Abstract
In most countries, firms and organizations are subject to a corporate tax. The main principles of such a tax (incidence, tax persons, residence, permanent establishment, tax period, and revenues and costs) are largely harmonized at the OECD level. In addition, most countries have a similar conceptual framework of corporate tax whereby firms pay corporate tax based on their accounting pre-tax profits, after tax adjustments. The respective tax adjustments are based on transactions that cannot, or should not, be recorded by the tax rule, but rather by the accounting rule (e.g., not-deductible costs, tax benefits, or operations subject to different treatments between accounting and tax). This chapter also analyses several relevant issues for corporate tax purposes, namely: depreciation, grants, capital gains, tax losses carried forward, loan interest deductions and limits, corporate tax rates, and declarations and payments. Several examples across each topic and exercises are presented at the end.
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Notes
- 1.
The accounting profit is in the P&L and is the income before pre-tax income, according to the accounting standards, before the provisions of the corporate tax.
- 2.
[1] The OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. In addition, the European Commission is involved in the work of the OECD.
- 3.
Alternatively, in the United States, the IRS also permits that instead of observing a 12-month tax year, US taxpayers may observe a 52- to 53-week fiscal year. In this case, the tax year ends on the same day of the week each year, whichever happens to be the closest to a certain date—such as the nearest Saturday to 31 December. This system automatically results in some tax years having 52 weeks, and other having 53 weeks.
- 4.
For example—if there is an increase in costs of more than 100%, then for tax purposes it is considered that there is a tax benefit of 30%, where each dollar of accounting costs will be considered to be 1.3$ for calculating the corporate tax, which will lead to a tax correction to the accounting result of 0.3$.
- 5.
Fair value is the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
- 6.
The IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate, because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. The IASB also clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. This presumption, however, can be rebutted in certain limited circumstances.
- 7.
This International Accounting Standard governs the accounting for and the disclosure of government grants and the disclosure of other forms of government assistance. The distinction between government grants and other forms of government assistance is important as the standard’s requirements only apply to the former.
- 8.
The grant is recognized as income over the period in which the related costs occur and for which the grant is intended to compensate, on a systematic basis [IAS 20.12].
- 9.
When a government grant takes the form of a low-interest government loan, the loan should be recognized and measured in accordance with IFRS 9 (at its fair value) and the difference between this initial carrying value of the loan and the proceeds received is treated as a government grant.
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Sarmento, J.M. (2023). Corporate Tax. In: Taxation in Finance and Accounting. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-031-22097-5_7
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