How to Calculate Corporation Tax?

Corporate tax is one of the primary sources of income for the budget of most countries. This article will explain how to calculate corporation tax.

What is corporate tax?

If you do business abroad or have counterparties from abroad, you are faced with the definition of “corporate income tax.” So, how does it work? Corporate tax is a tax liability that legal entities incur after receiving income in a financial period, usually one calendar year. In other words, this tax element is levied on companies’ income and other legal entities. Through this type of tax, the organization in question declares its economic viability since it claims to have received payment. This tax provides an integral part of the government’s income and, therefore, can be considered additional to personal income tax within the fiscal panorama.

Corporate tax is levied on various legal entities such as companies, associations, groups, foundations, and institutions. In addition, it is also legally applicable to other entities present in economic reality, such as funds (for example, investment or pension funds). The corporate tax also affects those organizations that reside or are tax domiciled in the country. Of course, this type of tax also applies to limited liability companies or self-employed persons, including those who have the status of an autonomous entity.

Corporate tax can be:

  • direct, 
  • personal
  • periodic, 
  • personal income tax (IRP). 

Although, unlike the IRP, the corporate tax rate is proportional. It does not increase as profit increases. All companies pay the same tax rate. Of course, the more benefits received, the more the amount will be paid out in terms of money.

How to calculate corporation tax?

The basis for calculating the tax in most countries is the amount of income reduced by the amount of total spending. Corporate taxpayers are usually recognized as:

  • residents of the country, that is, organizations registered as legal entities in the territory of this country and having a permanent legal address in it;
  • non-residents carrying out commercial activities through a permanent branch or representative office in this country.

Corporate tax for residents

The simplest option is that your company is a resident of the taxpayer country, or you have your full-fledged permanent representative in this country. Then, for all income that you receive from such activities, you pay tax to the budget of a foreign state.

As a rule, corporate tax is calculated based on the results of 12 months. However, some countries provide for the payment of advance payments. At the end of the year, the company calculates the net income received, calculates tax payable, and submits a corporate income tax return. Depending on the country, it is given from 3 to 9 months after the expiration of the period. A company that has not filed a declaration on time and has not transferred tax to the budget pays a fine. A foreign company operating through a permanent establishment pays tax in the same manner as a resident company.

Corporate tax for non-residents

The tax payment procedure is somewhat more complicated for non-resident companies that do not have a permanent establishment in the territory of the tax recipient state. According to international laws, income received by such companies abroad is not subject to tax but becomes the basis for the formation of income tax. In some states, tax agents are required by law to withhold corporate income tax on all income paid to counterparties for works, services, and goods, unless the counterparty provides at the time of payment a certificate stating that he is a resident of a foreign state and does not confirm that he is the final recipient income.

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