Systems of Corporate Income Taxation

Within the context of growing capital mobility, taxation of corporate profits is becoming a daunt­ing challenge to most governments. The predomi­nating in the world classical system considers the corporation as an independent legal entity, whose property and liabilities are separate from those of the owners. The double taxation, however, increas­es the tax burden on entrepreneurs and distorts the choices of financing methods of companies. In addition, the differential tax treatment of dividends and interests paid distorts firms’ investment deci­sions. With a view of overcoming the problems in­herent in the classical system, a number of coun­tries have adopted alternative tax regimes based on the integration of corporate and individual in­come taxes. The present article provides a con­cise review of the existing systems of corporate income tax and a comparison of their advantages and shortcomings. The main conclusion is that the classical system remains most widely used, albeit in a modified version, and it is the most appropri­ate regime in terms of achieving neutrality between resident and non-resident investors.