Course: Corporate Tax Planning

Course Code: 6203

Assignment 01:
Designing Corporate Income Tax

Submitted to:
Dr. Dhiman Chowdhury
Professor
Department of Accounting & Information Systems
University of Dhaka

Submitted by:
Sl. #
1.
2.
3.
4.
5.

Group Members
Ahmed Rizvan Hasan
Israque Fatema Naima
Sayda Sharon Ahmed
Farhana Akter
Md. Nazmul Hassan

ID
17-001
17-021
17-022
17-074
17-080

1. Introduction:
This assignment is prepared as part of the course 'Corporate Tax Planning' and is titled
'Designing Corporate Income Tax'. As the titles of both the assignment and the course suggest,
the prime focus of the students is on the design, plan and formulation of corporate tax system of
a country. This requires sound knowledge about public finance as well as taxation all around the
world. Corporate income tax is one of the most critical areas under taxation system of any
economy. Therefore, utmost care and dedication should be exerted in designing such tax. In this
assignment the corporate tax practices in Bangladesh along with global practices have been
highlighted, compared and discussed. The objective is to find out some areas in which gap exists
and thus further reforms or developments can be done. Providing recommendations as to how to
design a corporate tax system is also an objective of this assignment.
In the following section, a theoretical discussion is given that addresses some fundamental issues
of taxation as well as some issues specifically relevant to the core focus of this assignment which
is 'Corporate Income Tax'. After discussing the theoretical aspects the focus has been exerted on
the global perspective on corporate income tax. In that section corporate tax trend around the
world is discussed in detail. Some evidential information is also tabulated in order to facilitate
the discussion thereon. In line with the discussion on global practice, the section that follows
concentrates on the practices that are taking place here in Bangladesh. After that, an endeavor
has been made to identify some of the areas where there exist gaps between the global practice
and the national (Bangladesh) practice. In the penultimate section of this assignment, points to be
kept in mind while designing corporate income tax of a country have been listed. Finally, the
assignment ends with a conclusive remark from the writers.

2. Theoretical Discussion:
Taxation is a concept found and discussed under the discipline of public finance. Tax has been
defined in many laws, acts and statutes in many ways. In simple terms, tax is a contribution
exacted by the state. It is a non-penal but compulsory and unrequited transfer of resources from
the private to the public sector, levied on the basis of predetermined criteria. Public revenues can

be categorized into two broad heads: Tax revenue and non tax revenue. Taxes are the most
important source of revenue of the modern governments. A government collects tax revenue by
way of direct and indirect taxes. Direct tax includes- personal income tax, capital gain tax,
corporate tax, gift tax and wealth tax etc. Examples of indirect tax are- custom duty, excise duty,
VAT and service tax etc.
In Bangladesh the levy of income tax is regulated by the Income Tax Ordinance, 1984. Corporate
tax is also covered under the ITO, 1984. No separate act is there for corporate income tax. Many
developed countries with age old taxation practice and refined policies have formulated and
enacted separate acts for corporate tax e.g. UK, USA have separate corporate tax laws.
The major three taxes around the world are- income tax, customs duties and VAT. In Bangladesh
also this trend holds. The following table shows the percentage of revenues collected from
different types of taxes:
Item wise collection
2007-08
2008-09
2009-10
2010-11
VAT
35.4%
36.2%
35.6%
35.8%
Import Duty
19.3%
17.2%
16.3%
13.8%
Income Tax
22.9%
24.4%
25.9%
28.0%
Supplementary Duty
16.6%
16.4%
16.4%
17.1%
Other taxes and duties
1.0%
0.8%
0.7%
0.6%
Excise Duty
0.4%
0.4%
0.4%
0.34%
Table: 1 (Source: Bangladesh Economic Review 2012)

2011-12
36.0%
12.9%
31.5%
17.8%
1.3%
0.5%

From this data it is seen that Bangladesh's tax revenue is heavily reliant on the indirect taxes. The
income tax percentage itself is very low as compared to global average. Moreover, this amount
contains corporate income tax. Thus, corporate income tax amount in Bangladesh is very little
under the current practice. This means that there are still many untapped income generated
around the country that are to be brought under the tax net in order to boost the government's
revenue.

3. Global Perspective on Corporate Income Tax:

In general, corporate tax around the world is not 'flat'. Rather in most cases it is progressive in
nature. The theory or concept of tax is universal but the mechanism or application differs from
country to country. This is why the rate of tax also differs among countries. The following table
shows the latest corporate tax rates adopted by 19 countries all around the world.
Sl. #

Countries

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.

Australia
Brazil
Canada
China
France
Germany
India
Indonesia
Italy
Japan
Mexico
Netherlands
Russia
South Korea
Spain
Switzerland
Turkey
United Kingdom
United States
Average =

Corporate
Tax Rate
Rate in %
30
34
26.50
25
33.30
29.65
34.61
25
31.40
33.06
30
25
20
24.20
28
17.92
20
20
39

Referenc
e

Previous
Rate

Dec/15
Dec/15
Dec/15
Dec/15
Dec/15
Dec/15
Dec/15
Dec/15
Dec/14
Dec/15
Dec/15
Dec/15
Dec/15
Dec/15
Dec/15
Dec/15
Dec/15
Dec/15
Dec/15

30
34
26.50
25
33.30
29.60
33.99
25
31.40
35.64
30
25
20
24.20
30
17.92
20
21
39.10

Highest
Lowest
Rate
Rate
Rates are in %
49
30
37
25
50.9
26.10
33
25
50
33.30
56.80
29.40
38.95
32.44
39
25
53.20
31.40
52.40
33.06
42
28
48
25
43
20
30.80
22
35
28
21.23
17.92
33
20
52
20
39.30
39

27.72
Table: 2

The rate ranges from as low as 17.92% to as high as 39% with the average being 27.72%. But the
comparative rates reveal the fact that each and every country has been reducing the rate over the
years. This means that the tax system of each of these countries is undergoing continuous
changes in order to refine the system. This establishes the fact that no tax system is perfect. That
being said the tax system of a proper industrialist democratic country can always be considered
as reference for a developing or less developed country such as Bangladesh.
India, the neighboring country of Bangladesh, has a combination of both flat and progressive tax
rate as the country's corporate tax rate. There is no slab for corporate income; this way the rate is

flat in nature. But a surcharge of 10% (previously in the form of a wealth tax) for income over
Rs. 1 Crore brings in the progressive nature in the country's corporate tax system. This system
adopted by the Indian tax authority is surely not the best trick but definitely paves the way for
future development. India does not have a separate corporate tax law. Rather the corporate tax
issues are addressed under the common income tax law.
United Kingdom, a proper industrialist democratic country, has a progressive tax rate for its
corporate taxation. Up to the amount of 3,000,000 the rate is 20% but above that amount the
rate is 21%. This progressive tax rate for corporations, similar to the income tax rates, gives rise
to both some benefits as well as problems. Firstly, progressive tax is in line with the true notion
of taxation, which is 'the more a taxpayer earns, the more he/she/it should pay'. This promotes
equality in income and wealth distribution. Secondly, under this progressive tax rate 'income' and
'ability to pay' are positively correlated. So, the system is morally just as the richer section bears
heavier burden of the taxation than the relatively poorer section. Finally, under this type of
progressive system the rates are flexible; more taxes can be collected by adjusting the tax rates
suitably.
Though the UK corporate tax policy is critically acclaimed for its dynamic nature there are in
fact some associated risks and problems. The tax rates being progressive, the big firms are
encouraged (or rather forced) to split up in order to evade tax. Again when larger income is
subject to larger amount of tax, the investors (here companies) often tend to avoid investing in
productive sectors. In order to reduce such tax evasion practices the UK authority has come up
with a solution: by keeping the difference between different slab-rates small, the big firms are
encouraged not to split (e.g. difference between two slabs in UK corporate tax system is only
1%; 20 to 21%)
The superiority of UK corporate tax system can be witnessed by analyzing and comparing tax
rates of UK with that of G20 nations. The following two figures represent such information:

Figure: 1

Figure: 2

4. Bangladesh's Practice of Corporate Income Tax:

The corporate tax rate in Bangladesh stands at 27.5%. Corporate tax rate in Bangladesh averaged
31.39% percent from 1997 until 2014, reaching an all time high of 40% in 1998 and a record low
of 27.50% in 2009. Corporate tax rate in Bangladesh is reported by the National Board of
Revenue (NBR), Bangladesh.
In Bangladesh, the corporate income tax is a tax collected from companies. Its amount is based
on the net income companies obtain while exercising their business activity, normally during one
business year.
In Bangladesh there is no separate act or law for corporate tax. The Income Tax Ordinance, 1984
is the act that contains provisions for both personal income tax as well as corporate income tax.
For the purpose of computation of total income and charging tax thereon, sources of income has
been categorized, according to Section 20 of the ITO, 1984, into seven heads:
i.
ii.
iii.
iv.
v.
vi.
vii.

Salaries;
Interest on securities;
Income from house property;
Income from agriculture;
Income from business or profession;
Capital gains;
Income from other sources;

Among these seven heads of income the fifth head i.e. income from business and profession
deals with the corporate income tax issue.
Bangladesh has flat tax rate in respect to corporate tax. Prevailing tax rate for companies
operating in Bangladesh are:
Sl. #
1.
2.
3.
4.
5.
6.
7.
8.

Entity
Publicly Traded Company
Non-publicly Traded Company
Bank, Insurance & Financial Company (Except Merchant Bank)
Merchant Bank
Cigarette Manufacturing Company
Publicly Traded Cigarette Company
Mobile Phone Operator Company
Publicly Traded Mobile Company

Rates
27.5%
35%
42.5%
37.5%
45%
40%
45%
40%

Table: 3
If any publicly traded company declares more than 30% cash dividend, tax rate would be 24.75%
and if declares less than 10% dividend, tax rate would be 35%.
If any non-publicly traded company transfers minimum of 20% shares of its paid-up capital
through IPO ( Initial Public Offering) it would get 10% rebate on total tax in the year of transfer.
Bangladesh's corporate tax policy does not include any surcharge.
In today's advanced business world there are many emerging business and professions. For
example: universities, garments, sports clubs, charities, private clinics, NGOs, cooperative
societies, design and special skill-based firms, private English medium school etc. Each of these
Value Increasing Units (any venture except sole proprietorship) comprises peculiar and unique
sets of income and expenditures. In order to bring all these business activities under the tax net
the term 'corporate' has to be seen with a broader horizon. In that respect, the naming of the fifth
income head as 'Income from business and profession' by the NBR is efficient and
commendable.

5. Gaps between Global and National (Bangladesh) Practices:

From the discussions on both the global and national corporate tax practices the following gaps
are found:

 Bangladesh has a flat corporate tax rate whereas the developed countries with better
taxation structure and practice have progressive corporate tax rates supported by slabs of
income;
On top of having a flat rate, Bangladesh does not have any prevailing surcharge on the
income of corporations after crossing a specified 'high' amount; country with similar
economic scenario (India) has such surcharge that gives some sort of progressiveness in
the tax rates;
Bangladesh does not have a separate corporate tax law. Many of the developed countries
have separate corporate tax laws that address various issues in greater detail regarding
different types of businesses thereby facilitate the need for expanding the tax net;

The term 'corporate' generally means big firms (usually public limited companies). This
type of concepts limits the scope of taxation; Bangladesh tax law is this respect shows
better thinking by using the term 'income from business and profession'.

The difference between different applicable arbitrary rates should not be too much. Slab
rate differences should be kept low (e.g. UK slab rate difference is only 1%).

6. Factors that should be kept in mind while designing a country's corporate

income tax:
The following points should be taken into consideration while designing corporate income tax:
i.
ii.

Rate should not be 'flat';

Some sort of progressive nature has to be incorporated into the tax rates. This can be
either in the form of different rates for different income slabs or in the form of flat rate
accompanied by surcharge (previously wealth tax);

iii.

The difference between the rates at different slabs should not be too much. This may
induce the taxpayer to evade tax (e.g. splitting of large firms);

iv.

Comprehensive plan of tax system focusing on future years (at least 3 years ahead)
should be made;

v.
vi.

Futuristic concepts such as 'marginal tax rate' are to be employed in the system;
In this modern business world the term 'corporate' should not just confine itself to bigger
firms only, as new emerging businesses with peculiar and unique items of income and
expenses are evolving;

vii.

The arbitrary rates of tax must be in conjunction with the taxpayers ability to pay; unjust
tax imposition is not beneficial to the society;

7. Conclusion:
After consideration of all these aspects and analyzing various socio-economic factors a country
can expect to formulate a sound corporate tax policy. Then again, the establishment of a sound
tax system is a never ending process. It is only through time testing that a tax system emerges to
be sound, proper and effectual both for the society and for the government and thus for the
country as a whole.