Unit 3 - Taxation of Companies PDF

Advanced Taxation Taxation of Companies  Presentation Outline 1. Identify an activity as a trade or otherwise 2. Apply the ‘wholly and exclusive’ rule for:  allowable expenses/income  disallowable expenses/income 3. New Tax Measures 4. Explain how interest is treated in...

Advanced Taxation Taxation of Companies  Presentation Outline 1. Identify an activity as a trade or otherwise 2. Apply the ‘wholly and exclusive’ rule for:  allowable expenses/income  disallowable expenses/income 3. New Tax Measures 4. Explain how interest is treated in computing Corporation Tax. 5. Discuss taxation implications and treatments of the following:  Preference dividends  Investment Income  Tax losses  Payment of Tax and Estimated Tax Income from Trade, Business, Profession & Vocation Accounting Profit The accounting profit must be adjusted to determine the profits assessable to tax. Books of Accounts Section 89 of the Income Tax Act states that: Proper books of accounts must be kept in English The books must contain records of all transactions to ascertain profit or loss. Books must contain day to day details of : Cash received and paid Statements of annual stocktaking (where relevant) Accounts of all goods sold and purchased  Income from Trade, Business, Profession & Vocation Method of Accounting  Accruals vs Cash basis  Willingdale vs Int’l Commerical Bank (UK, 1977) “realised” Year of Assessment  Year of Assessment is defined as the period of twelve months beginning on the first day of January each year.  “Permitted accounting date” Measuring Income  Income is gross receipts less the cost of earning them.  Trading Income vs Capital receipt. Allowable Expenditure  Allowable Expenditure Interest on money borrowed for capital employed  Interest on the amount borrowed to invest in a business for a long term basis is an allowable expense. Rental, Repairs of building, Plant and Machinery  Rent is an allowable expense when the rented premises are used to produce income. Apportioned based on the part of the premises used for trade.  Repairs to an asset are allowable but if the repairs are so extensive that a new asset has evolved, the amount may be considered a capital expense, which is not allowable.  If repairs are done immediately after purchase, it may be seen as capital expenditure.  Allowable Expenditure Disbursements related to Employees  Wages and salaries, NIS, HEART, NHT contributions, education tax, are allowable deductions.  Employer advances commissions or salary to an employee vs. a loan to an employee.  Severance pay can be deemed an expense “wholly and exclusively incurred in acquiring the income. Contributions to an approved retirement fund.  Ordinary annual contributions to an approved superannuation scheme in which the contribution is not more than 20% of the remuneration of the employee are allowable deductions.  Allowable Expenditure Bad Debts  Debts due to the taxpayer – Specific debts that are incurred in the generation of income is allowable.  Debts payable by the taxpayer – The amount of the debt forgiven should be treated as income for that period. Advertising  Provided advertising is for the business it is an allowable expense. No deduction is allowed for creating permanent structure, e.g. advertising billboard.  Allowable Expenditure Business entertainment  Entertainment of customers or clients is allowable if it is wholly and exclusively incurred in acquiring the income. Education  Payments made by a trader, for the purpose of technical education related to the trade or business may be allowed. Insurance  Insurance premiums on policies of indemnity in respect of the business are allowable deductions.  The full amount recovered under an insurance policy is a trading receipt and must be added to profit for income tax purposes.  Allowable Expenditure Legal and Professional fees The general principle is that legal expenses of a revenue nature are allowed as deductions but the expenses of acquiring capital assets are not allowed. Examples of legal expenses not allowable are: Cost of purchasing fixed assets or “an enduring advantage” Cost in respect of business set up. Expenses in connection with issuing shares, debentures or loans. Cost in respect of fraud, irregularities or breaches of the law Expenses in connection with tax. Subscriptions Subscriptions that are wholly or exclusively for business purposes are allowed.  Allowable Expenditure Donations  Donations to approved institutions established and operated exclusively for charitable or educational purposes are allowable.  The total amount of approved donations may not exceed 5% of statutory income in the year of assessment. Foreign Exchange Losses  Foreign exchange losses are allowable if the related transactions are of a revenue nature. Expenditure Not Allowable Section 15 sets out some expenses excluded by the Income Tax Act:  Domestic or private expenses  Any capital withdrawn  Any capital employed in improvements  Any loss not connected with or arising out of the trade.  Rent of, or cost of repairs to, any premises or part of premises not paid or incurred for the purpose of producing the income. Taxation of Companies  Taxation of Companies Employment Tax Credit (ETC)  An incentive for prompt payment of the statutory deductions from employees. Effective from January 2014  Employers must file and pay their monthly payroll taxes on or before 14th of the following month.  The following conditions apply: 1. The amount of ETC claimed each year must be equivalent to the total amount of payroll deductions and contributions. 2. The deductions must be declared and paid on time and in full. 3. The tax credit is restricted to 30% of the income tax chargeable. 4. ETC may not be claimed on any non-trading income, such as interest and dividend income.  Unused ETC cannot be carried forward and offset against any income tax chargeable.  Regulated companies are not eligible for ETC  Claw back of the ETC claimed  Taxation of Companies Interest Paid and Received Interest payable and receivable is brought into the tax computation on an actual basis. The interest actually has to be paid, and not accrued. Ordinary Shares and Ordinary Dividends Currently taxed at 15%.  Taxation of Companies Interest on Preference Shares & Preference Dividend  Fixed rate preference dividend paid is treated as an allowable deduction for companies on the stock exchange.  Companies not on a recognized stock exchange may treat preference dividend as an interest payment. o To the extent that the paid- up preference share capital does not exceed a half of the remaining paid up ordinary share capital. o Provided the rate of dividend of the preference shares appears to be reasonable by the commissioner of tax. o Provided that shares issued on or after 16th of June 1970 were issued for new consideration equal with the value of the shares.  Taxation of Companies Franked Income  The Act states that where a corporate company distributes income to another corporate company which is subject to tax, deducts tax at source, the income is described as “franked income”.  Illustration  A resident corporate company makes a distribution: i. To a major shareholder (holding in excess of 25%) – No withholding tax. The recipient should account for the tax at nil. ii. To a shareholder whose holdings is less than 25% - Tax should be withheld at 15%. iii. To a shareholder who resides overseas – Tax should be withheld at 25% or 33 1/3% or Treaty rate. iv. Where the dividend is paid within a group of companies, (by a resident to a resident) to shareholders holding 25% or more of the voting rights the rate of income tax payable shall be nil.  Taxation of Companies Tax Losses  Where the company has a tax loss which has been agreed with the tax department, it may carry forward the loss indefinitely and set it off against future years’ taxable profits (if any).  The deduction allowed for prior year losses is 50% of the net income for the respective year.  Carry- back of tax losses is not permitted. Company making a loss  Where a company ends its financial year with a trading loss, to calculate the tax position, the loss will be decreased by amounts for items not allowable such as depreciation and will be increased by amounts allowable.  Taxation of Companies Effective Tax Rate  The effective tax rate is the ratio of tax liability to accounting income before tax, expressed as a percentage.  The charge to tax may be reduced by capital allowances and interest charges. On the contrary, the profit chargeable to tax may be increased by a company realizing currency gains for example in addition to its operating income.  Having an effective tax rate below the standard tax rate is suggesting that management is able to minimize the amount of tax they pay.  Taxation of Companies Payment of Tax and Estimated Tax  Companies and individuals who compute profits from trades, businesses or professions pay estimated tax in four quarterly instalments.  Taxes are paid on 15th of March, 15th of June, 15th of September and 15th of December in the year in which the profits are being earned.  The estimated tax is based on the chargeable income of the previous year or on a projected basis if the income is likely to be less. Questions & Answers THE END