corporation tax

Corporate Tax

A tax levied on corporations' profits. Because corporations are legal entities separate from their owners, they may be taxed as if they were persons. A corporate tax, then, is the equivalent of the income tax for natural persons. Corporate taxes vary from country to country; in the United States, they are levied at both the federal and state levels. Proponents of the corporate tax argue it guards against excessive profits that may result from unethical or illegal corporate practices, while opponents say that corporations simply pass on the tax to their customers.

corporation tax

a DIRECT TAX levied by the government on the PROFITS accruing to businesses. A company's corporation tax is loosely based upon its profit for the accounting period as determined in the COMPANY'S PROFIT-AND-LOSS ACCOUNT. However, since firms use different methods for calculating DEPRECIATION of FIXED ASSETS to charge against revenues and so arrive at different PROFIT figures, the UK government establishes a standard scale of CAPITAL ALLOWANCES which all firms must apply to their fixed assets when computing taxable profit.

When a company pays dividends or makes other distributions of profit to shareholders, then it must also make a payment of advance corporation tax to the government, currently equal to one third of the dividend paid. This is an advance payment of corporation tax and can be offset by the company against its liability to mainstream corporation tax when this liability is assessed at the year end. Shareholders receiving a dividend are also treated as receiving a tax credit equal, at current rates, to one third of the dividend received. This tax credit is added to the dividend received to establish the shareholders' total taxable income. This imputation system, whereby the tax paid on distributed profits by the company is credited to the shareholders, avoids double-taxing the shareholders both on their company's profits and on their dividend distributions.

In the UK (as at 2005/06) the general corporation tax rate is 30% of taxable profits per annum, but there is also a ‘smaller companies’ corporation tax rate. No tax is payable on taxable profits up to £10,000 per annum and 19% on taxable profits over £10,000 up to a maximum of £300,000 per annum.

The level of corporation tax is important to a firm insofar as it determines the amount of aftertax profit which is available to it to pay out DIVIDENDS to shareholders or to reinvest in the business (see RETAINED PROFITS). See INLAND REVENUE.

corporation tax

a DIRECT TAX levied by the government on the PROFITS accruing to businesses. The rate of corporation tax charged is important to a firm insofar as it determines the amount of aftertax profit it has available to pay DIVIDENDS to shareholders or to reinvest in the business. In the UK currently (as at 2005/06) the general corporation tax rate is 30% of taxable profits per annum, but there is also a smaller companies’ corporation tax. No tax is payable on taxable profits up to £10,000 per annum and 19% on taxable profits over £10,000 up to a maximum of £300,000 per annum. See TAXATION, FISCAL POLICY, RETAINED PROFIT.