How do you compute corporation tax?
Corporation tax is computed in much the same way as income tax. Firstly, all the sources of income are assembled, with any deduction which is only allowable against a specific type of income being allowed against the particular income. The main differences with the income tax computation are:
(a) Corporation tax is computed for an accounting period (for example, the year ended 30 June 2013), whereas income tax is computed for a tax year (i.e. a calendar year, for example, 1 January 2013 to 31 December 2013). In practice, the trading part of an income tax computation is based on the profits of an accounts period ending in the tax year.
(b) Corporation tax is computed on income plus chargeable gains. Income tax is only computed on your income. In practical terms, this means that company can set a trading loss against chargeable gains. This is not possible for an individual, but it is unlikely to be something that you would want, as the setting off of a 41% loss against a gain would waste much of the benefit of the income loss.
(c) Corporation tax is largely payable (90%) one month before the end of the company’s accounting period, with the 10% balance payable nine months after the end of the accounting period. Income tax is payable on 31 October falling within the tax year.
(d) A company which is a member of a corporate group can surrender a loss to and have a loss surrendered to it by a fellow group member. An individual cannot do this.
In summary, the general format of the corporation tax computation is as follows:
PROFITS (income from all sources plus chargeable gains)
Less deductions allowed in computing taxable profits
= PROFITS BROUGHT INTO CHARGE
taxed at 12.5%, 25% as appropriate = TAX
Less TAX CREDITS
= NET TAX LIABILITY
Exemptions:
When computing a company’s corporation tax, it is always best to check initially:
(a) That the company is in fact liable to Irish tax in the first place, i.e., that it is resident in Ireland for tax purposes.
(b) That the income in question is liable to corporation tax, i.e., that it is not exempt. The following types of income are exempt:
(i) Distributions received from Irish resident companies. Such distributions are to be paid gross, i.e., without deduction of dividend withholding tax (DWT).
(ii) Various Exchequer-funded employment grants and recruitment subsidies.
Types of computation:
There are two basic corporation tax computations. The first type is for a trading company, and the second is for an investment company, i.e., a company whose income derives mainly from the making of investments, for example, a holding company which owns the shares in several trading companies. An investment company does not include a property dealing company, as such a company would be regarded as carrying on a trade of buying and selling properties. Neither, it appears, does it include a pure rental income company.
Trading company
To compute a company’s corporation tax liability, six steps are required:
Step 1: Calculate INCOME FROM ALL SOURCES.
Step 2: Calculate INCOME BROUGHT INTO CHARGE.
Step 3: Add chargeable gains to arrive at PROFITS BROUGHT INTO CHARGE.
Step 4: Deduct losses etc to arrive at PROFITS ON WHICH CT FALLS FINALLY TO BE BORNE.
Step 5: Calculate tax, deduct credits.
Step 6: Add surcharges and interest, if applicable.
Step 1. Calculate INCOME FROM ALL SOURCES:
Take tax-adjusted trading or professional income (see 5.15, 5.20);
Deduct: Gifts to approved body (see 5.17);
Deduct: Expenditure on research and development (see 5.18);
Deduct: capital allowances (see 5.19);
Add income from foreign trade or property (see 5.21);
Add interest not subject to withholding tax (see 5.23);
Miscellaneous income: Schedule D Case IV, 5.24;
Rental income: Schedule D Case V, 5.25.
Step 2: Calculate INCOME BROUGHT INTO CHARGE
Total the above (see 5.26)
Step 3: Calculate PROFITS BROUGHT INTO CHARGE
Add: Chargeable gains (see 5.27- 5.28);
Deduct: Trading or professional loss (see 5.29);
Deduct: Expenditure on heritage buildings and gardens (see 5.30);
Deduct: Gift to Minister for Finance (see 5.31);
Deduct: Excess rental capital allowances (see 5.32);
Deduct: Charges (interest and annual payments (see 5.33);
Deduct: Film investment (see 5.34);
Deduct: Investment in renewable energy (see 5.35);
Deduct: Group loss relief (see 5.36).
Step 4: PROFITS ON WHICH CT FALLS FINALLY TO BE BORNE
Step 5: Calculate tax, deduct credits (see 5.37);
Deduct: Professional services withholding tax (PSWT) paid in basis year (see 5.43);
Deduct: Relevant contracts tax (RCT) paid (see 5.44);
Deduct: Foreign tax credit under double tax treaty (see 5.45);
Deduct: Preliminary tax paid (see 5.46);
Deduct: Tax paid by donation of heritage items (see 5.47);
Step 6: Add surcharges and interest, if applicable.
Add: Surcharge on undistributed investment and rental income (see 5.50);
Add: Surcharge on undistributed service income (see 5.51);
Add: Surcharge for late filing (see 5.48);
Add: Interest on late payment (see 5.49).
Investment company
An investment company is a company whose income derives wholly or mainly (i.e., more than 50%) from the holding of investments. In other words, it is not strictly a “trading” company. Its main activity is to receive passive income (dividends, interest, royalties, rents).
The calculation proceeds in the same way, to arrive at INVESTMENT INCOME, from which management expenses are deducted. The company will have a surcharge on undistributed investment and rental income.