## 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

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### 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/allowances-for-corporate-equity-in-practice-19935_