomes the main area of work for global companies. Cooperation and coordination in relation to tax legislation will be critical.
Technological Advancements
Technological improvements like the blockchain and artificial intelligence affect tax administration and enforcement in modern society.
Economic Inequality
The fight against economic injustice shall continue receiving attention and efforts especially on how corporations are taxed with resultant outcomes on wealth sharing and provisioning of social amenities.
Conclusion
Corporate tax is the tax levied on businesses central to the contemporary economy its effects cut across business strategies economic development and government income. Although the regimes of corporate taxes have also been developed in the past one hundred years they are still fraught with many problems in the context of the increasing globalization of the world economy. Issues like base eroding measures BEPS tax on the digital economy and tax competition cannot be solved without cooperation and policy innovations. This is where the corporate tax systems of the world will continue to change as the global economy is also changing attempting to satisfy the requirements of companies states and society as a whole.
