1.1.Contrast income tax with corporation tax
There are significant similarities and differences between income tax and corporation tax and the main points are detailed below.
1.1.1.Scope of each
Generally income tax only taxes the income of an individual in a tax year and capital gains tax is charged on gains arising to an individual.
By contrast, a company is chargeable to corporation tax on its “profits” which is the sum of both its income and chargeable gains.
1.1.2.Basis of assessment
The concept of a basis period (for Case I/II income) and the income tax year which exists in the law relating to income tax is not relevant for corporation tax purposes.
Corporation tax is assessed on the profits of a company’s accounting period at the rate of tax in force applicable to that accounting period (see Section 21 TCA 1997). A tax accounting period is a period of not more than 12 months and is normally the period for which a company makes up its financial statements (see Section 27 TCA 1997 and 1.2.5 below).
The rules relating to income tax and corporation tax are both set out in the TCA 1997. Broadly speaking, corporation tax follows the same general principles as income tax with a number of exceptions. The main differences in terms of the treatment of trading income, the treatment of investment income and the administration of the respective systems are addressed in the following chapters.
Under income tax rules, an individual’s taxation status depends on his tax residency. If he is resident in Ireland he will be liable to income tax here on all his world wide income. On the other hand, if he is non-resident and non-ordinarily resident he will only be liable to Irish tax on any income arising in Ireland.
The concept is broadly similar for companies. If the company is incorporated in Ireland it is liable to Irish corporation tax on all of its worldwide profits. In all other cases, it is only liable to Irish corporation tax on profits generated in Ireland. See section 1.2 for a full discussion on corporate residency rules.
1.1.5.Pro-forma corporation tax computation
This section sets out the layout to be followed in setting out a company’s corporation tax computation. It should be followed at all times for calculating a company’s taxable profits.
You should contrast the layout with that of an individual’s income tax return.
Patrick Company Limited
Corporation tax computation for the 12 month accounting period to 31.12.2018
|Case I tax adjusted trading profits y/e 31/12/18 after capital allowances||X||1 & 2|
|Less: allowable Case I losses forward||(X)||5|
|Trade losses – current period and carried back||(X)||5|
|Allowable trade charges||(X)||X||4 & 5|
|Case III:||X||X||1 & 2|
|Case IV||X||X||1 & 2|
|Case V||X||X||1 & 2|
|Chargeable gains (as adjusted for corporation tax)||X||1, 2 & 7|
|“Total Profits” - income and chargeable gains||X|
|Allowable non-trade charges paid during y/e 31/12/18||(X)||4 & 5|
|Other losses deductible from total profits – e.g. excess Case V capital allowances||(X)||5|
|Profits liable to corporation tax||X|
|Corporation tax liability|
|Charge at appropriate rate (12.5%, 25% etc)||X||1|
|Trade charges and losses on a value basis||(X)||4 & 5|
|Close company surcharges||X||10|
|Income tax deducted by Patrick Company Ltd on annual payments||X||9|
|Income tax suffered by deduction||(X)||X||14|
|Withholding tax for professional services||(X)||14|
|Net corporation tax payable||X|
The computation should always have the name of the company at the top and an appropriate heading e.g. “Corporation tax computation for the 12 month accounting period to…”. It is possible for a corporation tax accounting period to be less than 12 months but it can never exceed 12 months, see section 1.2.5.
You should refer to the above layout regularly during your studies.