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.
|2018 CORPORATE INCOME TAX CALCULATION|
|Income for the year||7,225,000|
|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|
|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|
|Gross tax payable||2,374,375|
|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%).