Corporate Income Taxation: Issues, Trends and Need for Reform Question & Answer Sample

Question 1: what are the peculiarities of corporate income taxation

Corporate income taxation has several peculiar features that distinguish it from other forms, like personal income tax levied on individuals. One major peculiarity is the issue of double taxation. Under the corporate income tax system, profits earned by a company are first taxed at the corporate level when it files its tax return (Petkova et al., 2019). Then, when these after-tax profits are distributed to shareholders as dividends, the shareholders will pay personal income tax on the dividends received. This results in the same corporate earnings getting taxed twice – first at the company level and then at the individual level when dividends are paid out. The personal income tax is thus levied on corporate profits already taxed under corporate income tax.

Another key feature of corporate income tax is that corporations are treated as separate legal entities from their shareholders for tax purposes. The company is considered a distinct legal person and is taxed independently (Petkova et al., 2019). Shareholders consequently have limited liability when it comes to the tax obligations and liabilities of the corporation. The corporate veil shields shareholders from the total tax liabilities of the company they invest in. This separation of the legal identity of the corporation is a central pillar of corporate income taxation.

In addition, most countries tax corporate income at significantly lower rates than personal income. The average corporate statutory tax rate in OECD countries is around 23.54%, while the top marginal individual income tax rate might rise to 45-50% in many countries (Halim & Rahman, 2022). The lower corporate tax rates are meant to promote business investment and activity and to compensate for the double taxation of corporate profits. However, this discrepancy between personal and corporate tax rates creates distortions and incentives for tax avoidance.

Question 2: Why levy corporate income tax?

Despite the many peculiarities and distortions created by corporate income taxes, governments continue to levy them due to the revenue they generate and other policy motivations. According to the OECD (2022) from the 2019 database, corporate income taxes account for around 15% of total tax revenue collected by governments on average in advanced economies; for developing nations, the contribution is even higher. So, corporate income tax is a significant source of funds for the public budget. The progressivity embedded in corporate taxes is another reason – successful large corporations pay higher taxes, enhancing overall progressivity.

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The benefits principle also provides a rationale for corporate taxes. Companies benefit extensively from public infrastructure like roads, the legal system, telecom networks, etcetera, created using taxpayer funds. Halim & Rahman (2022) highlight that corporations also benefit from public spending on education, healthcare, and law enforcement. So, the benefits principle suggests that companies should pay taxes to support the services they utilize.

Double taxation under corporate income tax encourages companies to retain a significant fraction of their earnings rather than distribute dividends. This gives governments more control over capital allocation in the economy since corporations retain more capital (Halim & Rahman, 2022). There are also political and economic motivations. Taxing corporations garner more outstanding public support and address perceptions about fairness in the tax system. Imposing taxes on large, powerful companies resonates with the public.

Finally, the corporate income tax is a vital backstop preventing individuals from sheltering income within corporations to avoid higher personal income taxes. Absent corporate taxes, high-income individuals would shift income to corporations. So corporate income taxes are still levied despite their distortions because they raise revenue, enhance progressivity, give government control over capital, win public support, and prevent tax avoidance (OECD, 2022). However, reforms are needed to improve the corporate tax system.

Question 3: Are there other taxes that can substitute the CIP?

Carriage and insurance paid to (CIP) is an incoterm applicable in international trade to outline the requirements and responsibilities for sellers and buyers in delivering goods. According to Trade Finance Global (2023), in CIP, the seller assumes the risk during the delivery of goods until they reach the first carrier, where the buyer takes over the responsibility and risk of damage or loss of the goods. CIP mostly outlines the terms of trade, particularly the freight and insurance costs of goods (International Freight Forwarding Company, n.d.). Hence, CIP mostly focuses on the responsibilities of various parties involved in shipping goods, making it less of a form of tax. It specifies the roles of sellers and buyers in delivering goods until they reach an agreed destination, outlining the transportation and insurance costs. CIP focuses on enforcing trade, making it challenging to have taxes that can directly substitute it. Notably, CIP offers guidelines that dictates where and when sellers should transfer the risk of goods to buyers and vice versa.

Nonetheless, various taxes and duties are suitable for CIP substitution in international trade. Taxes such as customs duties, value-added tax (VAT), and taxes related to imported products can substitute CIP in international trade. Various countries have their trade regulations for importing particular goods. Hence, the customs duties and VAT taxes might differ across countries.

Question 4: What are the recent trends in modifying the CIP in OECD countries?

CIP has proven effective in ensuring the smooth running of shipped goods to buyers from sellers since its establishment in 1936. Shipping goods across international borders faces various risks, such as damage and loss. The delivery of goods from the seller to the buyer has multiple carriers that increase the risk of damage or loss, making it challenging to determine the bearer of the risk. However, with the creation of CIP, an international trade term, sellers and buyers have clear risk transfer guidelines and ensure they are accountable for the goods during shipping to the agreed destination. Regarding recent trends in modifying CIP in OECD countries, CIP relates to international trade incoterms, which are rarely subjected to modifications by individual countries.

The rules under CIP are standardized and developed by the International Chamber of Commerce (ICC) to oversee international trade. CIP agreement, therefore, applies to all nations for buyers and sellers engaging in international transactions. Hence, the CIP incoterms are not subject to modifications within specific countries, including OCED countries. Also, CIP has remained unamended since its creation in 1936 by the ICC. However, it was updated in 2020 when the chamber ruled that the standard insurance under CIP be instituted to cargo clause A for extensive coverage. Therefore, the ICC has not given any country, including the OECD countries, the mandate to make CIP modifications, and hence, the recent trends can only be understood from the ICC perspective.

References
Bivens, J. (2022). Reclaiming corporate tax revenues. Economic Policy Institute. https://epi.org/247534
Keightley, M. P., & Marples, D. J. (2023). An overview of the corporate income tax system (R47519). Congressional Research Services. https://crsreports.congress.gov/
Mengden, A. (2023, October 19). International tax competitiveness index 2023. Tax Foundation. Retrieved November 4, 2023, from https://taxfoundation.org/research/all/global/2023-international-tax-competitiveness-index/
Tax Foundation. (2023, August 25). What is the corporate income tax? Retrieved November 4, 2023, from https://taxfoundation.org/taxedu/glossary/corporate-income-tax-cit/
Trade Finance Global. (2023, February 9). Carriage and insurance paid to (CIP). Retrieved November 4, 2023, from https://www.tradefinanceglobal.com/freight-forwarding/incoterms/cip-carriage-insurance-paid-to/

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