Corporate tax

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Corporate taxes are levies assessed against business rather than individuals. Corporate taxes can take many forms: income taxes, real and personal property taxes, value added taxes, license fees, royalties and payroll taxes.

Some economists compare countries based on the tax burdens that corporations must pay. Economists try to consider the "effective tax rate" of a nation based on the amount of money collected divided by the income of the business. The effective tax rate is usually different than the maximum tax rate set in the nation's tax laws because corporations may deduct certain expenses from their gross income before paying income tax. Payroll or value added taxes can raise the tax burden of companies beyond their income taxes.

United States

The United States imposes a corporate income tax on most corporations. However, many corporations do not pay such taxes. For example, small businesses can elect to be "Subchapter S Corporations" where the tax burden is transferred to the owners to pay as a part of their personal income tax. Other corporations are exempt from federal taxation under Section 501 of the Internal Revenue Code. Many individual states and local government also assess taxes including income taxes, sales taxes, real and personal property taxes and annual fees and business license fees.

"The United States has the highest corporate tax rate in the world at 35 percent, which puts U.S. companies at a competitive disadvantage with other countries that have lower rates (e.g. Canada at 15 percent, Ireland at 12 percent, Bulgaria at 10 percent and so on). As a result, U.S. companies are forced to move some of their operations into other countries in order to remain competitive." [1]

Multinational corporations

When a company operates in several different countries, complicated rules apply to determine what taxes are owed in each country and when they are due. In general, countries agree to tax treaties to address enforcement details.

The United States takes the approach that a U.S. company owes taxes on all of its operations, even if the operations are overseas. However, the U.S. tax laws allow a company to defer paying taxes on its foreign profits until the year that the company brings the foreign profits back to the United States. Some other countries tax only the profits made within their own borders and disregard profits that a company makes in foreign countries.

In 2012, the United States Senate conducted an investigation into how high technology companies are able to evade paying United Staets taxes on their foreign earnings. A Senate report said that from 2009 to 2011, Microsoft shifted $21 billion in profts to an offshore subsidiary that allowed it to avoid paying $4.5 billion in U.S. corporate income taxes. Microsoft had moved "intangible property" such as some of its patents to the overseas subsidiary company to shift the income away from the United States. Similarly, Hewett-Packard Co. reduced its tax bill by sending $9 billion annually of offshore profits back to the United States as a "loan" so that no U.S. taxes would be due on those profits. Senator Carl Levin said, "Major U.S. corporations are increasingly earning their profits here but shipping them overseas to avid paying the taxes they owe."[2]

When a United States citizen invests in a foreign company, he must pay foreign taxes on the dividend income that he receives from that company. But the U.S. tax laws allow the citizen to either deduct or get a credit on his U.S. tax bill for any foreign taxes paid.

Notes

  1. "Democrats' hypocrisy with the rich," editorial by Richard W. Rahn (a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth) in the Washington Times 27 August, 2012.
  2. John D. McKinnon and Shira Ovide. "Corporate Loopholes in Tax Law Targeted", Wall Street Journal, September 21, 2012, p. B1. 
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