What is Corporate Tax?
Corporate tax is a tax levied by a local government on the profits of a corporation. These taxes are required to be paid on that corporation’s taxable income. This includes revenue minus COGS (Cost of Goods Sold), marketing and sales, administrative expenses, research and development, depreciation, and other operating costs.
The rate at which these taxes are applied vary by country and is referred to as the statutory rate. Corporate taxes can be lowered through the application of various deductions, loopholes, and government subsidies. The effective corporate tax rate is found by subtracting these methods from the statutory rate.
Corporate Tax in Asia
Corporate taxes in ASEAN (Association of Southeast Asian Nations) countries have shown a decrease in their overall average tax rate over the last 15 years. Most countries in Southeast Asia impose corporate tax rates that generally fall within a few percentage points of 23%. Trends over the last two decades show there is a possibility of convergence around 20%. While there are similar trends in East Asia, the East Asian economies are more stable with well developed economies and various tax break opportunities for businesses who wish to explore the region.
Corporations should consider the tax rates, and regulations surrounding it, in the intended country before committing to entering into that market. Additionally, countries should also research the predictability of the tax system, processing times, corruption, protection of intellectual property, and the transparency of legal guidelines. Understanding these issues can help managers create a useful model for understanding the likelihood of success for their particular business in these markets.
China Corporate Tax Rate
China’s rapid economic expansion over the past half century has been a stellar example of the impact that opening up to global markets can have on a local economy. During this period, China has transformed itself from majority agrarian society to an industrial powerhouse. During this change, China experienced sharp increases in productivity and wages. Today China is the second largest economy in the world and is on pace to become the largest by 2031 according to Bloomberg.
In China, tax resident enterprises (TRE) must pay corporate income tax (CIT) on their worldwide income. A non-TRE that has no establishment within China is only taxed on income that comes from China. Essentially, the location in which the revenue is generated will impact the final amount owed.
China’s CIT rate is 25%, and there is no local or provincial income tax. A lower CIT is available for certain sectors in the economy. Some examples of these reductions include high tech enterprises, which are eligible for a reduced rate of 15%, software enterprises which are reduced to 10%, and pollution prevention enterprises which are reduced to 15%. Corporations with establishments in developing and specialized areas also have reduced tax liability.
Although China has a large national GDP, in many areas they are still developing. The differences in these tax rates are representative of their desire to develop high-technology infrastructure, alongside developing underdeveloped regions. The Chinese tax authorities have created a system to encourage development in areas that they find crucial to economic success in the future.
Japanese Corporate Tax
After World War II, the Japanese economy experienced rapid growth (averaging 10% from 1955-1960) that changed Japanese culture and catapulted the country to becoming one of the largest economies on earth. This economic growth, while overall a great benefit for the Japanese people, changed many important aspects of daily life in Japan. Housing prices soared, ecological damage increased, there was a decreased competitiveness for manufacturing, and trade surpluses with other developed nations.
Today, Japan has successfully made the transformation into a fully developed economy and is working to address these issues. Being the third largest economy in the world, international corporations frequently attempt to enter the market and establish business operations. However, apart from the difficult process of understanding and appealing to the Japanese consumers, corporations must also research what their tax liability would be once they decide to enter Japan.
According to PWC, a domestic corporation in Japan is taxed on its worldwide income, while 95% of dividends received for qualifying companies can be excluded from that company’s taxable income. Foreign corporations are taxed only on the income that comes from Japan. Any foreign company that has a permanent establishment (PE) in Japan is liable for taxes exclusively for the income that comes from that PE.
The effective tax rate in Japan will vary depending on the paid-in capital of that particular company. According to KPMG because the enterprise tax liability is deductible, the effective tax rate is less than the total of the statuary rates for the corporation tax, inhabitant’s tax, and enterprise tax. On average, the effective tax rate in Japan is 30.62%.
Japan has a developed economy, an extensive social welfare system, and an aging population. These three reasons contribute to the effective tax rate in Japan. The tax rates in Japan are intended to continue support of older citizens, while still allowing corporations to innovate and strengthen the Japanese economy.
South Korea Tax Rate
In the 1960’s, South Korea underwent a period of increased economic development that transformed the country into an industrious, prosperous society. During this period, per capita output increased at a rate of around 7% per year. By the 1970’s, South Koreans were benefiting greatly from the economic prosperity and distribution of wealth (as measured by the Gini coefficient).
In 1996, South Korea joined the OECD (Organization for Economic Cooperation and Development) and was internationally recognized as a developed state. Although the living standards of South Korea lagged slightly behind other developed nations, economic growth had propelled per capita income to comparable rates of Western Europe and shifted the country from a borrower of technological ideas to an innovator in technology. Currently, international corporations have successfully entered the South Korean market through economic research and an understanding of legal requirements and tax liabilities.
Corporations residing in South Korea are taxed on their worldwide income, while non-resident corporations with a PE are taxed for only their Korean sourced income. Corporations that do not have a PE and are not residents are usually taxed using a withholding tax on each distinct item of Korean-sourced income. Corporate income tax rates are using a marginal tax rate system. These rates start from 10% for under 200 million KRW and increase incrementally as revenue increases. The effective corporate tax rate in South Korea is 25%.
South Korea has made a huge economic jump over the past several decades. The developments in urban areas have helped transform the economy and culture. Although it is considered a developed country, it still lags behind other countries in this category. The tax policies that are in place represent the economic reality of being a country with a developed economy that still intends to improve living standards to match that of other developed economies.
Taiwan Corporate Tax Rate
Taiwan’s post War World II economic development has been driven by the growth of textile factories, and manufacturers of common consumer goods, like small appliances and footwear. By the 1980s, Taiwan had become one of the largest producers of computer peripherals in the world.
Today, Taiwan is a developed capitalistic economy with the seventh largest economy in Asia and the 20th largest in the world by PPP (purchasing power parity). Taiwan is also the most technically advanced microchip maker in the world. Taiwan has a competitive manufacturing sector that includes electronics, machinery, petrochemicals, and communication technology products.
Taiwan has a corporate tax rate of 20%. However, for profit seeking corporations that earn less than TWD 500,000 in taxable income, the rate is lowered to 18% in 2018, 19% in 2019, and 20% in 2020 if taxable income is over TWD 120,000. Resident companies that operate in Taiwan are taxed on the income that they earn from worldwide sales.
Revenue earned from TWD 0-120,000 is tax exempt, with everything earned over that threshold is taxed at a rate of 20%. A non-resident company is taxed on income that is earned from Taiwan sources. A non-resident corporation that has a fixed place of business in Taiwan is taxed similarly to resident companies.
The development Taiwan underwent in the later parts of the 20th century propelled its economy into a developed state. The economy shifted from an undeveloped country that mostly relied on agriculture to a prosperous economy with a developed manufacturing industry and a competitive information technology center. These tax rates are intended to compete with other Asian economies while still ensuring the countries stability.
Hong Kong Corporate Tax Rate
One of the main provisions during the time the British relinquished control of Hong Kong, was that Hong Kong be allowed to maintain its economic structures and financial characteristics. Because of its historical and economic position, Hong Kong has traditionally played a critical role in facilitating investments and financial assets between the West and the East.
Today, Hong Kong still holds this critical financial role. It is a highly developed free market economy that is characterized by low taxation, mostly free port trade and a well establish international financial market. Apart from the financial role that Hong Kong occupies, it also has a very large and developed services sector, alongside a developed trade industry. The majority of recently opened businesses in Hong Kong are in the eCommerce, fintech, and software industries.
Hong Kong has a corporate tax rate of 16.5%. For tax purposes in Hong Kong, corporate residency isn’t relevant for determining tax liability of any legal entity except for in regards to a tax treaty context. Under Hong Kong’s domestic tax code, the deciding factors for determining tax liability are whether a corporation is carrying out operations in Hong Kong, and if profits are derived from the operations in Hong Kong.
While the tax rates in each of the above jurisdictions differ, there are many benefits for companies who wish to enter or grow in the region. Whether it be a growing economy or stable economic environment you are looking for, East Asia offers the environment you seek.
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