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Appendix III. Calculation of corporate income tax

CALCULATION OF CORPORATE INCOME TAX

A Limited Liability Company tax resident in Spain (Teleco, S.L.) is engaged in the supply of telecommunications services. According to the 2018 financial statements, the company obtained a profit per books of €7,225,000. The company has recorded in its accounts the following transactions which may give rise to the need to make the relevant tax adjustments to the income per books:

  • Teleco, S.L. has its offices in a rented building, and pays to the owner of that building an annual amount in this respect of €200,000. In addition, the company owns a building, which has been rented to a third party. The rental income obtained by Teleco, S.L. amounted to €100,000, and the withholding taxes borne by it amounted to €20,000.
  • The company has recorded a corporate income tax expense amounting to €2,167,500.
  • The company recorded a provision for impairment losses in relation to foreseeable bad debts amounting to €170,000. Of that amount, €125,000 relate to accounts receivable less than six months past-due on the date on which the corporate income tax relating to that year fell due.
  • Teleco, S.L. purchased certain software on July 1 of the previous year, for €600,000. This tax period it recorded an amortization expense for that software amounting to €300,000.
  • In the previous tax period the company recorded a provision for impairment losses in relation to foreseeable bad debts amounting to €350,000, relating to accounts receivable two months past-due at the date on which the corporate income tax relating to that year accrued.
  • The company recorded a provision for other expenses (provision for incentives to be paid after 3 years) in the amount of €225,000 to cover the expense to be incurred in relation to the bonus payable to employees.
  • In 2013 and 2014, it made adjustments in relation to the limit on the deductibility of amortization, for the amount of €20,000.
  • The company purchased some computers on October 1, 2015 amounting to €60,000. In this tax period it recorded a depreciation expenses totaling €20,000 in relation to those computers.
  • The company incurred expenses on scientific R&D in the amount of €620,000 during the year. The average expenses incurred in the previous two years amounted to €120,000.
  • The company purchased shares in certain companies. In this connection, the company obtained dividends in a gross amount of €105,000, and bore withholding taxes in the amount of €21,000. Such shares were acquired by February 15 and transferred by the end of March.
  • According to the information furnished by the company, tax installment payments were made during the tax period in the amount of €2,400,000.

Appendix III

2018 CORPORATE INCOME TAX CALCULATION
Income for the year  7,225,000
POSITIVE ADJUSTMENTS
Corporate income tax expense 2018 2,167,50045
Provision for impairment losses on receivables 125,00046
Excess amortization of software 102,00047
Excess depreciation of computers 5,00048
Provision for incentives 225,00049
NEGATIVE ADJUSTMENTS
Provision for impairment losses on receivables recorded in the previous tax year <350,000>50
Reversal of 30% adjustment to amortization/depreciation <2,000>51
Tax Base 9,497,500
Tax rate 25%
Gross tax payable 2,374,375
TAX CREDITS
Expenses in scientific R&D <240,000>52
Deduction of reversal of adjustment to amort/depr. <100>53
Net tax payable 2,134,275
Withholdings and prepayments
Withholding on dividends <21,000>
Withholding on rental income <20,000>
Tax installments payments <2,400,000>
Net amount refundable <306,725>

45  As stated previously, the corporate income tax expense is nondeductible.

46  As this amount is less than 6 months old on the date when the tax falls due, it is deemed a nondeductible expense.

47  The maximum depreciation of software is €198,000 per year (33% of the acquisition cost). Consequently, as the depreciation for accounting purposes is higher than for tax purposes, a positive adjustment must be made for the difference (€102,000).

48  The maximum depreciation of data processing equipment is €15,000 per year (25% of the acquisition cost). Consequently, as the depreciation for accounting purposes is higher than for tax purposes, a positive adjustment must be made for the difference (€5,000).

49  The provision for long-term incentives for personnel who will presumably leave the company is a nondeductible expense.

50  This expense becomes deductible once it is more than 6 months old.

51   The tax provision permits reversing the adjustments made in fiscal years 2013 and 2014 due to the limitation on the deductibility of the amortization/depreciation recorded. Given that the total positive adjustment for this item amounted to €20,000, and the period for reversing it is 10 years, a negative adjustment must be made to the book income for one-tenth of the positive adjustment made in the past, that is, €2,000 (20,000 x 10%).

52  As the R&D expense of the year is higher than the average incurred in the last two years, the deduction rate applicable is 42%, the deduction totaling €240,000 (120,000 x 25% + 500,000 x 42%). It is necessary to verify that this deduction does not exceed 25% of the gross tax payable reduced by domestic and international double taxation tax credits and reductions. However, this limit goes up to 50% when the amount of the R&D tax credit, relating to expenses and investments made in the same tax period, exceeds 10% of the gross tax payable, reduced by domestic and international double taxation tax credits and reductions. In this case, the limit is €1,434,510 (the limit is 50% because the R&D expenses of the year exceed 10% of the gross tax payable), and thus the tax credit can be taken in full.

53  The new Corporate Income Tax Law has established, for taxpayers to which the 70% limit on the tax deductibility of accounting amortization/depreciation applied, the right to take an additional deduction of 2% in fiscal year 2015 (5% starting in 2016) of the amount included in the tax base (2,000 x 5%).