Capital 6: Business taxation II Flashcards
What is the classification of corporation tax systems?
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
What methods exist to reduce or avoid double taxation at the Corporate and shareholder level?
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).
What happens under a classical system?
- 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
Which systems avoid double taxation and which system mitigate double taxatipon?
Double taxation is avoided under:
- Full imputation system
- Dividend exemption system
Double taxation is mitigated under:
- Partial imputation system
- Shareholder relief system
What happens under the full imputation system?
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
What are the key features of the full imputation system?
- 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
How are differences between PIT and CIT rates adjusted under the full impuation system?
- 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)
What is the partial imputation system in taxation?
A system where double taxation is mitigated by
- partially crediting corporate income tax (CIT) on dividends against personal income tax (PIT).
What are the key features of the partial imputation system?
- 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.
How does the total tax burden on dividends compare to the individual income tax rate in a partial imputation system?
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
What is the shareholder relief system in taxation?
A system where double taxation is mitigated by
- considering corporate income tax (CIT) on profits before taxing dividends at the shareholder level.
How does the shareholder relief system reduce taxation on dividends?
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.
How is the total tax burden on dividends determined in the shareholder relief system?
- 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
What is the dividend exemption system?
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
How does the dividend exemption system differ from the full imputation system?
Tax Burden: determined solely by the corporate tax rate, not by the PIT rate
When is the tax burden under dividend exemption and full imputation system the same?
Tax burdens under both systems are equal only when both
- PIT and CIT rates are the same and
- PIT rate is proportional (flat tax).
What is the purpose of comparing corporation tax systems in terms of their impact on business decisions?
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.
What is financing neutrality in the context of debt financing?
- 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
How is the financing neutrality in the full imputation system?
- financing neutrality (dividend is subject to individual PIT) not
How is the financing neutrality in the dividend exemption system?
- 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)
What is the financing neutraloity in the Classical or partial imputation system?
debt financing is favoured against equity financing
What is the financing neutraloity in the Shareholder relief system?
- 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
What is the treatment of loss offset in corporations?
Loss offset is impossible because a corporation is a single business and only has business profit
What is the treatment of loss deduction in corporations?
- 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
