corporate tax

Definition of corporate tax

Noun

corporate tax (plural corporate taxes)

1. (economics) A tax levied on a corporation, especially on its profits; corporation tax
   
   Corporate taxes were levied on capital or net income, subject to an annual minimum.

Further reading

Corporate tax (or corporation tax) refers to a tax levied by various jurisdictions on the profits made by companies or associations. It is a tax on the value of the corporation's profits.[1] The general global trend of national corporate taxation is downwards - In the last ten years average rates fell from 35.0% to 26.30% [2].

Tax base

The measure of taxable profits varies from country to country. In some countries, for example the United States, the taxable profits are calculated according to a quite different set of rules from those used in the calculation of profits in the financial statements. The amounts that can be deducted for capital expenditure and for interest payments vary substantially from country to country.

In many countries, depreciation of capital assets calculated in the financial statements ("book depreciation") is not deductible, and a deduction is given for tax depreciation calculated on a different basis. In the United States, tax depreciation is generally calculated by a method known as MACRS. In the United Kingdom, where the main corporate tax is called corporation tax, tax depreciation, known as "capital allowances", is allowed instead of book depreciation, usually at the rate of 25% per annum (20% from 1 April 2008) on a reducing balance basis. In France depreciation is allowable, within certain rates per classes of asset set down by statute.

Tax rates

The global average rate of corporate taxes has lowered from 32.69% to 25.51% between 1999 and 2009. In OECD countries (a group of developed countries), it has fallen from 35.0% to 26.30% during the same period [3]. Many observers explain this fall by a political phenomenon called the "race to the bottom", in which governments compete with each other in order to attract corporations and capital.

Tax rates around the world vary considerably both in their statutory rates, and in their effective rates after all offsets are considered, preventing any straightforward comparisons of tax rates between countries. In some countries, for example, the United States, Canada and Switzerland, subnational governments also collect taxes, which further complicates the calculation of the tax rate.

In the United States, the top marginal federal corporate rate for taxable income over $18.3 million is 35% (it can be as low as 15% for taxable income under $50,000). Most states also tax companies,[4] but the state tax is a deductible expense in calculating federal tax, so the overall tax rate is not simply the sum of the two tax rates.

The UK main rate of Corporation Tax was reduced on 1 April 2008 from 30% to 28%. This applies to companies with a taxable profit greater than £1.5m. Companies with taxable profits under £300,000 pay tax at the lower rate of 21%, with a sliding scale rate for profits up to £1.5m. Profits are taxed dependant on which bracket the company falls into, i.e. a company with profits of £2m would pay tax on all profits at 28%.

Detailed data are available for the world's most developed economies, i.e. those in the Organisation for Economic Co-operation and Development.

References

1. Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 360. ISBN 0-13-063085-3.
2. survey of corporate tax, KPMG
3. survey of corporate tax, KPMG
4. Interactive map of state corporate tax rates, LawServer