How Companies And Business Taxes Are Determined

by Adriana Noton | 12th April 2011

Business taxes are sometimes referred to as corporate tax or entity tax. Corporate tax is a levy imposed on the profit of a particular entity or cooperation by the state or a government. Different countries have different rates and mechanism for calculating this though they are mostly similar.

Simply put entity tax is levy that a company has to pay to a government. This happens in virtually all countries. Most countries have different jurisdiction to implement this. The tax or levy is usually imposed on the incomes of the company or its profits. Corporate tax can include income tax and other tax.

There are countries where corporate taxation is done through the dividends of the corporation or other distribution by the entity. The tax is more often than not imposed on the net taxable income. This is usually a detailed financial statement income with a few modifications on it. The statement may have alteration, these can be on assets, payroll and so on. This will depend on the particular entity in question.

In some countries, there is a system where some certain cooperate activities are not levied by the government. These activities could be aimed at formation or founding of a given entity. Reorganization of a corporation or entity is another activity that is not taxed. In certain cases the state provides special procedure and rules of levying a business and its members. These procedures normally apply in instances where a company is winding up or an entity is being dissolution.

In other systems of taxation items that are characterized as interest are normally taxed while those characterized as dividend are not. Generally different governments have adopted a particular way of calculating the tax each entity is supposed to pay. An example of this rule is the debt to equity ratio. Debt to equity ratio is a financial ratio showing the relative proportion between equity provided by the share holders and the amount of debt that was used to finance the assets of a company.

In some systems, the government offers tax relief to various businesses and entities. A government that wants to improve the general health of technological entities or agricultural business may offer tax relief to entities involved in these businesses . This it usually as an incentive to lure more investors and keep the ones already in these field.

Most system of taxation also tax company share holders on their distribution of earnings such as dividends. Other systems of taxation provide a partial integration of the business and its members taxation. These systems do imputation system where they track credit.

In the recent past there was a system where the tax of members was normally paid by the company this is not what happens these days. Many taxation system especially those with country level taxation systems have taxation based on the attributes of an entity. These could be the capital stock, of the company either by its value or by the number of shares issued. The total equity that the company holds is also another attribute. The net capital that the entity holds is also sometimes factored in. When determining business taxes these are just some of factors that are normally considered.

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