Corporation tax, also called corporate tax or company tax is a direct tax placed on the taxable profits of a company or business organisation by the government of the country in which it operates. Examples of taxable profits are profits from taxable income (such as trading or investment profits) and capital gains (also known as chargeable gains).
Examples of corporate tax are corporations property tax, payroll tax, withholding tax, excise tax, customs duties, value added tax (VAT), etc.
In many countries, corporation tax is levied by the federal government at the national level, and a similar tax may be imposed at state or local levels.
Who Must Pay Corporate Tax?
All limited companies and business entities must pay a corporation tax on all taxable profits, no matter where (in the world) the profits come from. However, If a company is not based in UK for instance, but operates there (e.g. operates through an office or branch) then the corporate tax only needs to be paid on taxable profits made in the UK alone, not the company's overall taxable profits for the year.
How To Pay Corporate Tax And What Is Taxed
As part of setting up a private limited company, to ensure that your business is paying the necessary tax, a company must register for corporation tax within three months of beginning to trade (make sales and receive payments).
Also Read: How to calculate sales tax
An important duty or responsibility of the entity is to keep accurate accounting records that can be used to prepare the company’s annual tax return.
Corporate tax is paid on all gains made by the organization. This includes: trading profits - the income from daily business practices of sales, investments, and money made from selling assets (chargeable gains).
How To Calculate Corporation tax
You can prepare and file your own corporate tax return if you feel completely confident in completing it yourself. However, if you are not, then it may be advisable to hire an accountant or better still, outsource your taxes to accounting firms offering corporate tax services.
Corporate Tax Formula
Since we now familiar with the concept of Corporate tax, it's time to learn about the formula and how to calculate corporate tax. The value of corporation tax is gotten when the total profit/net income of a company is multiplied by the given tax rate.
The formula for corporate tax is given as:
Corporate tax to be paid = Net profit obtained as per a country’s tax rules × tax rate as applicable
Net income or net profit is the profits earned by an organization in a financial year. You can calculate the amount of net income by deducting the total expenses from total revenues for the period under review. Total expense is the sum of cost of goods sold and other expenses like rent and rate, wages, interest, advertisment, discount allowed, etc. A company's total revenue is the sum of revenue and other income sources, like commission, discount received and capital gains, etc.
Corporate tax rate is the percentage of taxes that limited companies will pay to the government from their profit. It is the rate a corporation actually pays. This differs from one country to another. Some countries have a high tax rates while others have low.
Example of Corporate Tax
Let's solve a problem Involving corporate taxation
ABC Limited made a net profit of $50,000 during the current financial year, which includes $10,000 worth of non-taxable income. Besides, $5,000 worth of taxable expenses have not been included in the net profit. The tax rate applicable to the company is 21%. You are required to calculate the corporation tax using the above formula.
Solution to question on corporate taxation:
Step 1 - In the question above, the net profit contains a non-taxable amount of $10,000 which will be subtracted.
= $50,000 – $10,000
Step 2 – Since the net profit did not include a certain taxable amount of $5000, hence, we will have to add it.
Taxable Profit = Net profit earned + Income taxable not included in net profit
= $40,000 + $5,000
Step 3 – To calculate the corporation tax, we will multiply the taxable income with the tax rate.
= $45,000 * 21%
What Is The Deadline For Paying Corporation Tax?
Corporation tax is levied on all relevant entities at the end of each accounting year and is charged for the profits accrued during the accounting periods of the business.
The deadline for corporation tax is commonly nine months and a day from the date your accounting period ends. Filing the tax return must be completed 12 months after the end of the accounting period. You can outsource your corporate tax services to any reputable accounting firm near you so they can help you with your taxes.
Advantages Or Benefits Of Corporate Tax
- Governments generate revenue through taxes. Therefore, taxes plays an important role in the country’s economic 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 merger, demerger, amalgamation, acquisition, and corporate restructuring are relieved 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.
- Many developing economies give tax-related benefits to companies hired in the development sector, such as infrastructure.
Disadvantages Of Corporate Tax
- Losing a large chunk of earnings in taxes restricts the growth of firms. The amount paid as taxes could have been utilized as retained earnings, capital expenditure, capital allowance or other means to increase productivity.
- Tax payment increases a firm's administration cost. Besides, the computation of different amounts is 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.
- Finally, 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 businesses to illegally park their money, away from the reach of the law.