Capital 6: Business taxation II Flashcards

1
Q

What is the classification of corporation tax systems?

A

It depends on the degree of integration of CIT into PIT:

  • No integration: classical system
  • Partial integration: double taxation reducing systems
  • Full integration: double taxation avoiding system
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2
Q

What methods exist to reduce or avoid double taxation at the Corporate and shareholder level?

A

At the Corporate Level:

  • Dividend deduction: Dividends are treated as a business expense
  • Split corporation tax rate: Lower tax rates on distributed profits

At the Shareholder Level:

  • Corporate income tax credit: Credited against personal income tax
  • Reduced taxation of dividends: Compared to ordinary income (shareholder relief).
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3
Q

What happens under a classical system?

A
  • Dividends subject to personal income tax without any tax relief
  • Double taxation of dividends with corporate and personal income tax
  • Applied in Czech Republic, Hungary, Ireland and Lithuani
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4
Q

Which systems avoid double taxation and which system mitigate double taxatipon?

A

Double taxation is avoided under:

  • Full imputation system
  • Dividend exemption system

Double taxation is mitigated under:

  • Partial imputation system
  • Shareholder relief system
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5
Q

What happens under the full imputation system?

A

A system where double taxation is avoided by

  • fully crediting corporate income tax (CIT) on distributed profits against personal income tax (PIT) on dividend income
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6
Q

What are the key features of the full imputation system?

A
  • Corporate tax credit is part of the shareholder’s taxable income
  • Taxable income equals the corporation’s profit before CIT
  • Dividends are taxed at the individual PIT rate, with adjustments for differences between PIT and CIT rates
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7
Q

How are differences between PIT and CIT rates adjusted under the full impuation system?

A
  • PIT rate > CIT rate: PIT is levied on the difference (PIT rate – CIT rate)
  • PIT rate < CIT rate: CIT is reimbursed for the difference (PIT rate – CIT rate)
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8
Q

What is the partial imputation system in taxation?

A

A system where double taxation is mitigated by

  • partially crediting corporate income tax (CIT) on dividends against personal income tax (PIT).
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9
Q

What are the key features of the partial imputation system?

A
  • Corporate tax credit is included in the shareholder’s taxable income
  • Tax credit is lower than the CIT on distributed profits
  • The shareholder’s taxable income is lower than the corporation’s pre-tax profits.
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10
Q

How does the total tax burden on dividends compare to the individual income tax rate in a partial imputation system?

A

The total tax burden on dividends exceeds the individual income tax rate, as the corporate tax credit is only partial — and thus we still have a double taxation but only partial

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11
Q

What is the shareholder relief system in taxation?

A

A system where double taxation is mitigated by

  • considering corporate income tax (CIT) on profits before taxing dividends at the shareholder level.
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12
Q

How does the shareholder relief system reduce taxation on dividends?

A

Reduction of Tax Rate on Dividends:
- Final tax due
- Option to include dividend income in personal income tax for low taxable income

Reduction of Tax Base for Dividends:

  • Dividends partially exempt from personal income tax base
  • Ordinary income tax rate applied to a reduced tax base.
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13
Q

How is the total tax burden on dividends determined in the shareholder relief system?

A
  • The total tax burden is undetermined compared to the personal income tax rate
  • Minimum tax burden: Corporation tax becomes definitive.
  • Depending on the relief extent, the tax burden can be below, equal to, or above the personal income tax rate
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14
Q

What is the dividend exemption system?

A

A system where double taxation is avoided by

  • fully exempting dividends from personal income tax (PIT)
  • Dividends are taxed only once, at the corporate income tax (CIT) level
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15
Q

How does the dividend exemption system differ from the full imputation system?

A

Tax Burden: determined solely by the corporate tax rate, not by the PIT rate

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16
Q

When is the tax burden under dividend exemption and full imputation system the same?

A

Tax burdens under both systems are equal only when both

  • PIT and CIT rates are the same and
  • PIT rate is proportional (flat tax).
17
Q

What is the purpose of comparing corporation tax systems in terms of their impact on business decisions?

A

To evaluate how tax systems influence business decisions, particularly by ensuring the neutrality of taxation in the following areas:

1.Financing Neutrality: Equal tax treatment of equity and debt financing.

2.Neutrality Towards Legal Form: Equal tax treatment of all legal forms (sole proprietors, partnerships, and corporations)

3.Neutrality in Appropriation of Earnings: Equal tax treatment for distributed and retained profits.

4.Neutrality Regarding Location: Equal tax treatment for domestic and foreign investments.

18
Q

What is financing neutrality in the context of debt financing?

A
  • Interest payments deductible from corporate tax base
  • Interest payments not subject to CIT
  • Interest payments subject to PIT considering tax relevant personal
    circumstances of the shareholder and – if relevant– to final withholding taxes on interest income, see sections 2.3.4 and 2.6
19
Q

How is the financing neutrality in the full imputation system?

A
  • financing neutrality (dividend is subject to individual PIT) not
20
Q

How is the financing neutrality in the dividend exemption system?

A
  • Financing neutrality only achieved if personal income tax rate equals corporate income tax rate (i.e., flat rate tax systems)
  • Otherwise equity financing is favoured (PIT rate > CIT rate) or debt
    financing (PIT rate < CIT rate)
21
Q

What is the financing neutraloity in the Classical or partial imputation system?

A

debt financing is favoured against equity financing

22
Q

What is the financing neutraloity in the Shareholder relief system?

A
  • No clear answer whether equity or debt financing is discriminate
  • Tax burden on equity or debt financing depends on the corporate
    income tax rate and the degree of shareholder relief on dividend income
23
Q

What is the treatment of loss offset in corporations?

A

Loss offset is impossible because a corporation is a single business and only has business profit

24
Q

What is the treatment of loss deduction in corporations?

A
  • Carry-back
  • Carry-forward: Some countires restrict the right to carry forward losses:
  • Transfer or more than 50% of shares, no entitlement to carry forward losses
  • Transfer of more than 25% but lless than 50% of shares