Comparative Corporate Tax: Tax Base Issues


  •  Income:
    • Comparison:
      1.  Australia:
        • ITAA 1997 s. 4-1  Income tax is payable by each individual and company, and by some other entities.
          • ITAA 1997 s. 4-10(1) You must pay income tax for each financial year.
            (2) Your income tax is worked out by reference to your taxable income for the income year…
          • ITAA 1997 s. 4-15(1) Work out your taxable income for the income year like this: taxable income = assessable income – deductions.
          • ITAA 1997 s. 6-1(1) Assessable income consists of ordinary income and statutory income.
      2. UK: (accounting standards are not prescribed by law)
        • CTA 2009 s. 2(1)  Corporation tax is charged on Profits of companies… (2) … “profits” means income and chargeable gains [statutory concept, regulated in other Acts not accounting]…
          • CTA 2009 s. 1(2)… the charge to corporation tax on income has effect in accordance with…
            (a) Part 3 ([separately for] trading income)
            (b) Part 4 ([separately for] property income)
            (c) Parts 5 and 6 ([separately for, etc] profits arising from loan relationships)…
            (fa) Part 9A (company distributions), and
            (g) Part 10 (miscellaneous income).
          • CTA 2009 s. 35 The charge to corporation tax on income applies to the profits of a trade.
          • CTA 2009 s. 46(1) The profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for corporation tax purposes.
          • ‘Generally accepted accounting practice’ (GAAP) is defined by reference to section 1127 of CTA 2010. For companies using IFRS, GAAP is as prescribed by those standards.
      3. US: (accounting standards are not prescribed by law)
        • IRC s. 63(a)  … the term “taxable income” means gross income minus the deductions allowed by this chapter…
          • IRC s. 61(a) … gross income means all income from whatever source derived, including…
            (2) Gross income derived from business…
            Gross income is similar to gross profit, not gross receipts. Gross profit is the total of receipts from sales minus the cost of the goods sold; Regs Section 1.61-3(a).
      4. Germany:
        • Corporate tax base: global approach (all income is business income)
          • KStG s. 7(1) The corporation tax shall be assessed on the basis of taxable income.
            (2) Taxable income is income in the meaning of Section 8, Paragraph 1…
          • KStG s. 8(1) The provisions of the Income Tax Law and this act define what is considered income and how income is to be determined.
            (2) Unlimited tax obligations pursuant to Article 1, paragraph 1, no. 1-3 are all to be treated as income from business operations.
          • EStG s. 2(1) The income tax is levied on…
            2. Income from business activity…
            (2) Income is considered:
            1. as profit if from… business activity…
          • EStG s. 4(1) Profit is the difference in amount between the operating assets at the close of the accounting period and the operating assets at the close of the preceding accounting period…
          • EStG s. 5(1) In the case of traders who… are required to keep books and prepare financial statements regularly… the operating assets must be evaluated… [and] recorded according to the generally accepted accounting principles, unless a different adjustment is or has been made in accordance with the elections provided under tax law.
  •  Accounting
    • Should the corporate tax base follow financial accounts? No, because:
      1. Income tax law (at least in the UK) was introduced long before the addition of the registered company and even longer before registered companies were required to prepare and file accounts.
      2. Prior to 20th century, accounting remained very discretionary, inconsistent and underdeveloped
      3. Discretion. Accounting rules accept a range of results for particular transactions and positions. A tax law should be certain: 1) taxpayers should not have a choice as to how much income they declare; and 2) taxpayers should know what the tax consequences of a transaction will be before entering into it.
      4. Purpose. Accounts are prepared for investor and public consumption, and as a result, conservatism (prudence) can be important. In tax law, the focus should be on accuracy in comparing positions so as to promote fairness.
      5. Accounting Standards Boards, in many cases, are independent authorities. If tax law followed financial accounts, these bodies would have an ability to alter the tax base by altering their standards.
    •  Comparison:
      1. Australia: N/A
      2. UK:
        • Applies financial accounts but in different level, that is in ‘a trade’ level.
      3. US:
        • Although the US approach also has a global corporate tax base, the linkage with financial accounting is substantially weaker. Indeed, as a result of the basic tax base formula (gross income minus allowable deductions) there is no express legislative link at all. US tax law does prescribe that ‘[t]axable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books’. However, this is not a direct reference to generally accepted accounting principles, and the section goes on to provide for overriding the taxpayer’s books. (p 90)
      4. Germany:
        • Germany is a good example of a country where there is a close correspondence between the corporate tax base and financial accounts” (p 90)
  • Losses of an independent corporation
    • Three ways losses are used:
      1. The year incurred
        • Used in the year in which they are incurred.
        • Depends on whether an income tax law adopts a global or schedular approach to calculation of the corporate tax base)
      2. Carry back.
        • If a loss cannot be absorbed in the year incurred, that loss may be carried backwards to reduce the profits of previous years.
        • Many countries do not permit carry back because the mechanism often involves refund; Countries that permit loss carry-back have often restricted loss carry-back when lowering corporate tax rates [see Germany].
      3. Carried forward.
        • For how long those losses may be carried forward and what type of income they may be set against will depend on the tax law in question.
    • Comparison:
      • The year incurred
        1. Australia: N/A
        2. UK:
          • Schedular approach
            • Under CTA 2010 s. 37, losses incurred in a trade of a corporation may be set against any profits of the same year ….
            • Under CTA 2010 s. 37, losses incurred in a trade of a corporation may be set against any profits of the same year or …
            • Sideway relief: The UK has special rules specifying when a person with a loss from one activity may set that loss against the profits that the person derives from another activity.
            • “trading losses can be set against any income or capital gains of the corporation of the accounting period in which the loss is incurred.
            • capital losses cannot be deducted in calculating income (i.e. cap losses are quarantined, similar to the position in the US).”
        3. US:
          • global approach, but is partly schedularised through the quarantining of certain losses under section 165 of IRC
            • IRC (US) s. 1211(a) ‘losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges.
            • IRC (US) s. 1221 ‘Capital asset’ is defined in terms of ‘property’ but does not include trading stock, depreciable business assets, certain intellectual property and some other types of assets.
        4. Germany:
          • Global approach
            • EStG Art 10d(1) Losses, which are not set off upon determination of the total income, ……
      • Carry-back
        1. Australia: N/A
        2. UK:
          • One year (general) or three year (for terminated trade). Cannot be applied to property business loss and capital loss.
            • Under CTA 2010 s. 37, losses incurred in a trade of a corporation may be set against any profits of the same year or [any excess] the previous year.
            • CTA 2010 (UK) s. 39, There is a special three-year carry-back for losses incurred in the year in which a trade is terminated
            • A loss from a UK property business cannot be carried backwards. There is also no carry-back of capital losses.
        3. US:
          • Two years (revenue loss) or three years (capital loss)
            • IRC (US) s. 172(b)(1)(A):
              the US permits a carry-back of two years without such a limitation
            • For capital loss: IRC (US) s. 1212(a)(1)(A). An exception is capital losses, which may be carried back for three years
        4. Germany:
          • One year
            • EStG Art 10d(1) Losses, which are not set off upon determination of the total income, shall be deducted up to a total amount of EUR 1 million… from the total income of the directly preceding assessment period…
      • Carry-forward
        1. Australia: N/A
        2. UK:
          • Permanent carry-forward of unused loses. However, under the schedular approach, carried-forward trading losses may only be set against 1) profits; and 2)  of the same trade that made the loss (i.e. trading losses are quarantined when carried forward).
            • Under CTA 2010 s. 45, losses incurred before 1 April 2017 may be carried forward to set against profits of that trade (not any other one) [“a trade”] arising in later accounting periods.
            • CTA 2010 s. 45A, trading losses incurred after 1 April 2017 may be carried forward and set against the total profits of a later accounting period [no quarantine]. The trade must continue.
            • CTA 2010 269ZD, carried forward trading losses can be deducted fully from total profits up to £5m and after that are limited to 50% of the company’s total profits [8 m = 5 m + 50%x3]
        3. US:
          • 20 years (operating losses) or 5 years (capital losses)
            • IRC (US) s. 172(b)(1)(A) net operating losses may be carried forward for twenty years
              • IRC s. 172(a) There shall be allowed as a deduction for the taxable year an amount equal to the lesser of-
                (1) the aggregate of the net operating loss carryovers to such year… or
                (2) 80 percent of taxable income computed without regard to the deduction allowable under this section. [20% of taxable income must remain]
            • IRC (US) s. 1212(a)(1)(B) capital losses may be carried forward for five years only
        4. Germany:
          • 100% up to EUR 1 million; 60% the exceeds (but doesn’t cancel the loss)
            • EStG Art 10d(2) Losses, which are not offset, which have not been deducted in accordance with paragraph 1, shall be deducted in the following assessment periods up to a total unlimited amount of income of EUR 1 million, beyond this up to 60% of the total amount of income exceeding the EUR 1 million… (loss carry-forward) [not lose your loss, just cant use this year]
  • Group losses relief
    • Some ways to relief loss
      1. Pure consolidation
        • There is only the single tax base of the corporate group as a whole. As a result, a corporate tax system adopting pure consolidation simply applies the loss rules for an independent corporation to corporate groups (i.e. there is no need for special group loss relief rules).
        • Australia: Pure consolidation regime. US: check-the-box regime.
      2. Partial consolidation
        • The separate identity of corporations are collapsed only for certain purposes
        • US: consolidated return regime
          • Title 26 Code of Federal Regulations (US) § 1.1502–13(a)(2): group corporations are ‘treated as separate entities for some purposes [calculating income] but as divisions of a single corporation for other purposes [timing recognition of intra-group transactions; filing tax returns]). Losses of one group member offset the taxable income of another group member in arriving at consolidated taxable income.
      3. Loss transfer
        • Germany: the transfer of independent tax results of group corporations to the parent corporation (Organschat regime; see below)
      4. Group contribution
        • A group member makes a payment (deductible) to the loss-making company (income, reducing the losses).
        • Used in Finland, Norway and Sweden. (p 124)
    • Comparison:
      1. Australia:
        • Pure consolidation
          • ITAA 1997 s. 701-1(1) If an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the head company of the group, rather than separate entities, during that period.
          • ITAA 1997 s. 703-5(1) A consolidated group comes into existence… on the day specified in a choice by a company under section 703-50 as the day on and after which a consolidatable group is taken to be consolidated…
            (3) At any time while it is in existence, the consolidated group consists of the head company and all of the subsidiary members (if any) of the group at the time.
        • Definition of group: N/A
      2. UK:
        • Loss transfer
          • The surrendering company: : Under CTA 2010 s. 99 a corporation may surrender trading losses of an accounting period
            • Under CTA 2010 s. 188BB, a company may surrender losses carried forward under s. 45A (so not pre-2017 losses)
          • The claimant company: CTA 2010 s. 130(2) A company (“the claimant company”) may make a claim for group relief for an accounting period (“the claim period”) in relation to [surrendered] amounts (in whole or in part) if the following requirements are met.
          • Requirements:
            • The surrendering company consents to the claim.
            • There is a period (“the overlapping period”) that is common to the claim period and the surrender period.
            • At a time during the overlapping period:
              1. (a) the group condition is met (see section 131), [or]
              2. [(b)-(d) a consortium condition is met
            • A corporation can only surrender a loss of the current year, and a claimant corporation can only claim the loss to the extent of its corresponding current year. Loss = trading loss, not capital loss. (as for capital losses, however, it is possible to trade them, p 123).
            • A corporate group can also use current year losses of a group member against the total profits (i.e. any income or capital gain) of any other group member.
        • Definition of group:
          • 75% ownership (directly or indirectly); the parent must be a corporation
            • CTA 2010 s. 152 For the purposes of this Part two companies are members of the same group of companies if-
              (a) one is the 75% subsidiary of the other, or
              (b) both are 75% subsidiaries of a third company.
            • CTA 2010 s. 1154(3) B is a 75% subsidiary of A if at least 75% of B’s ordinary share capital is owned directly or indirectly by A.
      3. US:
        • Pure consolidation
          • IRC s. 1501 An affiliated group of corporations shall, subject to the provisions of this chapter, have the privilege of making a consolidated return with respect to the income tax imposed by chapter 1 for the taxable year in lieu of separate returns…
          • Consequences of consolidation-
            1. consolidated income is aggregation of taxable income of group members
            2. transactions between group members are recognised but deferred
            3. complex adjustments to cost base of shares in other group members
        • Definition of group:
          • 80% ownership; the parent must be a corporation
            • IRC s. 1504(a)
              • (1) The term “affiliated group” means-
                • 1 or more chains of includible corporations connected through stock ownership with a common parent…
                • but only if-
                  1. the common parent owns directly stock meeting the requirements of paragraph (2) in at least 1 of the other includible corporations, and
                  2. stock meeting the requirements of paragraph (2) in each of the includible corporations… is owned directly by 1 or more of the other includible corporations.
              • (2) The ownership of stock of any corporation meets the requirements of this paragraph if it-
                1. possesses at least 80 percent of the total voting power of the stock of such corporation, and
                2. has a value equal to at least 80 percent of the total value of the stock of such corporation.
      4. Germany:
        • Loss transfer
          • KStG s.14 If a European company, joint-stock company or partnership limited by shares with business management in Germany and headquarters in an EU Member State or EEA Member State (group-controlled company) is obliged to pay their entire profit to one sole other commercial business due to a profit transfer agreement as defined by Section 291, paragraph 1 of the Stock Corporation Act (AktG), the income of the group-controlled company [subsidiary] must be attributed to the holder of the enterprise (parent company)…
            • Requirements:
              1. The parent company must have a share in the group-controlled company from the start of its fiscal year which, as an unbroken block, entitles the parent company to majority voting rights (financial integration). Indirect participation must be recognised when the stake holding in each intermediate company grants the majority of voting rights…
              2. The profit transfer agreement must be signed for at least 5 years…
          • AktG (Germany) s. 293. The profit-sharing agreement is a legally binding agreement that requires the approval of 75% of the capital represented at a members’ meeting of the subsidiary.
          • The transfer of profits and losses occurs not only for tax purposes but is also reflected in the commercial accounts.
          • Subsidiaries still separately file tax returns, but their income is shown as transferred to the parent. If the parent holds 100% of the shares, the income of subsidiaries is thus reduced to zero.
        • Definition of group:
          • Two features: 1) solely based on voting power 2) Majority (>50%); the parent can be a corporation or individual/partnership/PE
            • KStG (Germany) s. 14(1)1. a ‘participation in the controlled company … such that the majority of the voting rights of the shares in the subsidiary are held’ by the controller [person to whom the profit or loss is transferred]




Hi, this article is summarised from Peter Haris’ “Corporate Tax Law: Structure, Policy and Practice (Cambridge Tax Law Series)”. If you wish to read the book, please click FREE PREVIEW from Amazon.

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