A zero tax company is a business that shows a book profit and pays dividends to investors but does not pay taxes. This became a serious problem in India until it was corrected in the 1990s.
Two Tax Acts
In India two different business tax laws conflicted with each other. A company was liable for taxes under the income tax act but profit and loss accounts of the company were prepared under provisions of the Companies Act. This meant that many companies showed book profits in their profit and loss account but their income under the income tax act was zero or insignificant.
In 1996/7 the MAT or Minimum Alternative Tax was put into place in India which split the difference between the two accounting practices. Under the MAT the companies' taxes were calculated by the standard income with allowable deductions for a variety of business needs.
Zero Tax Holding Structures
According to Americorp, zero tax companies are frequently set up in tax sheltered countries for various reasons. These reasons sometimes include one-time transactions but at other times are used as intermediaries for the buying and selling of goods and services and profits are later uploaded to higher tax jurisdictions. Americorp claims that the countries where this occurs most are generally the British Virgin Islands, Anguilla, the Bahamas and Cayman Islands as well as countries with a "territorial tax regimes like Singapore, Hong Kong and, to a certain extent, New Zealand."
- A businessman calculating expenses at tax time image by Christopher Meder from Fotolia.com