Corporate Tax

Corporate Tax Meaning

Corporate tax refers to a tax charged by the government on a company’s profits or net income. It is calculated as per the specific norms of a country.

We will take you through a detailed explanation of corporate tax which is used interchangeably as corporation tax. 

Explanation

  1. A business earns profits from different sources such as sales, capital gains, commission, and rent, among others. The tax imposed on these earnings is an essential source of revenue for the government. 
  2. Income tax is different from corporation tax as it is charged on an individual’s income. Just like income tax, corporates are allowed many deductions and exemptions to bring down the taxable amount. 
  3. Besides, the corporation tax rate undergoes frequent revisions around the globe. For instance, in 2015, the corporate tax main rate was revised to 19% in the UK. 
  4. Likewise, in 2019, the statutory corporate tax rate in India was lowered to 22% from 30%. However, the 22% tax rate can be availed only by domestic companies that are not seeking any tax exemptions.
  5. In 2017, the corporate tax rate in the US was reduced to 21% from 35%. At 9%, Hungary is amongst the countries with the lowest rate of corporation tax. 
  6. The rates are revised and lowered to help the corporates grow. With a substantial portion of profits in their hands, corporates can focus on business development and capital enhancement. 

Corporate Tax Formula

Now that we have familiarized ourselves with the concept. Let’s learn about the formula and calculations of corporate tax.  When the total profit/net income of a corporate boy is multiplied with the given tax rate, we get the value of corporation tax. 

Corporate tax to be paid = Net profit obtained as per a country’s tax rules × tax rate as applicable

Corporate Tax

Net income is another term to describe the profits earned by a business in a financial year. You can derive the net income by deducting the total expenses from total revenues. Total expense is the sum of cost of goods sold and other expenses like rent, wages, interest, etc. Total revenue is the sum of revenue and other income sources, like commission and capital gains.

Example of  Corporate Tax

Let us solve a problem.

XYZ Corporation has earned a net profit of $50,000 during the current financial year, which includes $10,000 worth of income that is not taxable.

Besides, $5,000 worth of taxable expenses have not been included in the net profit. The tax rate applicable to the company is 21%. Calculate the due amount of corporation tax using the above formula.

Solution:

  • Step 1- In the problem, the net profit contains a non-taxable amount which we will need to subtract.
  • Step 2 – Since the net profit did not include a certain taxable amount, we will have to add it.

Corporate Tax - Example 1.1

  • Taxable Profit = Net profit earned – Income not taxable but included in net profit + Income taxable not included in net profit
  • = $50,000 – $10,000 + $5,000
  • = $45,000
  • Step 3 – To calculate the value of corporation tax, we need to multiply the taxable income with the tax rate.

Corporate Tax - Example 1 (Result)

  • = $45,000 * 21%
  • = $9,450

Benefits

  • Governments gain an enormous amount of revenue through taxes. It plays a significant role in the country’s growth as it helps the government in funding services like infrastructure, defence and transportation.
  • Corporation Tax puts less burden on the business as various formations like mergeramalgamation, demerger, acquisition, and corporate restructuring are released from the tax burden.
  • Companies willingly opt for employee insurance and payment of some employee expenses to seek tax deduction. They are also allowed to deduct the bad debts from the taxable amount. 
  • Moreover, many developing economies offer tax-related incentives to firms employed in the development sector, such as infrastructure.

Disadvantages

  • Losing a massive chunk of earnings in taxes restricts the growth of firms. They could have utilized the same as retained earnings, capital expenditure or other means to enhance their productivity.
  • Tax payment increases the administration cost of firms. Besides, the computation of different amounts is utterly time-consuming.
  • Tax cuts are rooted in the idea that more availability of profit will help firms hire more workers and pay better wages, thereby developing society. A recent study shows that since the 1980s, the tax cut for the rich has led to greater income equality than creating jobs. Moreover, it suggests that corporates need to pay more taxes to overcome the financially crippling effects of Covid-19.
  • Also, it is believed that many financial crimes are an outcome of a high rate of tax. Some countries are a breathing ground for many tax evasive activities enabling corporates to illegally park their money, away from the law’s eyes.

Key Takeaways

  • Corporation tax refers to a tax charged by the government on a company’s profits or net income. 
  • Since it is calculated as per the specific tax norms of a country, the tax rate differs worldwide.
  • Corporation tax to be paid = Net profit obtained as per a country’s tax rules × tax rate as applicable

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This has been a guide to what is Corporate Tax and its meaning. Here we discuss the formula to calculate the corporation tax along with the example. You can learn more from the following articles –