Allowances for Corporate Equity in Practice

November 1, 2006

Preview Citation

Format: Chicago

Alexander D Klemm. Allowances for Corporate Equity in Practice, (USA: International Monetary Fund, 2006) accessed December 3, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper provides an overview of full and partial allowance for corporate equity (ACE) tax systems in practice. In the recent past, ACE systems have been used in Austria, Croatia, and Italy. Brazil still applies a variant of such a system and Belgium introduced one this year. This paper summarizes the empirical literature on past ACE systems, and provides a theoretical and empirical assessment of the Brazilian ACE variant. The main finding is that the Brazilian reform introduced an ACE system for a minority of firms only, with the majority instead having a system of dividend deductibility. 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.

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

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/259
Stock No:

WPIEA2006259
ISBN:

9781451865196
ISSN:

1018-5941

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