Reduction in Corporate Tax and Foreign Investment Inflow

This article discusses the reduction in corporate tax rates and its impact on foreign investment inflow. It explores the reasons why companies shift their operations to lower tax jurisdictions and highlights major companies that have benefited from corporate tax planning. The article also provides information on countries that have reduced corporate tax rates, such as the United Kingdom, Ireland, Portugal, and Italy.

Reduction in Corporate Tax and Foreign Investment inflow
Introduction
Corporate Income Tax is the rate of tax levied on Business Corporation for the profits earned
during the relevant year. The rate varies from country to country ranging from zero corporate
tax as levied by UAE to 40-50% levied by different countries. The tax is generally levied on
the actual profits as computed under the Income Tax regime of different countries. A sample
computation of corporate Income tax is presented here-in-under:
Profit earned during the year as per books of account: $100 Mio.
Profit earned during the year as per Income-tax account: $80 Mio.
Tax Rate: 25%
Corporate Income Tax= Profit earned during the year as per Income-tax account* Tax Rate
Corporate Income Tax=$ 80 Mio* 25%= $ 20 Mio.( Subject to surcharge and cess, if any).
Further, other types of tax that are levied on enterprise range from Goods and Service Tax,
Dividend distribution Tax, Withholding tax etc.
Corporate Taxation
Recently, many countries around the world has been on a shopping spree by reducing the
corporate of taxation with some countries having a basic tax rate of zero percent. Further, the
impact of such corporate tax reduction entails company to shift their head operations into
lower tax and entail the advantage of favourable tax policies.
In addition, not only the corporate taxation policy of the country determines the rationale for
shifting of enterprise to a lower tax jurisdiction, there are various other parameters that needs
to be analysed to determine the reason for multi giants to set up their operation in the tax
jurisdiction:
(a) Opaqueness of the country i.e. maintaining of secrecy and privacy and non-sharing of
information with other countries of operation of the company;
(b) Patent Box Regime: Laws of the country favouring the establishment and registration of
patents, copyright, trademark etc;
(c) Cost of establishing the organisation in the jurisdiction in comparison with the benefits.
Further, a comparison of cost and benefit analysis needs to be compared;
(d) Capital Gain tax regime of the country along with nil tax on capital gain. For instance,
economies like India have dual tax classification wherein tax rate on capital gain is lower
than normal business income;
(e) Structure of company that can be operated in the country. Example in the form of
partnership, company etc.
The aforesaid factors also play a critical role in determining the rationale for attracting
investment in the foreign jurisdiction.

Major Companies which profited from such Corporate Tax Planning
Multinational companies all around the world have had complicated tax structures that have
highlighted a number of tax avoiding issues. For instance, Star bucks in 2012 had sales of
approximately £400m in UK, but paid no corporation tax to UK, as they transferred some
money to their Dutch sister company as royalty payment in furtherance of paying high
interest rates to borrow from other parts of the business. Another example is that of Amazon
who reported a tax expense of £1.8m, while having sales of £3.35bn in UK in 2011 by
reporting sales through a Luxembourg based unit. Similarly, Google paid £6m in tax, while
having sales of £395m in 2011, by channeling its income via Ireland and Bermuda. The
French government demanded €1bn from Google, and also highlighted the issue of how the
internet giant was avoiding tax in France and was of the view that it must not be acceptable
and 49 efforts must be made to harmonize the tax structure.
In addition, companies like those that Apple Inc. has been charged with complain from many
countries of paying nil or zero withholding tax. Also. Many giant software companies like
Google, Yahoo etc has been very agile in shifting their tax base to lower tax jurisdiction to
benefit from reduced corporate taxation.
Countries which have reduced Corporate Rate of Taxation
United Kingdom: One of the major countries of Europe which is compliant with IFRS/
GAAP and IAS, major accounting standards of the World. The country is continuously
reducing its corporate rate of tax on year on year basis. The country has planned to reduce its
corporate tax rate to 17% by 1st April, 2020 from 19% currently and much higher rate
previously. The said action has been taken by the country to make it investment attractive,
inflow of foreign funds and rapid growth of Economy. Further, United Kingdom is currently
undergoing a drastic phase of Brexit which is lower down its economic growth on year on
year basis. Further, the tax is levied on world-wide profits and gains with credit for overseas
tax paid.
In addition, taxable income in United Kingdom is imposed on trading income, several non-
trading income in basket form and capital gains. Thus, the country does not distinguish
between capital gain and corporate income.
Other incentives that are offered by the tax jurisdiction encompass the following:
 Qualifying capital expenditure on plant and machinery shall be allowed to be written
down at 8% and 6% in current year. An alternative is also provided in the form of written
down value method at the flat rate of 18%;
 Full deduction is permitted for first GBP of qualifying expenses during the year;
 Exemption of receipt of dividend to most dividend receipt and distributions unless
received by a bank, an insurance company or other financial trade;
 Gain or loss on the substantial holding both in UK and foreign countries are exempt
under the participation exemption scheme and Parent Subsidiary directive;
 There is no Surcharge tax in the economy;
 There is no Alternative Minimum Tax in the economy;
 Trading losses can be set-off against the profit without any restriction;
 Losses can be carried forward indefinitely.

 Enhanced deduction of 230% on certain qualifying R& D expenditure of the company;
 No payroll tax etc
A brief snapshot of the tax regime is presented as under:
Sl. No Particulars Rate
1 Corporate Tax 19%
2 Capital Gain Tax Generally exempt/ 19%
3 Double Tax Avoidance Agreement Major Countries
4 Anti-Tax Avoidance Directive Yes
5 Controlled Foreign Companies Yes
6 Thin Capitalisation Rules Yes
7 Payroll Tax Nil
8 Alternative Minimum Tax Nil
(Deloitte Touche Tohmatsu Limited., 2019)
UK expects to raise an extra 24 Million $ per year from the above tax incentives offered and
bolster the growth of economy.
Ireland: One of the major countries of Europe, which is compliant with IFRS/ GAAP/IAS
and Irish GAAP, major accounting standards of the World. The country is continuously
reducing its corporate rate of tax on year on year basis. The country has current corporate tax
rate of 12.5% currently and much higher rate previously. The said action has been taken by
the country to make it investment attractive, inflow of foreign funds and rapid growth of
Economy. Further, Republic of Ireland is currently undergoing a drastic phase of Brexit
which is lower down its economic growth on year on year basis. Further, the tax is levied on
world-wide profits and gains with credit for overseas tax paid.
In addition, taxable income in Ireland is imposed on trading income, capital gains and passive
income. In addition, the country does distinguish between capital gain and corporate income
as capital gain tax of 33% and 40% applies in Ireland. Further, normal business expenses
shall be deducted to arrive at the profitability
Other incentives that are offered by the tax jurisdiction encompass the following:
 Trading losses can be carried back for preceding period of equal length and can be
carried forward indefinitely;
 Dividends are exempt from taxation under participation regime;
 There is no Surcharge tax in the economy;
 There is no Alternative Minimum Tax in the economy;
 Expenditure on certain revenue items, royalties, certain buildings and plant and
machinery which are in relation to R&D shall get a benefit of 25% on volume basis;
 Enhanced deduction of 230% on certain qualifying R& D expenditure of the company;
 No payroll tax etc
A brief snapshot of the tax regime is presented as under:
Sl. No Particulars Rate

1 Corporate Tax 12.5%
2 Capital Gain Tax Generally exempt/ 33-40%
3 Double Tax Avoidance Agreement Major Countries
4 Anti-Tax Avoidance Directive Yes
5 Controlled Foreign Companies Yes
6 Thin Capitalisation Rules Yes
7 Payroll Tax Nil
8 Alternative Minimum Tax Nil
(Deloitte Touche Tohmatsu Limited, 2019)
Portugal: One of the major countries of Europe, which is compliant with IFRS/ GAAP/IAS
and Portuguese GAAP, major accounting standards of the World. The country is
continuously reducing its corporate rate of tax on year on year basis. The country has current
corporate tax rate of 21.0% currently and a reduced rate applies to the first 15,000 Euro of the
taxable profit of Small and Medium Enterprises and much higher rate previously. The said
action has been taken by the country to make it investment attractive, inflow of foreign funds
and rapid growth of Economy. Further, Republic of Portugal is currently undergoing a drastic
phase of Brexit, which is lower down its economic growth on year on year basis. Further, the
tax is levied on worldwide profits and gains with credit for overseas tax paid.
In addition, taxable income in Portugal is imposed on trading income, capital gains and
passive income. In addition, the country does distinguish between capital gain and corporate
income as capital gain tax in Portugal. Further, normal business expenses shall be deducted to
arrive at the profitability
Other incentives that are offered by the tax jurisdiction encompass the following:
 Trading losses can be carried back for a period of five years and the losses used in any
year should not exceed 70 percent of the taxable profit.
 Dividends are exempt from taxation under participation regime and apply to 25 percent
for the non-resident.
 There is a Surcharge tax levied on the taxable profit 3 percent for profit over Euro 1.5
million and up to Eur7.5 million 5% on profits over EUR 7.5 million and up to EUR 35 million;
and 9% on profits if it exceeds EUR 35 million;
 There is no Alternative Minimum Tax in the economy;
 Expenditure on certain revenue items, royalties, certain buildings and plant and
machinery which are in relation to R&D shall get a benefit of 25% on volume basis;
No capital Duty tax is applicable in Portugal;
 No payroll tax etc
A brief snapshot of the tax regime is presented as under:
Sl. No Particulars Rate
1 Corporate Tax 21.0%
2 Capital Gain Tax Generally exempt/ 33-40%
3 Double Tax Avoidance Agreement Major Countries
4 Anti-Tax Avoidance Directive Yes
5 Controlled Foreign Companies Yes

6 Thin Capitalisation Rules Yes
7 Payroll Tax Nil
8 Alternative Minimum Tax Nil
(Deloitte Touche Tohmatsu Limited., 2019)
Italy: One of the major countries of Europe, which is compliant with IFRS/ GAAP/IAS and
Italian GAAP, major accounting standards of the World. The country is continuously
reducing its corporate rate of tax on year on year basis. The country has current corporate tax
rate of 24.0% currently and much higher rate previously. The said action has been taken by
the country to make it investment attractive, inflow of foreign funds and rapid growth of
Economy and there is no foreign exchange restrictions for transfer to funds to other major
countries and the non-residents can easily hold the foreign currency inside and outside the
country. However, there is one condition to the rule that the fund held outside the country or
transferred in the country without bank intermediary must be declared the same for the
taxable income purpose. Further, Republic of Italy is currently undergoing a drastic phase of
Brexit, which is lower down its economic growth on year on year basis. Further, the tax is
levied on worldwide profits and gains with credit for overseas tax paid.
In addition, taxable income in Italy is imposed on trading income, capital gains and passive
income i.e dividends, interest and royalties. Taxable income is also based on the income,
which is arrived at after certain adjustments done with the income part .Also; the country
does not do any distinguishment between capital gain and corporate income as both are
charged at the same rate of 24% of the corporate income tax. . Further, normal business
expenses shall be deducted to arrive at the profitability
Other incentives that are offered by the tax jurisdiction encompass the following:
 Trading losses can be carried back for preceding period of equal length and can be
carried forward indefinitely;
 Dividends paid to domestic shareholder are subject to tax regime of 1.20 percent and 26
percent if the dividend is distributed to the non resident.;
 There is no Surcharge tax in the economy;
 There is no Alternative Minimum Tax in the economy;
 There is no Branch remittance Tax.
 There is no capital acquisition tax
 Deductions on certain employment income, contribution towards social security scheme
dependents deductions are also available in computing taxable income.
 No payroll tax etc
A brief snapshot of the tax regime is presented as under:
Sl. No Particulars Rate
1 Corporate Tax 24.0%
2 Capital Gain Tax 20%
3 Double Tax Avoidance Agreement Major Countries
4 Anti-Tax Avoidance Directive Yes
5 Controlled Foreign Companies Yes
6 Thin Capitalisation Rules Yes
7 Payroll Tax Nil

8 Alternative Minimum Tax Nil
(Deloitte Touche Tohmatsu Limited, 2019)
Finland: One of the major countries of Europe, which is compliant with IFRS/ Finnish
GAAP and IAS, major accounting standards of the World. The country is continuously
reducing its corporate rate of tax on year on year basis. The country corporate tax rate is 20%
. The said action has been taken by the country to make it investment attractive, inflow of
foreign funds and rapid growth of Economy. Further, in Finland resident are taxed on the
basis of worldwide income and non residents are only taxed on the basis of Finnish source of
income on the basis of their permanent establishment in finland.Further, the tax is levied on
world-wide profits and gains with credit for overseas tax paid.
In addition, taxable income in United Kingdom is imposed on trading income, several non-
trading income in basket form and capital gains. The expense, which the company incur in to
generate profit, is deducted to arrive at the taxable income.
Other incentives that are offered by the tax jurisdiction encompass the following:
 Qualifying capital expenditure on plant and machinery shall be allowed to be written
down at 8% and 6% in current year. An alternative is also provided in the form of written
down value method at the flat rate of 18%;
 Payment of interest to the non residents are generally exempt from tax;
 Exemption of receipt of dividend to most Finnish resident received from another Finnish
company with few certain exceptions, only the dividend received from all other countries
are taxable in nature;
 Capital gain is generally treated as the ordinary income and taxed at the normal corporate
rate of 20 percent .However certain gains are exempt if they do satisfy certain criteria;
 There is no Surcharge tax in the economy;
 There is no Alternative Minimum Tax in the economy;
 Trading losses can be set-off against the profit without any restriction;
 Losses can be carried forward for a period of 10 years but the carry back in losses are not
permitted.
 Payment of foreign tax by the Finland residents may be credited against Finnish tax
assessed but the credit can be availed only up to the amount of tax payable in Finland
and the rest amount can be carried in forward for a period of five years.;
 No payroll tax etc
 No technical service fees are levied.
 No Branch remittance tax.
A brief snapshot of the tax regime is presented as under:
Sl. No Particulars Rate
1 Corporate Tax 20%
2 Capital Gain Tax Generally exempt/
3 Double Tax Avoidance Agreement Major Countries
4 Anti-Tax Avoidance Directive Yes
5 Controlled Foreign Companies Yes
6 Thin Capitalisation Rules Yes
7 Payroll Tax Nil

8 Alternative Minimum Tax Nil
(Deloitte Touche Tohmatsu Limited, 2019)
(OECD, 2019)
The above graph depicts the various countries reduction in the rate of corporate income tax
and the flow of foreign funds from different countries and the reduction in the rate of tax and
the inflow of funds from another country also benefits a lot as it can create many jobs for the
people and youth in that country, bring new technologies and create new employment and
infrastructure and promote growth This also helps in the increment of the GDP of the
country. The increase in the domestic income is shared with the government and the policy
makers of tax continuously re examine the taxation system in order to ensure that there is no
decrease in the flow of foreign funds and the taxation system is very much attractive so that is
a continuous growth in the economy and the system .
References:
Deloitte Touche Tohmatsu Limited. (2019, April 20). International Tax Finland Highlights 2018.
Retrieved from www2.deloitte.com:

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-
finlandhighlights-2018.pdf
Deloitte Touche Tohmatsu Limited. (2019, April 20). International Tax Finland Highlights 2018.
Retrieved from www2.deloitte.com:
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-
finlandhighlights-2018.pdf
Deloitte Touche Tohmatsu Limited. (2019, April 20). International Tax Ireland Highlights 2018.
Retrieved from www2.deloitte.com/:
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-
irelandhighlights-2018.pdf
Deloitte Touche Tohmatsu Limited. (2019, April 20). nternational Tax Italy Highlights 2018. Retrieved
from www2.deloitte.com/:
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-
italyhighlights-2018.pdf
Deloitte Touche Tohmatsu Limited. (2019, April 20). International Tax Portugal Highlights 2018.
Retrieved from /www2.deloitte.com:
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-
portugalhighlights-2018.pdf
Deloitte Touche Tohmatsu Limited. (2019, April 20). www2.deloitte.com. Retrieved from
International Tax United Kingdom Highlights 2019:
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-
unitedkingdomhighlights-2019.pdf
OECD. (2019, April 20). Tax Effects on Foreign Direct Investment. Retrieved from www.oecd.org/:
https://www.oecd.org/investment/investment-policy/40152903.pdf