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Chapter 14 - Company income tax, capital gains and income tax reform
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Company income tax, capital gains and income tax reform
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CHAPTER 14Company income tax, capital gains tax and
income tax reform
14.1 Why company taxation?
Reasons for taxing companies:
o Companies are separate legal entities → taxed independently from
shareholders.
Owned by shareholders but have their own legal identity and
operate independently from shareholders.
o Companies receive benefits and privileges from government →
accordance with the benefit principle = taxed for these benefits.
Benefit from law and order → stable environment within to conduct
business and from the infrastructure they use.
o If companies were not taxed → individuals could retain company profits
instead of distributing them to shareholders → will accumulate value if
distributed.
In the process, individuals would have opportunities to limit
personal income tax liabilities.
o Address market failures → taxing the excessive profits of imperfectly
competitive firms (e.g. economic or abnormal profits of monopolies).
o Administratively simple tax and generates significant revenue →
companies keep financial records and often have audited statements →
calculations of taxable income and tax liabilities relatively easy.
o Foreign investors are taxed on their investment income in their home
countries according to the residence basis of taxation.
Company tax → host country of the company also derives revenue
which would otherwise accrue to foreign investors and their home
governments.
, To avoid double taxation, countries enter into double taxation
agreements → home country credits taxpayers with taxes paid on
business income in the host country.
Corporate tax is a significant but declining source of revenue.
o Reasons for decline in revenue generated from company tax:
Countries develop economically → consumption and personal
income tax bases expand → become more significant for raising
revenue.
Decline is attributable to the expansion in other tax bases
and their growing shares in total revenue.
Declining profit margins of companies → a result of cost pressure
→ e.g. labour cost → regulatory environment is expensive to
comply with etc. → the effect of these cost pressures = drive profits
lower.
Tax exemptions for companies/tax avoidance and tax evasion
behaviour → causing a decline in the share of company tax in total
revenue.
Take notice of structural changes in SA’s production structure
concerning importance of mining sector.
Mining companies used to the bedrock of the SA economy
→ but as the share of the mining sector in production has
declined → so has the contribution to tax revenue.
o Despite the decline → company tax in SA is used very intensively
compared to other developing countries.
14.2 The company tax structure
Company income tax base → incorporated or unincorporated
o Incorporated businesses are companies → both private and public
companies, state-owned companies and non-profit companies.
o Unincorporated businesses → sole proprietorships and partnerships.
o Incorporated category → SA makes a distinction between mining
companies and non-mining companies.
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