Corporate Taxes
Other than in certain tax havens, around 95% of countries apply income taxes at varying rates to profits of companies. Although there is wide variation, the average rate is approximately 25%. For a standard trading company the profits will be defined in the normal way i.e. income less allowed expenses. In the case of a company on a cost + uplift (see “InterCompany Agreements”), the profit subject to corporate taxes will be pre-determined on a formula.
Adjustments required to the financial accounts to calculate the profits subject to corporate taxes may reduce or increase the effective rate of tax. When budgeting to operate in a country, it is important to check all the other taxes that may apply to a business examples of which are: property taxes, employer social security contributions, additional taxes on taxable income etc. Brazil, for example, has a surcharge on annual taxable income over a certain threshold which is reviewed from time to time. Other countries have a Federal tax and also a local tax e.g. Switzerland where each canton imposes a local tax.
Calculating Profits For Corporate Income Tax
Determining the Entity’s Income
Each country varies – the items below represent matters on which most countries have regulations and what generally affects the calculation of income for tax purposes. A list is provided at the end of each item of 10 major countries which have specific rules governing the item which you should check.
- Valuing stock (inventory) – the LIFO (Last In, First Out) basis is not accepted in many countries (e.g. Australia) who have their own regulations on how stock should be valued. Argentina, Australia, Brazil (LIFO not acceptable), China, France (LIFO not acceptable), Germany (generally FIFO – First in First Out – not accepted), India, Italy (allows most accepted methods e.g. LIFO: Last In, First Out, FIFO: First In, First Out, average cost), Japan, Netherlands (allows most accepted methods), UK (LIFO not accepted).
- Capital Gains/Losses – in many countries, these are taxed at normal rates of corporate income taxes. However, some countries tax gains on equities and other securities differently depending, for example, on the residency of the entity. Argentina, Australia, Brazil, China (generally treated as ordinary income), France (generally treated as ordinary income except for capital gains on patents), Germany (certain gains are exempt), India (clear distinction between long and short term assets), Italy (participation exemption regime may be available), Japan (generally ordinary income), Netherlands (generally taxed as income, participation income available), UK (taxed at normal corporate tax rates).
- Dividend income – the taxation of this may vary depending also on the residency of the paying entity. Dividends may or may not need to be included in the tax base of the recipient entity depending on its jurisdiction. Argentina, Australia, Brazil, China, France (special rules on intercompany dividends), Germany (there are exemptions for dividends), India, Italy (generally, available exemptions do not apply to dividends from tax havens), Japan (significant exemptions available), Netherlands (exempt if meet conditions for participation exemption), UK (mainly exempt but several criteria must be met).
- Foreign Exchange Gains/Losses – countries vary on whether a cash basis of accounting is acceptable or an accrual basis must be used. Argentina, Australia, Brazil (cash or accrual basis election available), China (unrealized gains can also be taxable), France, Germany, India, Italy, Japan (specific tax rules regarding translation), Netherlands, UK.
Deductible Expenses
- Bad Debts – surprisingly these cannot always be deducted in full for tax purposes. Some countries, for example Argentina, impose the restriction that a deduction can only be made if the debtor is in official bankruptcy. Argentina, Australia, Brazil, China, France (in some circumstances may be possible to establish a reserve for doubtful debts), Germany, India, Italy (restrictions on deductibility of provisions), Japan (strict procedures surrounding a write off, reserves not allowed except for certain types of businesses), Netherlands (provisions are allowed), UK (bad debt provisions can also be allowed if the provision is properly constructed).
- Depreciation and Amortization – allowable methods vary by country. Straight line is very common and tax authorities generally determine the rates at which different classes of assets must be depreciated for the purposes of tax allowances for depreciation. The majority of countries classify assets broadly into: Plant and machinery or machinery and equipment, furniture, buildings or real estate construction and automobiles. Amortization affects Intellectual Property, software developed by the company itself, various licenses among others. Argentina, Australia, Brazil (accelerated depreciation available in some situations), China, France, Germany (special depreciation rates may be available for small businesses), India, Italy, Japan, Netherlands (tax rules may limit the depreciation of assets), UK (tax authorities determine rates called “capital allowances”; special regime applies to all intangible assets)
- Director’s Fees – many countries impose restrictions on how much may be deducted for tax purposes in computing the profits subject to taxation. Argentina, China (e.g. disallows commercial insurance premiums), France (if a third party e.g. an independent service provider, is appointed as a gérante, that individual will be treated as a salaried employee), India (can claim non-compete payments to directors), Italy (treated as employment income unless paid to a VAT registered 3rd party), Japan (only 3 situations in which can be deducted), Netherlands (remuneration based on shares, profit shares, etc. is not deductible).
- Entertainment – many countries have restrictions on what may be deducted for entertainment even of customers or other business contacts. Argentina (representation expenses may be allowable), Australia, China (percentage of costs allowed), France, Germany (a percentage of these is deductible), India, Italy (both gifts and entertainment are generally allowable), Japan, Netherlands (deductible up to a limit for smaller companies).
- Fines and Penalties – the significant majority of countries disallow the deduction of any fines, penalties, surcharges or litigation costs that relate to tax obligations. Some disallow any fines or penalties whether or not they relate to tax obligations (e.g. Australia). Argentina, Australia, Brazil, China, France, Germany (some are deductible), India, Italy, Japan, Netherlands, UK (detailed rules govern what is or is not deductible)
- Goodwill – amortization of this is generally not allowable for tax purposes. Argentina, Australia, Brazil, China, France, Germany, India (goodwill as result of amalgamation is an intangible asset subject to depreciation), Italy (acquired goodwill can be amortized over periods specified by legislation from time to time), Japan (intangible assets are eligible for amortization), Netherlands (limited amortization available), UK (special regime applies to all intangible assets)
- Interest Expense – the deductibility of interest on a loan from a related entity will almost invariably be governed by “Thin Capitalization” rules (see “Intercompany Agreements” section). In addition, interest payments may be subject to withholding taxes at rates specified in tax treaties if they are to an entity in another jurisdiction. Majority of jurisdictions require interest to be at commercial rates. Argentina, Australia, Brazil, China, France, Germany (restrictions on deductions), India (generally no limit to deduction if arm’s length), Italy (has restrictions on deductibility), Japan (deductions for payments to related parties may be restricted), Netherlands (generally no withholding taxes but interest on certain intra-group transactions is limited), UK (must be at arm’s length)
- Net Operating Losses – generally these can be carried forward for specified lengths of time but cannot be carried back. Often foreign source losses cannot be offset at all and must be carried forward against future profits from similar sources. Argentina, Australia (also allows loss carry backs under certain circumstances), Brazil (amount of carry forward can be restricted), China (no carry back), France (limits apply to carry forwards), Germany (limited carry back available), India (no carry back), Italy (loss carried forward can be restricted), Japan (can be carried forward if specific form of tax return is filed), Netherlands (carry back for 1 year allowed), UK (carrybacks and even sideways relief can be available)
- Payments to Affiliates in Foreign Low/No tax Jurisdictions – many countries impose restrictions on the amount of such payments that may be deducted dependent also on their nature and purpose. Argentina, Australia, Brazil (deductions strictly limited), China (management fees generally not deductible), France (payments to a company in a tax haven must be shown to be bona-fide), Germany (deductible if there is written agreement), India (deductible as and when withholdings are paid over to Government), Italy (payment to tax haven jurisdictions must be shown to be at arm’s length), Japan, Netherlands (allowed if arm’s length), UK (no special rules)
- Research & Development – most countries aim to encourage companies to carry out this work in their jurisdiction so that this expense is generally allowable with specific rules governing over what period any expense must be amortized. Argentina, Australia (numerous costs associated with R&D are disallowed), Brazil, China (a percentage over actual expenses incurred are deductible), France, Germany, India (200% deduction may be allowable), Italy (tax credits available), Japan (tax credits available), Netherlands (3 types of incentives including Innovation [patent] Box), UK (220% deduction for small to medium sized companies)
- Royalty Payments – invariably have tax witholdings the amount of which will be governed by the relevant tax treaty which needs to be consulted to determine the amount. Argentina, Australia, Brazil (deductible only if contract registered with Instituto Nacional da Propriedade Industrial or INPI), China (has VAT implications), France (deductibility restricted between related parties), Germany (must satisfy arm’s length test), India, Italy (withholdings taxes for non-EU countries), Japan, Netherlands, UK (no withholding taxes),
- Start Up Expenses – again with Governments now seeking to attract companies into their countries, these expenses are generally allowable but some countries may require that they are wholly or partly amortized over a specific period. Argentina, Australia (no specific provisions but capital expenditure may qualify), Brazil, China, France (no specific rules), Germany, India, (generally can be written off over five years), Italy, Japan, Netherlands, UK (can be amortized),
Payment Of Corporation Tax
Each country has its own set of dates. Failure to meet these dates will inevitably trigger interest charges and possibly penalties as well. For companies over a certain size, installment payments may need to be made based on estimates or monthly based on monthly book keeping results. Some countries (e.g. Argentina) require monthly payments whereas others e.g. France require quarterly payments irrespective of the size of the company. Others, e.g. China, allow different options for the estimation of profits on which the corporate tax installments are paid. In India, the quarterly payments must be made in advance.
Note: The countries on which information is provided above are Argentina, Australia, Brazil, China, France, Germany, India, Italy, Japan, Netherlands, and United Kingdom.
These are general guidelines, for more information on your specific country or situation, please connect with us.