Question

Now that you are reviewing the Financial statements of corporations - it is time to see the impact of Corporate Taxes on the companies profitability. Remember, if the Earnings go to the Government - they don't go to the stockholders/owners. Research the corporate Tax rates in 2016 and discuss the different tax bracket on corporate earnings.

How much Federal Tax would the largest corporations pay? keep in mind this is before any State corporate taxes. If a corporation had $800 million in earnings in 2016 - how much would they have paid in Federal taxes?

Research "tax inversion" - which was being done prior to 2017 - explain what it is, why companies engaged in it and provide some examples. Was it worth moving?

Examine The Tax Cuts and Jobs Act (TCJA) of 2017 - what did it do for corporations? Did this create and incentive for corporations that were holding Trillions overseas to bring it back to the US? Has this affected the American businesses and the stock market?

Answer 1

Corporate earnings

2016

Corporate income tax rates

There was a multi-structure corporate tax rates levied at different slab rates in 2016

Taxable income	Tax
0-50000	15%
50001-75000	7500+25% over 50000
75001-100000	13750+34% over 75000
100001-335000	22250+39% over100000
335001-10000000	113900+34% over33500
10000001-15000000	3400000+35% over10000000
15000001-18333333	5150000+38% over 15000000
Over18333333	35%

The said rates are slab rates and hence step wise tax will; be applicable suppose income is 335000, then on income

Slab	Difference	Difference amount	Rate	Tax value
0-50000	=50000-0	50000	15%	7500
50001-75000	=75000-50000	25000	25%	6250
75001-100000	=100000-75000	25000	34%	8500
100001-335000	=335000-100000	235000	39%	91650
				113900

Any income above Rs 335000 upto Rs 10000000 will be taxed at 113900 plus applicable rates i.e. 34% and so on

Personal service corporations are taxed at 35% flat

The largest corporation will pay at a flat rate of 35% over its total earnings ignoring slab rates

If the income is $ 800 million tax as per 2016 slab rates would be flat 35% on total taxable income i.e.280 million

Tax inversion

Tax inversion is a form of tax avoidance where a company restructures itself such that the current parent is replaced by a foreign parent and original company becomes the subsidiary of the foreign parent, thus moving its tax residence to foreign country thus reducing income tax burden

The original shareholders remain a majority control of the post inverted company.

Companies who received significant portion of income from foreign resources adopt this as a strategy

The destination country will have lower tax and more favourable regulatory environment than domestic country

Example:

Burger king shifted its tax residence from US to Canada in 2014 by combining with Tim Hortons

Untill 2017 US followed global tax system. US company that earned foreign income would have to pay foreign income tax as well as additional tax when income was brought back equivalent to the tax difference

Before 2017, US companies paid corporate tax of 35% on all income earned in US and abroad but credit was available against US tax liability for the amount of foreign taxes paid.

Tax cuts and Jobs act, 2017 reduced the yop income tax rate from 35% to 21% bringing the US tax rates below average from most organisations for economic co-operation and development countries. It also increased deduction limits for depreciation on new investment purchases. It also changed tax system where worldwide income of US was only taxed on income earned within US.

Earlier to this act tax system, was referred to as world wide tax meaning any business incorporated in US will have to pay 35% tax on all incomes from US and other foreign countries as well

It changed the way in which US based global companies would be taxed on their foreign income, referred to as territorial tax system.

This reform helped incentivized large corporations to bring back their foreign earnings to US

The TCJA eliminated taxes on repatriation of foreign income, thereby ending incentives for US companies retaining assets overseas. Also it imposed a minimum tax of 10.5% on certain foreign source income and one time transition tax of 15.5% for cash assets and 8% non-cash assets accumulated in foreign before 2017

Thus, it brought over more than $350 billion to US after tax cut