This essay briefly describes the main different theoretical approaches (tax systems) designed to alleviate the double burden of corporation tax and shareholder income tax under Part 2. Parts 3- 5 explain how the problem of dividend double taxation was tried to be solved in the heterogeneous tax systems of the Germany, the UK and the US. However, the essay will not cover the different double tax avoiding treaties in force in those countries.
Table of Contents
1. INTRODUCTION
2. GENERAL DESCRIPTION OF DIFFERENT TAX SYSTEMS
A CLASSICAL SYSTEM
B DOUBLE TAXATION REDUCING SYSTEMS
I. DIVIDEND DEDUCTION SYSTEM
II. SPLIT RATE SYSTEM
III. SHAREHOLDER RELIEF SYSTEM
IV. PARTIAL IMPUTATION SYSTEM
C DOUBLE TAXATION AVOIDING SYSTEMS
I. DIVIDEND DEDUCTION SYSTEM / SPLIT CORPORATE TAX RATE SYSTEM
II. FULL TAX IMPUTATION SYSTEM
III. DIVIDEND EXEMPTION SYSTEM
3. THE GERMAN APPROACH
A THE FORMER GERMAN IMPUTATION SYSTEM
B THE NEW GERMAN SHAREHOLDER RELIEF SYSTEM
C DISTORTIONS OF THE GERMAN CORPORATE TAX SYSTEM
I. NEUTRALITY TOWARDS CORPORATE FINANCE DECISIONS
II. INTERNATIONAL NEUTRALITY
III. NEUTRALITY TOWARDS LEGAL FORM OF BUSINESS
IV. OTHERS
4. THE UK APPROACH
A THE FORMER UK PARTIAL IMPUTATION SYSTEM (THE ACT SYSTEM)
B CHANGES MADE TO THE ACT SYSTEM
C DISTORTIONS UNDER THE UK CORPORATE TAX SYSTEM
I. NEUTRALITY TOWARDS CORPORATE FINANCE DECISIONS
II. INTERNATIONAL NEUTRALITY
III. NEUTRALITY TOWARDS LEGAL FORM OF BUSINESS
IV. OTHERS
5. THE US APPROACH
A THE US CLASSICAL SYSTEM
I. INTEGRATION SYSTEMS UNDER THE CLASSICAL SYSTEM
B DISTORTIONS UNDER THE US CLASSICAL SYSTEM
I. NEUTRALITY TOWARDS CORPORATE FINANCE DECISIONS
II. INTERNATIONAL NEUTRALITY
III. NEUTRALITY TOWARDS LEGAL FORM OF BUSINESS
IV. OTHERS
6. CONCLUSION
Research Objectives and Topics
This essay explores the economic impact of double taxation of corporate profits and dividends, examining how different countries attempt to alleviate these burdens. The research aims to compare the corporate income tax systems of Germany, the UK, and the US, specifically analyzing how they address dividend relief and the resulting economic distortions.
- Theoretical classification of tax integration systems (Classical, Reducing, Avoiding).
- Comparative analysis of German, UK, and US corporate tax approaches.
- Evaluation of economic distortions regarding corporate finance, international investment, and legal form of business.
- Impact of recent legislative reforms on tax neutrality.
- Critical assessment of governmental influence on market forces through taxation.
Excerpt from the Book
1. INTRODUCTION
The separate taxation of companies has become a common feature in the vast majority of tax jurisdiction. This separation between corporate profit taxation and shareholder income taxation can lead to a problem commonly referred to as “double taxation”. This problem arises out of the taxation of corporate profits (including retained and distributed profits) at the corporate tax rate and an additional taxation of the distributed profits (dividends) at the shareholders income tax rate. Double taxation is known to weaken economical efficiency as resources will not be allocated to their most productive use. Double taxation may cause the following economic distortions:
- Favours Debt Financing: Due to high dividend taxes (and no possibility of deduction of theses expenses in contrast to interest expenses) corporations will rely more on debt financing than equity financing. Highly indebted firms are generally more vulnerable to economic downturns and more likely to suffer bankruptcies.
- Fosters Corporations to treasure cash: Earnings may be retained not to fund future growth but only as a tax shelter, which prevents shareholders from spending it in more productive investments.
- Creates international tax competition: Shareholders may be influenced in regards to where to invest their funds if different relief systems are in place in different countries.
- Favours certain legal forms of business: If certain legal forms of business are taxed favourably investors may choose those forms of business over others.
- Encourages Poor Corporate Governance and Promotes Speculation: Shareholders may become more interested in the stock price than in a company’s earnings statement (although this is certainly connected). Furthermore, they may get more interested in volatile stocks with potential for a quick capital gain than in companies that traditionally pay out stable or growing dividends.
- Reduces Investment and Savings: Double taxation generally biases against investment and savings by shareholders.
Summary of Chapters
1. INTRODUCTION: Defines the concept of double taxation and outlines the economic distortions it causes, such as biases against equity financing and reduced investment efficiency.
2. GENERAL DESCRIPTION OF DIFFERENT TAX SYSTEMS: Categorizes corporate tax systems based on their integration level, specifically distinguishing between classical, reduction-oriented, and avoidance-oriented systems.
3. THE GERMAN APPROACH: Analyzes the transition of the German tax system from an imputation model to a hybrid shareholder relief system, evaluating its impact on neutrality and economic decision-making.
4. THE UK APPROACH: Discusses the former Advanced Corporate Tax (ACT) system and the subsequent reforms that altered the relief mechanisms for dividends in the UK.
5. THE US APPROACH: Examines the persistence of the Classical System in the US and the various integration mechanisms and distortions currently present within the US tax framework.
6. CONCLUSION: Synthesizes findings across the three jurisdictions, noting that recent tax changes reflect specific governmental economic goals rather than purely theoretical attempts to minimize distortions.
Keywords
Double Taxation, Corporate Taxation, Dividend Relief, Tax Neutrality, Classical System, Imputation System, Debt Financing, Economic Distortions, Fiscal Policy, Tax Reform, Capital Structure, Shareholder Taxation, International Tax Competition, Tax Integration, Corporate Governance.
Frequently Asked Questions
What is the core subject of this research essay?
The essay focuses on the comparative analysis of corporate income tax systems in Germany, the UK, and the US, particularly regarding the issue of dividend double taxation and its associated economic distortions.
What are the central themes discussed in the work?
Key themes include the theoretical distinction between classical and integrated tax systems, the impact of tax laws on corporate finance decisions, international tax neutrality, and the neutrality toward various legal forms of business.
What is the primary objective of this study?
The objective is to compare how these three countries handle dividend relief and to identify which economic distortions persist under their respective systems, while also assessing whether those distortions might be considered desirable.
Which methodology is employed in this research?
The author utilizes a comparative legal and economic analysis, evaluating historical and current tax frameworks and the repercussions of legislative changes, such as the German Tax Reduction Act or UK's ACT reform.
What content is covered in the main body of the work?
The main body systematically details the tax systems of Germany, the UK, and the US, analyzing their specific mechanisms for relieving double taxation and measuring their performance against criteria like finance decision neutrality and international competitiveness.
Which keywords characterize this research?
The work is defined by concepts such as double taxation, corporate tax systems, fiscal neutrality, dividend relief, and comparative tax law.
How did the German tax reform affect small vs. large companies?
The study notes that the drastic reduction in corporate tax burden following the 2001 reform suggests that larger corporations may benefit disproportionately compared to smaller firms, which often lack the retained profits to take full advantage of the new system.
How does the US "check-the-box" regime influence taxation?
The check-the-box regime allows US entities to choose their tax status, enabling certain businesses to be treated as pass-through entities, which effectively shifts the tax burden to the shareholder level and acts as a form of full tax integration.
- Quote paper
- Benjamin Mahr (Author), 2004, Comparison of US, UK and German corporate income tax systems with respect to dividend relief, Munich, GRIN Verlag, https://www.grin.com/document/28077
