Definition of Corporate Tax Management

The term corporate tax management consists of three words that can be defined as follows:
Corporate means of a corporation, where a corporation (or company) is a legal entity
formed under the Companies Act having a continued existence, paid-in capital represented by
transferable shares, limited liability for the shareholders and a divorce between management
and ownership.
Tax is a contribution exacted by the state Chambers English Dictionary (New Delhi:
Allide Publishers Ltd., 1992). The term taxes is confined to compulsory, unrequited
payments to general government Organization for Economic Cooperation and
Development (OECD) (1988).
Management is the process of planning, organizing, leading and controlling the work of
organization members and of using all available organizational resources to reach stated
organizational goals J. A. F. Stoner, R. E. Freeman, and D. R. Gilbert (1998), Management
(Englewood Cliffs, N.J.: Prentice-Hall; 6th edition). Organizational resources include six
Ms men, materials, machine, money, method, and market. According to Henri Fayol, To
manage is to forecast and plan, to organize, to command, to coordinate and to control.
Thus, corporate tax management means dealing with the tax matters of a corporation or
company with a view to maximizing the after-tax rate of return on investments after ensuring
voluntary tax compliance. For this purpose, each corporate entity has to
(1) ensure that it keeps proper records;
(2) deduct tax at source where it is necessary;
(3) pay advance tax in time, if applicable;
(4) file returns in time;
(5) comply with notices received from the tax authorities; and
(6) be aware of legal remedies where it does not have its rights under the law recognized.
TAX EVASION, TAX AVOIDANCE, AND TAX PLANNING
Tax Evasion
Evasion is illegal. It can involve acts of commission or omission (Webley et al. 1991, 2).
Noncompliance is a more neutral term than evasion since it does not assume that an
inaccurate tax return is necessarily the result of an intention to defraud the authorities and it

recognizes that inaccuracy may actually result in overpayment of taxes (Webley et al. 1991,
2).
Tax cheating describes deliberate acts of noncompliance and does not entail the difficulty
of legal proof of tax evasion (Webley et al. 1991, 3).
In evading tax one is knowingly breaking the law. This has social and psychological
consequences such as stigma and guilt and involves confronting different costs since there is
a risk of being caught and fined or sent to prison (Webley et al. 1991, 3).
The expression Tax evasion means illegally hiding income or concealing the particulars of
income or concealing the particular source or sources of income or in manipulating the
accounts so as to inflate the expenditure and other outgoings with a view to illegally reduce
the burden of taxation. Hence, tax evasion is illegal and unethical (Lakhotia and Lakhotia
1998, 9)
A Social Psychological Model of Individual Income Tax-Evasion Behaviour
Under this model, evading taxes is seen as a defective act within a social dilemma as follows.
SOCIAL CONDITIONS
Situational Instigations
1

Financial Strain (amount of tax owed after

withholding)
2 Social Norms (emphasis on individual wealth as a
measure of success within reference group)
Situational Constraints
1

Opportunity (occupational rating regarding the

probability of cash receipts, withholding at source,

etc.)
2

Legal controls (probability of apprehension and

punishment for reference group)

TAX EVASION BEHAVIOUR

(unreported income, unwarranted

deductions, failure to file a return)

1
2

Self-Report
Behavioural

Outcome

Measures
3

Behavioural

Simulation

Measures
PSYCHOLOGICAL CONDITIONS

Personal Instigations

1 Personal Strain (estimates of difficulty meeting tax

obligations and perceived unfairness of tax laws and
authorities)
2

Personal

Orientations

(self-serving

versus

community orientation)
Personal Constraints

Perceived Opportunity (subjective estimate of

opportunity to evade)
2

Perceived Risk of Punishment (certainty and

severity)
3

Intolerance of Tax Evasion (attitudes and moral

beliefs about the propriety of tax evasion)

Source: Adapted from Weigel, R. H., D. J. Hessing, and H. Elffers (1987), Tax Evasion
Research: A Critical Appraisal and Theoretical Model, Journal of Economic Psychology,
(Vol. 8: 215-35), p. 229.
Tax Avoidance
According to Justice Jagadisan J., Avoidance of tax is not tax evasion and it carries no
ignominy with it, for, it is sound law and, certainly, not bad morality, for anybody to so
arrange his affairs as to reduce the brunt of taxation to a minimum mentioned in the
verdict of Aruna Group of Estate v. State of Madras (1965) case (Palkhivala and Palkhivala
1976, 46).
Avoidance involves every attempt by legal means to prevent or reduce tax liability which
would otherwise be incurred, by taking advantage of some provision or lack of provision in

the law it presupposes the existence of alternatives, one of which would result in less tax
than the other (Report of the Royal Commission of Taxation 1966, 538; vide Webley et al.
1991, 2).
Tax avoidance is the art of dodging taxes without breaking the law. tax avoidance
means of traveling within the framework of the law or acting as per the language of the law
only in form, but murdering the very spirit of the law and thus acting against the intention of
the law and defeating the purpose of the particular legal enactment (Lakhotia and Lakhotia
1998, 10).
Tax Planning
Tax planning takes maximum advantage of the exemptions, deductions, rebates, reliefs and
other tax concessions allowed by taxation statutes, leading to the reduction of the tax liability
of the tax payer (Lakhotia and Lakhotia 1998, 10).
According to Shuklendra and Gurha (1992, 10), the prime objectives of tax planning are to
achieve the following results:
(i) Reduction of tax liability,

(ii) Minimization of litigation,

(iii) Productive investment,

(iv) Healthy growth of economy, and

(v) Economic stability.

However, according to Scholes and Wolfson (1992, 3), Traditional approaches to tax
planning fail to recognize that effective tax planning and tax minimization are very
different things. The reason is that in a world of costly contracting, implementation of taxminimizing strategies may introduce significant costs along nontax dimensions. Therefore,
the tax-minimization strategy may be undesirable. After all, a particular easy way to avoid
paying taxes is to avoid investing in profitable ventures. Thus, effective tax planning means
not to minimize tax, but to maximize after-tax rates of return on assets.
According to Lakhotia and Lakhotia (1998, 11-12), the various objectives of corporate tax
planning can be grouped under four different heads:
(a)

Having maximum taxpayer units;

(b) Taking maximum advantage of the exemptions, deductions, rebates, reliefs, and other tax
concessions;
(c)

Legally avoiding unwarranted additions to the income; and

(d)

Avoidance of tax worries and tensions through voluntary tax compliance and tax

management.
Why do Tax Rules influence Investment Decisions? [Scholes and Wolfson (1992, 2)]
Tax rules affect the before-tax rates of return on assets. Some firms select investments with
high before-tax rates of return while others select assets with low before-tax rates of return
even when both types of investments are available to all firms. Before-tax rate of return
means the rate of return earned from investing in an asset before any taxes are paid to
domestic and foreign central and local taxing authorities. The before-tax rates of return differ
because:
(1) the returns to different types of assets are taxed differently,
(2) the returns to similar assets are taxed differently if they are located in different tax
jurisdictions,
(3) the returns to similar assets located in the same tax jurisdiction are taxed differently if
they are held through different legal organizational forms (such as a corporation versus a sole
proprietorship), and
(4) the returns to similar assets located in the same tax jurisdiction and held through same
legal organizational form are taxed differently depending upon such factors as:
(a)

the operating history of the organization,

(b) the returns to other assets held by the organization, and

(c)

the particular characteristics of the individual owners of the organization.

Why do Tax Rules influence Financing Decisions? [Scholes and Wolfson (1992, 2)]
Tax rules influence the financing decisions of firms through their effect on the cost of
financing the firms activities. A firm is said to make a capital structure decision when it
decides how it will finance its activities. The capital structure of a firm is composed of
various types of ownership claims, some of which are called debt and others of which are
called equity. The cost of issuing a capital structure instrument depends on the tax treatment
it is accorded, which, in turn, depends on whether the instrument
(1) is debt, equity, or a hybrid,
(2) is issued to an employee, a customer, a related party, a bank, or any one of a number of
other special classes of suppliers of capital, and
(3) is issued by a corporation, a partnership, or some other legal organizational form.
It also depends upon the tax jurisdiction in which the capital structure instrument is issued.

Why do Tax Rules influence Dividend Decisions? [Scholes and Wolfson (1992, 328-30)]
If investment by individual investor is deemed to be tax-advantageous relative to
corporations, it is important to determine whether existing corporations should liquidate (so
individual investors can reinvest the funds in ways that result in single-level taxation) or
whether retained earnings should be reinvested at the corporate level, if there exist projects
that generate returns above the competitive rate.
Say, a company distributes Tk. 1 as a dividend today, shareholders pay taxes at their own
personal tax rates, tpo, and reinvest the after-tax income on their own account for n periods
at an after tax rate of Rb (1 tpn) or rpn per period. If the company retains the Tk. 1 of after-tax
corporate income, on the other hand, and invests it on corporate account, it returns R b (1 tcn)
or rcn per period after tax until it finally distributes the accumulated amount of retained
earnings. At that time, shareholders pay tax on the distribution at tax rate t pn. So we can
compare the two alternatives as follows:
Liquidate and invest on personal account for n periods: Tk. 1(1 tpo) (1 + rpn)n
Retain and invest on corporate account for n periodsTk. 1(1 + rcn)n (1 tpn)
before liquidating:
Where, rpn and rcn should be interoperated as annualized return available over the n-period
horizon.
The best strategy depends upon two factors:
(1) the investors marginal tax rate today, tpo, versus the investors marginal tax rate in the
future, tpn, (a decreasing tax rate, or an ability to convert dividend income into a capital gain
taxed at a reduced rate, favors dividend deferral), and
(2) the corporate versus investor tax rate (a higher corporate rate favors current payout).
Dividend Taxation Incidence on whom
A new section 16D has been inserted by the proposed Finance Act 2003. As per provision of
this section 16D (Charge of dividend distribution tax), where a company registered under the
Companies Act 1994 declares dividend, whether interim or otherwise, on or after 1 July 2003,
the company shall pay, in addition to tax payable under the ITO, dividend distribution tax
(DDT) at the rate of 10 percent on such dividend within 60 days from the date of such

declaration. Under the proviso to this section 16D, the DDT is not applicable for following
two types of dividends defined u/s 2(26):
(1)

any profit remitted outside Bangladesh by a company not incorporated in Bangladesh

under the Companies Act, 1994 [clause (dd) of section 2(26)], and
(2)

any payment by a private company of any sum (whether as representing a part of the

assets of the company or otherwise) by way of advance or loan to a shareholder or any

payment by any such company on behalf, or for the individual benefit, of any such
shareholder, to the extent to which the company, in either case, possesses accumulated profit
[clause (e) of section 2(26)].
Under paragraph (mentioned as para hereinafter) 22 (amended by Finance Act 2003) of Part
A, Sixth Schedule, dividend income on which the DDT is payable by the company u/s 16D is
totally non-assessable and under the provision of the new proviso u/s 54 (replaced by Finance
Act 2003), no tax shall be deducted at source on this dividend. Under para 22A (inserted by
Finance Act 2003) of Part A, Sixth Schedule, dividend income from a mutual fund or a Unit
Fund is non-assessable up to Tk. 25,000. Since there is no mention about any exemption
provision from tax deducted at source (TDS) u/s 54 @ 10%, the dividend on unit/mutual
fund is thus apparently subject to TDS for holders of unit/mutual fund certificates unless
(s)he submits a certificate to be taken u/s 54(2) from the Deputy Commissioner of Taxes
(DCT) that the aggregate amount of dividends to be received from one or more public
limited companies will not exceed Tk. 25,000.
For publicly traded company, if dividend payment is more than 20%, a rebate of 10% of
income tax will be allowed (FA 2002 & Finance Act 2003). However, by inserting section
16B by the FA 2002, a provision has been made to impose additional tax on undistributed
profit @ 5% if the dividend payment or issue of bonus share within 6 months after the end of
the income year has not been at least 15% of paid up capital.
For AYs 2012-13 and 2013-14, undistributed profit means total income with accumulated
profit including free reserve as reduced by the aggregate of dividend or bonus share issued,
declared or distributed for that year, the tax which is payable under section 74 and the paid-up
capital. From AY 2014-15, undistributed profit means accumulated profit including free
reserve (changed by FA 2014).
For publicly traded company, income tax rate is

37.5% if dividend declared by less than 10% or failure to pay declared dividend within

SEC stipulated time

* 30% for other situation.
Dividend payment vs. Corporate tax rates:
Income tax rates for a public limited company, not being a banking or insurance company,
listed with any Bangladeshi stock exchange can be shown as follows on the basis of dividend
payment ratios (for AY 2004-2005):
Table-1: Dividend Payment Ratios vs. Corporate Tax Rates for AY 2004-05
Types of Income

Income Tax Rates if dividend payment rate is

Less than At
least 15%
or More
10%

10%,
less

but more, but not than

than more

than 20%

15%

20%

stocks & shares of private limited 10%

10%

10%

10%

company
Capital gain arising out of transfer of 15%

15%

15%

15%

other capital assets

Dividend income, not subject to DDT 15%

15%

15%

15%

u/s 16D
Other income
37.5%
Dividend distribution tax (DDT) u/s 10%

30%
10%

30%
10%

30%
10%

16D
Additional tax on undistributed profit 5%

5%

nil

nil

Capital gain arising out of transfer of

u/s 16B
Income tax rebate
nil
nil
nil
10%
In the above structure of tax rates, two changes have been occurred this year (AY 2004-05):
(1) capital gain arising out of transfer of stocks and shares of private limited company is now
subject to tax at 10% instead of 15%; and (2) change in the definition of undistributed
profit (see above). Due to these changes, in case of a profitable public limited company
(PLC) having low capital base and high retained earnings, now additional tax on
undistributed profit u/s 16B will be a big amount if dividend payment is less than 15%. But
for dividend payment at 15% or more, overall tax liability is expected to decline from this

fiscal year by a small amount only if there is any capital gain arising out of transfer of stocks
and shares of private limited company. Otherwise there is no additional tax incentive. For
instance, X Ltd., a publicly traded cement producing company enlisted with Dhaka Stock
Exchange, had the following income in last income year of 2003-04: (a) capital gain of Tk.
100,000 arising out of transfer of stocks and shares of private limited company and Tk.
50,000 arising out of transfer of other capital assets; (b) dividend income of Tk. 50,000, not
subject to DDT (Dividend Distribution Tax) u/s 16D; and (c) other income of Tk. 500,000. X
Ltd. has paid-up capital of Tk. 1,000,000 and undistributed profit of Tk. 2,000,000 at the
beginning of income year 2003-04. Table-5 shows the computation of tax liabilities on
various incomes and the financial effect on this years changes in the ITO.
Table-2: Dividend Payment Ratios vs. Income Tax Liabilities for AY 2004-05
Types of Income

Income Tax Liability (in Taka) if dividend payment rate

is
Less than At

least
less

10%, 15% or more, but More

10%

but

than not

9%

15%
10%

14%

10,000

7,500

more

20%
15%

than than

20%

20%
21%

10,000 10,000

10,000

10,000

7,500

7,500

7,500

Capital gain arising out of:Transfer of stocks & shares

of private limited company 10,000
Capital gain arising out of:Transfer of other capital
assets
Dividend

7,500
income,

7,500

not

subject to DDT u/s 16D

7,500
Other income
187,500
DDT u/s 16D
9,000
Undistributed profit tax u/s

7,500
7,500 7,500
150,000 150,000 150,000
10,000 14,000 15,000

7,500
7,500
150,000 150,000
20,000 21,000

16B
135,000
Total tax
356,500
Income tax rebate

Income tax payable

356,500
Effective tax rate (%)
50.9
Income tax plus Dividend 446,500
Implications
of
new

135,000
320,000

320,000
45.7
420,000

195,000

195,000
27.9
395,000

135,000
324,000

324,000
46.3
464,000

190,000

190,000
27.1
340,000

196,000
19,600
176,400
25.2
386,400

changes:
Extra tax u/s 16B for new
definition of undistributed
profit
105,875
Increase/(Decrease) in total

110,875 130,875

income tax payable

100,875
Increase/(Decrease) in total

104,000 124,000 (5,000)

(5,000) (4,500)

income tax & dividend

104,000 124,000 (5,000)

(5,000) (4,500)

100,875

Dividend Taxation in AY 2005-2006

Dividend Distribution Tax (DDT) @ 10% on Dividend declared/ distributed to be paid

by the company declaring the dividend withdrawn [Section 16D repealed]; [and
consequently definition of Tax u/s 2(62) changed and proviso to section 44(4),
clause (d) of section 46A(7), proviso to section 54(2) and para 22 of Part-A of Sixth
Schedule repealed]

Compulsory tax @ 10% to be deducted at sources for non-corporate resident

shareholders by the company distributing the dividend [Section 54(2) amended]

Exemption on Dividend Income subject to Dividend Distribution Tax (DDT)

withdrawn [para 22 of Part A, Sixth Schedule repealed]

Condition for Existing Tax Holiday for Industrial Undertaking, Tourist Industry or
Physical Infrastructure u/s 46A: Condition of investment of minimum 30% of
exempted income (as reduced by the dividend declared) within tax-holiday period or
within one year from the end of the tax-holiday period in the concerned undertaking
or in a new industrial undertaking and in addition to that investment of another 10%
of exempted income each year or before the expiry of 3 months from the end of
income year in the purchase of shares of a company listed with any stock exchange;
previously the condition was: investment of minimum 40% of exempted income (as
reduced by the dividend declared) within tax-holiday period or within one year from
the end of the tax-holiday period in the concerned undertaking or in a new industrial
undertaking or any productive assets being stocks and shares of a public company or
bonds or securities issued by the Government [clause (c) of sub-section (2) of section
46A replaced].

Table-3: Comparative Tax Rates for Assessment Years (AYs) 2005-06 and 2006-07

Types

of Type of Income

Assessee
Banka, insurance, (1)
financial

Capital

gain Transfer of stocks & shares of private 10%

limited company
Transfer of other capital assets
15%
Dividend Subject to dividend distribution tax nil

10%

arising out of

institutions

(2)

15%

tax u/s 16D

Both for publicly traded and not 45%

45%

publicly traded company

gain Transfer of stocks & shares of private 10%

10%

(3) Other income

company (1)

Capital

(except

RMG arising out of

company

taxed

@ 10% & textile

& jute companies

(2)

15%
Repealed

u/s 16Db
Not subject to dividend distribution 15%

income

Other

Tax Rates for AY

2005-06 2006-07

limited company
Transfer of other capital assets
15%
Dividend Subject to dividend distribution tax nil

income

taxed @ 15% for

AYs 2004-05 to (3) Other income
2005-06) c

15%
Repealed

u/s 16Db
Not subject to dividend distribution 15%

15%

tax u/s 16D

For publicly

37.5%

traded

companyd* 37.5%

Dividend declared by less than 10% or 30%

30%

failure to pay declared dividend within

SEC stipulated time
* Other situation
For other company
37.5% 40%
Note: u/s = under section; RMG = readymade garments; ATR = average tax rate, FA = Finance
Act.a Under section 16C inserted by the FA 2002, a bank company operating under the Bank
Companies Act 1991, if shows, in the return, profit exceeding 50% of the aggregate sum of capital
and reserve, shall pay tax @ 15% of such excess profit as additional tax.
b

Provision of section 16D (inserted by Finance Act 2003) is applicable for dividends declared on

or after July 2003, but not applicable for two types of dividends defined u/s 2(26): (1) any profit
remitted outside Bangladesh by a company not incorporated in Bangladesh under the Companies
Act, 1994 [clause (dd)], and (2) any payment by a private company of any sum (whether as
representing a part of the assets of the company or otherwise) by way of advance or loan to a
shareholder or any payment by any such company on behalf, or for the individual benefit, of any
such shareholder, to the extent to which the company, in either case, possesses accumulated profit
[clause (e)]. Under para 22 (amended by Finance Act 2003) of Part A, Sixth Schedule, dividend

income on which dividend distribution tax (DDT) is payable by the company u/s 16D is totally
non-assessable and under the provision of the new proviso u/s 54 (replaced by Finance Act 2003),
no tax shall be deducted at source on this dividend. Under para 22A (inserted by Finance Act
2003) of Part A, Sixth Schedule, dividend income from a mutual fund or a Unit Fund is nonassessable up to Tk. 25,000. Section 16D, para 22 of Part A, Sixth Schedule and proviso u/s 54
were repealed by Finance Act 2005.
c

In AY 2003-04, tax rate for RMG company was also 10%, but textile company was subject to

tax rate of 20% and this rate was declared for AYs 2003-04 to 2006-07).
d

For publicly traded company, if dividend payment is more than 20, a rebate of 10 of income tax

will be allowed (FA 2002, FA 2003, FA 2004 and proposed FA 2005). However, by inserting
section 16B by the FA 2002, a provision has been made to impose additional tax on undistributed
profit @ 5% if the dividend payment or issue of bonus share within 6 months after the end of the
income year has not been at least 15% of paid up capital. For AYs 2002-03 and 2003-04,
undistributed profit means total income with accumulated profit including free reserve as
reduced by the aggregate of dividend or bonus share issued, declared or distributed for that year,
the tax which is payable under section 74 and the paid-up capital. From AY 2004-05,
undistributed profit means accumulated profit including free reserve (changed by FA 2004).
Proviso to Section 31 of the Income Tax Ordinance 1984:
No tax shall be payable by an assessee, being a non-resident, in respect of any profits and
gains arising from the transfer of stocks or shares of a public company as defined in the
Companies Act 1994 (Act XVIII of 1994) subject to the condition that such assessee is
entitled to similar exemption in the country in which he is a resident.
Sections 32(7) and 32(12) of the Income Tax Ordinance 1984:
Under section 32(7), Notwithstanding anything contained in this section or section 31,
where a capital gain arises from the transfer of a capital asset being Government securities
and stocks and shares of public companies listed with a stock exchange in Bangladesh, then
no tax shall charged under this section.
Under section 32(12), notwithstanding anything contained in sub-section (7), no exemption
shall be allowed to any person on so much of profits and gains arising out of the transfer of a
capital asset as is attributable to the cost of acquisition of such asset in respect of which any

investment allowance referred to in paragraph 8 of Part B of the Sixth Schedule to this

Ordinance was at any time allowed.
Paragraph 8 of Part B of the Sixth Schedule of the Income Tax Ordinance: Exemptions and
Allowances [for Assessees Being Resident] for allowing Investment Tax Credit
8.

Any amount invested by an assessee, not being a company, in the acquisition, of any

stocks or shares of a company or other body corporate which fulfills the following conditions,
namely,(a)

in the case of a company, it shall be a company listed with a Stock Exchange in

Bangladesh;
(b) in the case of any other body corporate, it shall be established by or under any Act of
Parliament;
(c)

in the case of any stocks or shares acquired by purchase from a previous holder, if such

stocks or shares is transferred in the name of the transferee.