What is Corporate Taxation - Assignment Example

Corporate Taxation in U.K. Corporate tax: What is it' Corporates or business houses form the backbone of the economy of any nation smaller or bigger, irrespective of its shape or size. One of the oldest developed economies of World, United Kingdom was one of the first to be industrialized. And hence came Corporate Taxation. In any developed economy, the interaction of the Government becomes evident with the corporate world after a certain extent of time and hence the decision of the Government to levy taxes on the Industrial houses for the fiscal budgeting of the nation is called Corporate Taxation. (Graham, 2003) To fund Napoleonic Wars, William Pitt The Younger incorporated the simple process of taxation in Britain in the budget of 1798. And hence the tradition carries on. History of Corporate Tax: In the Finance Act of 1965, the process of uniform taxation for individuals and corporates was abolished and separate Corporate Taxation was started. It is currently governed by the Income and Corporation Taxes Act 1988, which has also undergone amendment. Thus here the Corporate Taxation System of U.K is discussed in terms of the following: - Efficiency, Incentives and Equity and the major turning points in its journey: Advance Corporation Tax (ACT) and its abolition: The advance Corporation Act introduced in 1976 came as a blow to corporates as dividends paid by the corporates were highly and disproportionately taxed. 0n 6 th April, 1999, it was abolished by Mr. Gordon Brown, the then vice chancellor of the Exchequer, who is none other than the Prime Minister of Great Britain today. Thus it provided a great deal of incentive, equity and relief to the corporates and hence made the taxation system more efficient in nature. Reduction of Rates by Gordon Brown In 1999: In the budget of 1999 Gordon Brown introduced a more efficient and proportionate taxing system or rate according to the volume of profits, as in opposition to age old system of 1965. Budget of 2002: It scrapped tax on companies earning profits up to 10000 pounds and that witnessed a huge growth in the number of self-employed and small-scale industries. It is still perceived to be a major step in UK's Corporate Taxation history. (Darmon, 2008) Adoption of Ethical and more scientific Appraisal standards: IFRSs or International Financial Reporting Standards was adopted by European Union in 2005 and hence as well as UK to promote transparency in taxation system and hence benefited the corporates in general. (Nardi, 2005) Finance Act of 2004: The first of its kind, it promoted the use of legal anti Tax Avoidance Schemes among Corporates. (Public Sector Information, 2004) Finance Act of 2005: For the need of higher revenues, Oil, Gas & Life Insurance companies were targeted in this budget and laws were implemented forcing them to pay lump sum tax installments and that cost these companies heavily. (Public Sector Information, 2005) HMRC (Her Majesty's Revenue & Customs): In 2005, this body introduced self-assessment for the Companies and made them liable for any late filing or misinformation. This introduced higher accountability on the part of the corporates. Abolition of Multiple Taxation: The government of UK has relieved its corporates from multiple taxations like India. If a corporate body has already paid tax on a foreign land, it is exempted to pay further tax on UK soil. Absence of Group Relief: The UK government doesn't permit group relief in case of corporates with multiple entities. Permitting Loss Relief: Offsetting the losses suffered by one entity against their own taxable profits are permitted in UK. It can act as a major relief to the corporate. (HMRC, 2008) Current Reforms: The government is acting on several reform processes and periodic checks and balances are being put to make the Corporate Taxation System more fluid, efficient and transparent. Not to forget, UK is governed by noted economist and reformer none other than Prime Minster Mr. Gordon Brown. So the Corporates can look forward to a smiling future. How Corporate Taxation System affects Corporate Performance' Well, in a number of manners. Different areas can be affected by a government's fiscal and taxation policy in case of corporates. A better taxation system can result in better structuring of operating capital and hence enhance the profitability of a firm. A transparent and stable Taxation System helps in structuring a better organizational form. A clear and more transparent Corporate Taxation policy can give rise to a more efficient formulation of an organizational structure and that can help or enable the Corporate entity to function better and with more efficacy and hence increase its chances of profit making in general. Lesser the Tax burden, more is the payout. A less tax burden can increase the chance of a company's profitability and hence increase in payouts. Or in other words it can discourage or prevent a company from giving more payouts in order to hide, conceal or suppress profits. Lesser the tax burden, more liberal will be the compensation policy. A lesser tax burden can increase in the overall revenue of a corporate entity and thus can leave it with more cash to compensate in case of any eventualities. Or in general, it can give rise to a very flexible and accommodating compensation policy. Lesser the Tax burden, better the funds can be allocated for future risk management. Less tax again would mean more cash at disposal and hence better scope of managing risks in case of any such unfortunate eventualities. (Sumner, 1973) General view on a perspective of 25 years: In 1984, the or from 1984 onwards the UK government took comprehensive reforms to broaden the tax base by abolishing the ever increasing depreciation rate and hence reducing the corporate tax rate as a result. It all happened in the Spring budget of 1984. Investment incentives were restructured and there was an increase in marginal tax rate and they were modified considerably. All these were done to promote Fiscal Neutrality and proper corporate growth. (King, 1985)Thus the main objectives can be generalized as follows: Abolishing the increasing depreciation rate: Depreciation means economic corrosion. If the depreciation rate of an economy can be prevented, then the asset collection or allocation will increase automatically. Broaden the tax base: Broadening of the existing tax base will result in more revenues and hence it was necessary. Restructuring Investment Incentives: Restructuring Investment Incentives provided the government the scope for better fiscal flexibility. Increase in marginal tax rate: It prompted into bigger and greater revenues. Promoting Fiscal Neutrality: It provided bigger and greater and a more level playing field to the corporates. Increase in Industrial Growth in general: All these prompted or would prompt an increase in Industrial growth in general. A Debate: Are the corporates cash cows' A debate ranges that whether the corporates are cash cows or not or whether they are targeted partially or not. But the Government at some point of time or the other has to come face to face and encounter this situation of taxing corporates. They fall under the largest income bracket of the country and hence they should be taxed. The Taxation of Corporate entities have got endless debates to its credit. But here are some basic points that are needed to be remembered while analyzing and going depths into Corporate Taxation. Why Taxes are needed' Taxes are needed by any Government to ensure its free and fair running of a nation. The Government uses the money collected to fund the Fiscal Budget of the nation. Taking into account the taxes levied from individuals as well as corporate brings into the basis healthcare, rural, urban and socio economic developments. What goes back from Corporate comes back to them only: Taxes levied under a free and fair government are used for tasks as Infrastructural developments, that include building roads, bridges, telecommunication facilities etc and hence providing all the factors that are absolutely necessary for richer and wider Corporate Development. So, in one words, it can safely be said, what goes from corporate, safely comes back to them. Corporate Taxation and its relation with open economy: In this open economy and era of globalization Corporate Taxation plays a very vital and major role. Too much Taxation on foreign companies coming to operate on domestic soil can discourage them in the long run and hence prevent FDI or Foreign Direct Investment. On the other hand too much incentives provided to them would discourage the growth of domestic enterprises and prevent them from growing freely. The UK government's policy of providing Fiscal Neutrality thus helps in providing a uniform corporate growth. Its current policy of abolition of taxes for domestic corporate earning and paying taxes can be cited and seen as one. Thus the UK government has promoted a very level a composite structure of corporate Taxation that provides a level playing field to both domestic and foreign enterprises. What can be a more decisive example of this than the recent takeover of Chorus by the Tata Group on the UK soil' Thus the Government of UK through its proper Taxation framework is being able to bring or rake in adequate Foreign Direct Investment, which is a must for proper GDP and overall economic growth. It is also promoting the growth of small and big domestic industries and the reduction in the marginal tax rates can be cited to be the best examples for this. Corporate Taxation & GDP: The undeniable relation between Corporate Taxation policies can't be ignored at all. The more proper, transparent, efficient and accurate, the corporate taxation policy will be, the more will be the growth of GDP and vice versa. We can safely predict that as the Gross Domestic Product growth of UK is heading towards the right direction and so we can comment the same on its corporate Taxation policies. (Morgan, 1987) A Debate: Will Taxation affect a company's dividend paying policy' There is a longstanding debate among economists about the rate of taxation on corporate dividends and hence such taxation affecting their policies. The long manner of price behavior doesn't follow the long run reduction in the advantage of capital gains versus dividends. As per time history tells us that amount of dividend distribution has increased while tax disadvantage on dividends hasn't been able to be consistent in its effect. To an extent, firms pay dividends inspite of tax disadvantage to portray to the market or assure the public in general about their profitability and hence increase and strengthen their market share and presence, which will increase their chances of profitability in the long run. (Holland, and Scott, 1998) Thus the funny part is inspite of the tax disadvantage, companies will never stop paying dividends and so taxation indirectly has little implication! Importance of Fiscal Neutrality: Fiscal neutrality gives a uniform playing field to all tax paying elements of a society and thus helps in promoting uniform economic growth. The steps taken by the UK government specially incase of marginal taxation has helped to promote this particular aspect and thus can aide in the nation's economic growth. Overall Demerits of UK Corporate Taxation viewed analytically: Sometimes it is unstable. Like all governments in this world, the policies keep changing. A more stable policy making can make a better platform. Reversal of own rules: Reversal of own rules and policies formulated once can lead to confusion among the corporate world. Higher taxation on dividend payouts can discourage corporates in the short run and discourage them from coming clean on profits. Again Self Assessment may act as an incentive on one hand and a tool to evade taxes on the other hand. After all, better tax collection means better tax collection means better infrastructure for the nation and thus aiding corporate growth in general. No provision for Group Relief. Overall Merits of UK Corporate Taxation viewed analytically. The United Kingdom has an advantage of being the pioneer in Industrial Revolution and a developed nation and an early superpower from the beginning. So who starts early, gains early' Abolition of Advance Corporation Tax in 1999 provided a big boost to the corporate sector. Introduction of International Financial Reporting Standards or IFRSs is a great boost. It will provide greater transparency, efficiency and accuracy to the overall taxation system. Provision of legal avenues or windows for Tax Evasion is present in UK. The first of it's kind; it's a boost for the Corporate. Corporate Taxation policy is announced in parliament keeping the financial year in mind and not the calendar year. It is a facility for the corporate. Provision for Self Assesment is present. It can act as a demerit for the Government but surely a merit for the corporate. Presence of Scheduler System of Taxation is there which levies taxes on a schedule specific basis. Relief for expenses is present which excludes almost all expenses from Taxable Income. Relief from double taxation is present where a corporate entity earning and giving tax on a foreign land is exempted from doing so on UK soil. Loss Relief provision is present which entitles a corporate entity with multiple sections to merge its losses of one entity against the profit of another Profit making entity. Constant effort for improvement is going on to make the system of Corporate Taxation more efficient. Britain is a democracy. And so all checks and balances are in place to keep this economy and its Corporate Taxation System in balance. Last but not the least, UK is led by Dr Gordon Brown, a GENIUS in his own right, a PhD and youngest ever Rector of Edinburgh University; it can be safely said that Britain is in 'ABLE' hands, very much able hands and the economic and corporate future of Britain is very bright and its going to regain its lost glory of the land in which 'The Sun never sets'. However, the merits of UK'S taxation system overpower its demerits and we can safely predict a bright future for this vibrant, rich and once super powerful democratic economy. Works Cited 1. Darmon, J. 2008. Is the UK becoming a corporate tax haven', Taxation Web, available at: http://www.taxationweb.co.uk/articles/article.php'id=32 [Accessed on July 23, 2008] 2. Graham, J.R. 2003. Taxes and Corporate Finance: A Review Source: The Review of Financial Studies, Vol. 16, No. 4, (Winter), Oxford University Press. The Society for Financial Studies. pp. 1075-1129 3. Holland, A. and Scott, A. 1998. The Determinants of UK Business Cycles, The Economic Journal, Vol. 108, No. 449, (July), Blackwell Publishing for the Royal Economic Society. pp. 1067-1092 4. HMRC. 2008. Welcome to HM Revenue & Customs, available at: http://www.hmrc.gov.uk/ [accessed on July 23, 2008] 5. King, M. 1985. Tax Reform in the UK and US. Source: Economic Policy, Vol. 1, No. 1, (Nov), Blackwell Publishing on behalf of the Centre for Economic Policy Research. pp. 220-238 6. Morgan, E. J. 1987. The UK Corporate Tax Reform and Business Investment Decisions Source: Managerial and Decision Economics, Vol. 8, No. 2, (June), John Wiley & Sons. pp. 149-159 7. Nardi, F. 2005. Ducati Motor Holding SPA, quarterly report, available at: http://sec.edgar-online.com/2005/11/28/0001275287-05-004805/Section2.asp [accessed on July 23, 2008] 8. Public Sector Information. 2004. Finance Act 2004, available at: http://www.opsi.gov.uk/Acts/acts2004/ukpga_20040012_en_1 [accessed on July 23, 2008] 9. Public Sector Information. 2005, Finance Act 2005, available at: http://www.opsi.gov.uk/acts/acts2005/ukpga_20050007_en_1 [accessed on July 23, 2008] 10. Sumner, M.T. 1973. Investment and Corporate Taxation, The Journal of Political Economy, Vol. 81, No. 4, (Jul.- Aug.), The University of Chicago Press. pp. 982-993 Read More