EKN310 Chapter 14 Notes
Company Income Tax
Why Company Taxation
Companies are separate legal entities
• A company has its own legal identity separate from shareholders.
• Even though shareholders own the company, the company operates
independently.
• Therefore, companies are taxed separately from shareholders.
Benefit principle
• Companies benefit from government services and should therefore pay
tax.
• Benefits include:
- law and order (stable environment in which to conduct
business)
- infrastructure (roads)
Reasons for taxing companies:
1) Preventing avoidance of personal income tax
o If companies were not taxed:
individuals could leave profits inside companies instead of
distributing them.
o The company’s value would increase and shareholders would still
benefit,
o But people would avoid paying personal income tax.
o Company tax prevents companies from becoming tax shelters.
2) Addressing market failures
o Some firms (like monopolies) earn excessive profits called:
economic profit / abnormal profits.
o Government can tax these excessive profits.
3) Administrative simplicity
o Companies keep proper records and audited financial statements.
o This makes company tax relatively easy to calculate and collect.
, o Company tax raises significant revenue.
Foreign investors and double taxation problem
• Foreign investors are taxed in their home countries on worldwide income.
• Example:
- German investor invests in a South African company.
- South Africa taxes company profits.
- Germany may also tax the investor.
- So the same income is being taxed twice.
• Solution: Double taxation agreements (DTAs)
- Countries sign DTAs to avoid the same income being taxed
twice.
- the home country gives a tax credit to the investor for tax
already paid abroad.
Company Tax Revenue
Company tax is important source of revenue but its declining.
Reasons for decline:
1. Expansion of other taxes
• As countries develop, tax bases expand
- personal income tax grows
- VAT/consumption taxes grow.
• These taxes become more important revenue sources.
2. Lower company profits
• Companies face rising costs: labour / regulations / compliance costs.
• Lower profits mean less company tax revenue.
3. Tax avoidance/evasion
• Companies may: avoid tax legally / evade tax illegally / receive tax
exemptions
• This lowers revenue generated by company tax.
4. Structural changes in South Africa’s production
• Mining sector in SA used to be very important - used to dominate the
economy.
Company Income Tax
Why Company Taxation
Companies are separate legal entities
• A company has its own legal identity separate from shareholders.
• Even though shareholders own the company, the company operates
independently.
• Therefore, companies are taxed separately from shareholders.
Benefit principle
• Companies benefit from government services and should therefore pay
tax.
• Benefits include:
- law and order (stable environment in which to conduct
business)
- infrastructure (roads)
Reasons for taxing companies:
1) Preventing avoidance of personal income tax
o If companies were not taxed:
individuals could leave profits inside companies instead of
distributing them.
o The company’s value would increase and shareholders would still
benefit,
o But people would avoid paying personal income tax.
o Company tax prevents companies from becoming tax shelters.
2) Addressing market failures
o Some firms (like monopolies) earn excessive profits called:
economic profit / abnormal profits.
o Government can tax these excessive profits.
3) Administrative simplicity
o Companies keep proper records and audited financial statements.
o This makes company tax relatively easy to calculate and collect.
, o Company tax raises significant revenue.
Foreign investors and double taxation problem
• Foreign investors are taxed in their home countries on worldwide income.
• Example:
- German investor invests in a South African company.
- South Africa taxes company profits.
- Germany may also tax the investor.
- So the same income is being taxed twice.
• Solution: Double taxation agreements (DTAs)
- Countries sign DTAs to avoid the same income being taxed
twice.
- the home country gives a tax credit to the investor for tax
already paid abroad.
Company Tax Revenue
Company tax is important source of revenue but its declining.
Reasons for decline:
1. Expansion of other taxes
• As countries develop, tax bases expand
- personal income tax grows
- VAT/consumption taxes grow.
• These taxes become more important revenue sources.
2. Lower company profits
• Companies face rising costs: labour / regulations / compliance costs.
• Lower profits mean less company tax revenue.
3. Tax avoidance/evasion
• Companies may: avoid tax legally / evade tax illegally / receive tax
exemptions
• This lowers revenue generated by company tax.
4. Structural changes in South Africa’s production
• Mining sector in SA used to be very important - used to dominate the
economy.
