Reduction in Corporate Tax and Foreign Investment Inflow

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