Definition
Corporate tax refers to a direct tax levied by various jurisdictions on the profits earned by businesses. It is calculated on the net income that companies make from their operations. The rates, regulations and tax structure can vary significantly from one country to another.
Key Takeaways
- Corporate tax refers to the tax levied by various jurisdictions on the profits made by companies or associations. It forms a major part of a nation’s tax income.
- The rate of corporate tax varies from one jurisdiction to another, and businesses are generally liable to pay it irrespective of their level of profitability or the sector in which they operate.
- While corporate tax contributes to government revenue, if set high, it can potentially discourage entrepreneurial endeavors and foreign investment.
Importance
Corporate tax is significant in the world of finance because it directly impacts the net income and the profitability of a corporation. As a government levy imposed on a company’s profit, it is a crucial determinant of the financial health and operational results of a business.
The rate of corporate tax impacts business decisions, the amount of investment a company makes, cash flows, shareholders’ returns, and even company reputation. It can influence crucial strategic decisions such as business location or capital structure.
Understanding corporate tax is therefore fundamental to accurately assessing a company’s value, projection of its profits, the feasibility of investment, and creating effective financial strategies. Essentially, it is a key element of a company’s financial landscape that impacts both internal operations and the external economic environment.
Explanation
Corporate tax refers to a direct tax imposed by a jurisdiction on the income or capital of corporations or analogous legal entities. Its fundamental purpose is to gather revenue for the government from the profits earned by these businesses.
This tax is a major source of income for governments, especially in developed countries, to fund public services, infrastructure, and other governmental expenses. Some countries also levy a corporate tax on the capital or net worth of a corporation, apart from the profits.
In addition, corporate tax can also be used as a regulatory tool by governments to encourage or discourage certain activities within the business sector. For instance, reduced tax rates on green businesses promote environment-friendly activities and sustainability.
Conversely, higher tax rates might be imposed on industries associated with environmental harm or health risks. Therefore, corporate tax isn’t just a revenue-generating tool, but also an instrument for governments to guide and influence corporate behavior according to societal interests and policy goals.
Examples of Corporate Tax
Apple Inc: Known for its technological innovations, Apple Inc. is also infamous for a corporate tax scandal. Apple was charged by the European Union (EU) for paying a corporate tax rate of just005% in
This exceedingly low tax rate was possible because Ireland, where Apple held its European headquarters, had lenient tax policies. However, the EU ruled this to be illegal state aid in 2016 and ordered Apple to pay €13 billion in back taxes.Amazon: Amazon is another giant that has faced criticism for its corporate tax practices. In 2019, the Institute on Taxation and Economic Policy revealed that the company did not pay any federal income tax on its U.S. profits for the year
Thus, despite recording a profit of more than $11 billion, Amazon did not pay any corporate tax, largely due to various tax credits and tax exemptions it was able to utilize.Starbucks: Starbucks had a significant corporate tax case in the UK. In 2012, it was revealed that Starbucks had paid only £
6 million in corporation tax in the UK over 14 years, despite generating over £3 billion in sales. Public outcry over this led to a parliamentary investigation, and the company voluntarily paid an additional £20 million in taxes over the next two years. The case brought attention to the issue of big multinational corporations and their corporate tax responsibilities.
Corporate Tax FAQs
What is Corporate Tax?
Corporate tax refers to the tax levied by various jurisdictions on the profits earned by companies or associations. It is a direct tax that a corporate entity pays on its income or capital.
How is Corporate Tax Calculated?
Corporate tax is usually calculated as a percentage of the company’s net income. This is the company’s income after deducting expenses such as salaries, cost of goods sold (COGS), depreciation, and other operational costs.
Why is Corporate Tax Important?
Corporate tax is a major source of revenue for governments. It aids in the funding of public goods and services, infrastructure development, and other government expenditures.
What are the Types of Corporate Taxes?
There are various types of corporate taxes such as Income Tax, Capital Gains Tax, Transaction Tax, and Property Tax, depending on the jurisdiction.
What are Tax Deductions and How do They Work?
Tax deductions are expenses that a company can subtract from its gross income to reduce its taxable income. Common tax deductions include interest on business loans, expenses for business operations, and depreciation on property and equipment.
Related Entrepreneurship Terms
- Taxable Income
- Deferred Tax
- Fiscal Year
- Tax Deductions
- Capital Gains Tax
Sources for More Information
- Investopedia: A trusted and comprehensive online financial education platform.
- Bloomberg Finance: A leading global business and finance news source.
- CNBC: A world leader in business news and real-time financial market coverage.
- Financial Times: An international daily newspaper with a focus on business and economic news.
