Allowances for Corporate Equity in Practice
IMF Working Papers, November 1, 2006
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Bibliographic details
- Authors: Alexander D Klemm
- Published: November 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451865196.001
Summary
- Provides an overview of full and partial allowance for corporate equity (ACE) tax systems in practice.
- Notes recent use of ACE systems in Austria, Croatia, and Italy.
- States that Brazil still applies a variant of such a system and Belgium introduced one this year.
- Summarizes the empirical literature on past ACE systems.
- Provides a theoretical and empirical assessment of the Brazilian ACE variant.
- Main finding: the Brazilian reform introduced an ACE system for a minority of firms only, with the majority instead having a system of dividend deductibility.
- Observed effects: despite the reduction in the tax preference for debt finance, capital structures have not changed much, but dividends have increased.
- Investment appears to have benefited from the reform, although the extent to which this was due to the new structure rather than the tax cut is unclear.
Key Findings and Evidence
- ACE systems have historical application in Austria, Croatia, and Italy.
- Brazil applies a variant of ACE; Belgium introduced an ACE in the year of publication.
- Brazilian reform outcomes:
- ACE implemented for a minority of firms.
- Majority of firms operate under dividend deductibility.
- Capital structures: little change despite reduced tax preference for debt finance.
- Dividends: increased following reform.
- Investment: appears to have benefited, attribution between reform structure and tax cut is unclear.
Policy and Analytical Implications
- Tax design matters for incidence across firms: introducing ACE can yield different regimes across firms (ACE vs. dividend deductibility).
- Reducing tax preference for debt finance does not necessarily produce large shifts in capital structure in the short to medium term.
- ACE-style reforms can be associated with higher dividends and potentially increased investment, but causality between structural change and tax rate change may be difficult to disentangle.
Publication and Metadata
- Author: Alexander D Klemm
- Publication title: Allowances for Corporate Equity in Practice
- Series: IMF Working Papers
- Series/Issue: Working Paper No. 2006/259
- Volume: 2006
- Issue: 259
- Pages: 33
- DOI: https://doi.org/10.5089/9781451865196.001
- Stock No: WPIEA2006259
- ISBN: 9781451865196
- ISSN: 1018-5941
- Subject: Allowance for corporate equity, Corporate income tax, Effective tax rate, Income tax systems, Stocks
- Keywords: ACE system, ACE tax, ACE variant, cost of capital, dividend deductibility, equity finance, WP
Source: Allowances for Corporate Equity in Practice (IMF Working Paper No. 2006/259) by Alexander D Klemm.