Instructions:

Start-ups are seen as innovative key drivers of economic growth and job creation. Some countries have already introduced measures to motivate the investment in start-ups, with a variety of incentives including tax reliefs and holidays. However, this would depend on the various requirements set within these policies including the type of business form.

Required:

Compare any three (3) countries of your choice, highlighting the tax policies and incentives to motivate investment in start ups. The answer should clearly identify the business forms mentioned in the policies and the tax implications.

demonstrate understanding of the various basic legal forms of business organization and the tax policies that are relevant to the current issues, which in this case refers to start ups.

Please refer to the course outline course outcomes:

Demonstrate the understanding on corporate taxable income

Analyze current situation of tax regulations

Complement the following work with the instructions:

Startup Business Incentives

Tax policies change investment incentives, with a specific focus on startups. Existing policies apply different impactful tax rates on investments in diverse countries, industries, and activities, favoring debt instead of equity and favoring pass-through businesses instead of corporations. Targeting tax incentives reduces the cost of capital for startups. These advantages are weakened or reversed. Firstly, this is because new businesses depend heavily on high-taxed equity. Secondly, this is because start-ups that are initially making losses face restrictions on getting the total value of tax credits and deductions. These restrictions can balance off the advantage offered by tax incentives. This article shall assess the impacts of prospective tax reforms that would lower the corporate income tax rate and realize fair, equal tax treatment throughout the start-ups in three different countries.

Looking at India, the country offers several tax incentives to startups. The country offers a 3-year tax holiday in a block of 7 years (Jain, 2020). Here the startups qualify for tax refunds of 100% on their profits for three years consecutively if their yearly turnover remains below Rs 25 scores in these financial years. This shall help startups meet their working capital requirements during their first years of operation. Also, India offers startups exemptions from long-term capital gains. Qualifying businesses shall be excluded from taxation on long-term capital gains if they invest all or some part of their gains in a government fund in the asset transfer period's six months. Besides, India HUFs and individuals from being taxed on their long-term capital gains have put equity investments of qualifying startups. Lastly, India allows startups that are transitioning not to consider carry forward losses and capital gains.

According to Zerbe (2019), the USA offers startups Research and Development tax credit to lower their tax bill. This credit is covered by Internal Revenue Codes Section 41 for corporations who invest in R&D in the US. Start-ups with gross receipts of not more than $5 million for the taxed year qualify for this tax credit. Secondly, the US offers local and state tax incentives. Startups are exempted from property and utility taxation, among other benefits starting from R&D tax credits, federal schemes to money rewards upon employment creation. Lastly, startups with investors who have Qualified Small Business Stock (QSBS) can avoid being taxed on some or all of their incomes from the selling of their shares in the case they utilize the Internal Revenue Code QSBS clause of section 1202. However, the QSBS clause instantly does not lower startups tax burden but compensates entrepreneurs and investors.

China, on the other hand, offers Corporate Income Tax (CIT) Reductions to halt economic slowdown (Partington, 2019). China announced massive cuts in Corporate Income Tax rates. Normally, CIT has imposed a 25% rate of a corporations taxable income if it does not exceed RMB 1 million. Now, it is imposed at a 20% discounted rate for startups. Also, the country has lowered its VAT, thereby saving more than RMB 270 billion in 6 months. This has been Chinas goals following the prioritization of VAT restructuring in 2018. Additionally, the country has relaxed standards for businesses to qualify as startups.

Before this regulatory change, the startups were required to have no more than 200 employees and have revenue of RMB 30 million annually. After the policy changes, the startups are allowed to have up to 300 employees and a revenue of RMB 50 million annually.