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Business and Finance

Corporate Tax And Fiscal System

Introduction

A tax that is imposed on the net income of the company. Companies and organizations that are United Kingdom-based must pay a corporate tax on all of the taxable profits. It does not matter where the profits are coming from. In order to ensure that the company is paying necessary taxes, it must register for corporation tax as part of establishing a private limited company. A corporation tax must be paid by a particular date. One of the responsible things seen is paying out a fair amount of tax to the government so that they can use this money in social welfare projects, social security projects, health, public investment in infrastructure, and education. There was a time when government spending have been cutted down which had a real impact on the daily lives of the people. Some say that it is indefensibly immoral for multinational companies to avoid paying out taxes. Organizations that are in close supplier and customer relationships avoid paying out a fair amount of tax (Cen et al., 2017). An executive of firm who is engaged in one of the leading republican parties of UK subjects to pay lesser amount of tax then the original amount (Christensen et al., 2015). A study conducted on investigating determinants and consequences of avoidance of tax in public trading companies in the UK revealed that the amount of pressure exerted by the public from outside activist groups could impose a strong influence on the behavior of large public trading companies (Dyreng et al., 2016). It has been found evident that the information provided by the third party on tax helps the government to impose the rate of tax (Klevin et al., 2016). It has been found evident that Corporate social responsibility activities reduce tax avoidance (Lanis & Richardson, 2015).

Government spending and taxation that influences the national economy of the country is termed as the fiscal policy. Fiscal policy usually shows the priorities of individual lawmakers. The local needs of constitutes overrule national economic priorities. This is one of the reasons why fiscal policies always come under discussion at the state or country level. When the future and current performance of the earnings is low for the organizations, then social responsibility activities are positively associated with tax avoidance (Watson, 2015). There are two main types of fiscal policy. One is the explanatory type, which explains the stimulation of economic growth. In the contraction phase of the business cycle expeditionary fiscal policy is very crucial. In most of the Euro area countries fiscal policy has been found dominated by the measures implemented under the institutional setting of growth and stability pact (Truger, 2015).  This is one of the situations when voters claim to clamor for relief from recession. In these situations, the government cuts taxes and spends more. Main idea behind doing this is to put money into the hands of the consumers that will come again into the business which will create job opportunities in the market. Expansionary fiscal policy is not followed by the city or state level as they have a balanced budget system. The policy that slows down the economic growth rate is termed a contractility fiscal policy. One of the main reasons for using this fiscal policy is to stamp out inflation.

Fiscal Policy Tools

Fiscal system has a very important role to play in the reduction of inequality and has interventions to enhance the improvement of distribution of wages (Woolard et al., 2015). Taxes and spending are the two main tools of fiscal policy. Taxes influence the economy by determining how much money has to be spent by an individual and how much money has to be spent by the government in certain areas. Spending is another type of fiscal policy used by the government when it wants to give an economic boost to a particular area or sector (Cordes et al., 2015). One of the things that makes tax unpopular is that taxes cuts down one’s income and he or she has less income to spent on themselves. Another word for spending is subsidiary, whose main aim is to provide money in the hands of the consumers so that they can spend more. It has been found evident that monetary policy aids fiscal policy during the inflation of 1980 in America (Bianchi & Illut, 2017).

Current Developments in Corporate Tax

From 1st April 2017, the normal tax rate on corporate tax is 19% which the government of UK is playing to reduce down to 17% by 2019. In history, it was about 30%. The declining tax rate is not concentrated on multinational firms but on domestic firms as well (Dyring et al., 2017). The same corporate tax is charged to all of the companies, no matter which sector they are operating in. However, certain regimes and treatments can proceed differently according to the size, along with R&D practices and transfer pricing. Diverted profit tax (DPT) is different from corporate tax, charged at 25% or 55% in the case of sources used that are UK-based. There are no provincial or local taxes on income. Howe ever, it has been seen that legislation authorities are planning to introduce a tax rate on this. One of the general rule of UK, the companies should pay withholding tax at 20% along with many exceptions like payment of interest made by the England company, those foreign companies whose owner is a resident of UK, payment of interest on quoted Euro bond, payment of interest that do not arises in UK or payment of interest paid by the UK bank. The domestic law of UK requires companies making payments on the basis of copyrights, patents and design royalties that may show up in UK are subject to make payments to deduct with holding tax of 20%. One of the other chances is that other royalties that may arise in the UK are subject to the same WHT rate. The table below shows the rate of WHT applicable to interests, dividends, and royalties under domestic UK law.

Resident Recipients   

Resident Recipient Interest (%) Royalties(%)
Corporations 0/20(1) 0/20(1)
Individuals 20 20

Source(Author)

If the recipient is chargeable to tax on royalty or income grounds then the payment to be made to UK can be free. Other corporate taxes include 3% for news, 5% for copyrights, 10% for Industrial, 15% on royalties, 0% on loans between businesses, and a lower rate of tax applied on equipment royalties and on TV, radio, and films. Below is the history of corporate tax from 2008 to 2018.

Source: Tradingeconomies.com

The corporate tax rate stands at 19% in UK in 2018, above table shows how it has been cutted down from 30% in 2208 to 19% in 2018. UK government has announced that by 2019, they will further cut it down to 17%.

Ethical and Strategic Issues faced by UK Companies

It is considered one of the healthy practices for a company to have a transparent and clear statement regarding their position on payment of the tax. These values are the backbone of the claim made by most companies regarding their operations according to their particular set of values and commitments. These companies consider tax as an issue in their code of ethics. Most of the companies operating in UK have a commitment of avoiding illegal tax evasions and following the rules and regulations of the country.

One of the main ethical issues faced by UK tobacco company is of issuing the research based on Tobacco (McCambridge, 2016).  After the assault of Iraq in 2003, Halliburton, which is the oil and gas company, linked with Dick Cheney (Former VP) and was accused of using illegal  resources for procuring billions of dollars in the light of government contracts for oil repair in the country.

Chevron Corporation, one of the successor companies of standard oils, has been accused of not paying a fair amount of taxes to the governments of countries where they were operating. Company has also been accused of with different environmental infraction in multiple countries across the globe. One of the most controversial accusations made by the company was the episode of November 1998 in Nigeria, when protesters took hostages against the company and the Nigerian soldiers were slaughtered. Chevron had an accusation of providing the facility for the transport of the soldiers. However, this accusation has been proven false in 2008.

Philip Morris International Inc. has been ranked fifth worst in the co-valence survey, although it is one of the world’s leading cigarette manufacturing companies. The company tried to persuade the government over the law that has been made regarding the tobacco industry to assertively cover the dangers of smoking.

One of the largest oil and gas companies operating in America is Occidental Petroleum Corporation. The company has been involved in countless disputes in multiple countries, including Colombia and Ecuador. In 2005, environmentalists got their sight on the company when it proposed to build a building that would go through the Ecuador National Park.

Michael O’Leary is the CEO of the Irish budget airline Ryanair. He is known for his unacceptable behaviors and aggressive cost-minimization methods. Employees of his company are not allowed to use the company stationary equipment like pens and are not allowed to charge their cell phones with their electricity. This is one of the main issues reported by the company employees. This is one of the reasons why his employees started leaving his company. He has also been known to get mean with customers. It has been reported that he yelled and cursed at an employee of the company who posed a request for reimbursement of medical charges he incurred while he was ill.

UK Resident and Non-Resident Companies

If a company is operating in the UK and using the resources of the country, and the owner of the company is also a UK resident, then it is said to be a UK-resident company. The tax rate on corporate profits is 20%, effective from 1st April 2015, and has been reduced from 21%. Those companies that are UK residents earning a profit of GBP 300,000 are subject to a tax rate of 20%; Marginal relief is applicable to companies making yearly profits between GBP 300,000 and 150,000. Marginal relief tax rates are applied on the basis of a rate between a small profit and the main corporate tax rate. Small profits rate is not to specific closely held investment companies. A UK-resident company is subject to corporate tax based on its profits coming from worldwide operations, chargeable gains, and income on assets used. Foreign profits arising from all permanent establishments of a UK resident company may be excluded. Profits made by the companies outside the home country would not be given to the UK because of  its government actions or foreign law, and then a deferral corporation tax can be claimed. A non-resident UK company is subject to corporate tax with respect to its profits from permanent establishments in the UK and the chargeable gains used or held by the PE. A 20% corporate tax will be charged on a non-resident UK company if it makes an investment using a UK source. Tax will be applicable if the company’s gains are made using UK residential property. 28% tax rate will be applicable where annual tax on enveloped dwellings has been paid or 20% in case of it has not paid.  Shipping companies may be subject to a tonnage tax under which profits from shipping activities are subject to corporation tax.

References

Dyreng, S.D., Hanlon, M., Maydew, E.L. and Thornock, J.R., 2017. Changes in corporate effective tax rates over the past 25 years. Journal of Financial Economics, 124(3), pp.441-463.

McCambridge, J., 2016. Ethical issues raised by tobacco industry‐linked research in the era of e‐cigarettes. Addiction, 111(8), pp.1334-1335.

Christensen, D.M., Dhaliwal, D.S., Boivie, S. and Graffin, S.D., 2015. Top management conservatism and corporate risk strategies: Evidence from managers’ personal political orientation and corporate tax avoidance. Strategic Management Journal, 36(12), pp.1918-1938.

Dyreng, S.D., Hoopes, J.L. and Wilde, J.H., 2016. Public pressure and corporate tax behavior. Journal of Accounting Research, 54(1), pp.147-186.

Kleven, H.J., Kreiner, C.T. and Saez, E., 2016. Why can modern governments tax so much? An agency model of firms as fiscal intermediaries. Economica, 83(330), pp.219-246.

Truger, A., 2015. The fiscal compact, cyclical adjustment and the remaining leeway for expansionary fiscal policies in the Euro area. Panoeconomicus, 62(2), pp.157-175.

Cordes, T., Kinda, M.T., Muthoora, M.P.S. and Weber, A., 2015. Expenditure rules: effective tools for sound fiscal policy? (No. 15-29). International Monetary Fund.

Cen, L., Maydew, E.L., Zhang, L. and Zuo, L., 2017. Customer–supplier relationships and corporate tax avoidance. Journal of Financial Economics, 123(2), pp.377-394.

Lanis, R. and Richardson, G., 2015. Is corporate social responsibility performance associated with tax avoidance?. Journal of Business Ethics, 127(2), pp.439-457.

Watson, L., 2015. Corporate social responsibility, tax avoidance, and earnings performance. The Journal of the American Taxation Association, 37(2), pp.1-21.

Bianchi, F. and Ilut, C., 2017. Monetary/fiscal policy mix and agents’ beliefs. Review of Economic Dynamics, 26, pp.113-139.

Woolard, I., Metz, R., Inchauste, G., Lustig, N., Maboshe, M. and Purfield, C., 2015. How much is inequality reduced by progressive taxation and government spending. Unpublished online manuscript.

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