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1/ The true cost of ACE may differ, e.g., because equity in tax accounts differs from commercial accounts or because our sample is not representative of the true population of firms in a country. For instance, the true cost of the ACE in Belgium is about 10 percent of CIT revenue, while our estimate suggests 16 percent. 2/The ACE may apply to both corporate and non-corporate firms. To the extent that ACE narrows the base of the PIT of non-corporate firms, our numbers as a percentage of GDP underestimate the cost of the ACE. For Germany, we use a modified number for the CIT-to-GDP ratio to correct for the low degree of incorporation. Table 3. Estimated Direct Revenue Effect of an ACE

Table 3 1/ The true cost of ACE may differ, e.g., because equity in tax accounts differs from commercial accounts or because our sample is not representative of the true population of firms in a country. For instance, the true cost of the ACE in Belgium is about 10 percent of CIT revenue, while our estimate suggests 16 percent. 2/The ACE may apply to both corporate and non-corporate firms. To the extent that ACE narrows the base of the PIT of non-corporate firms, our numbers as a percentage of GDP underestimate the cost of the ACE. For Germany, we use a modified number for the CIT-to-GDP ratio to correct for the low degree of incorporation. Table 3. Estimated Direct Revenue Effect of an ACE

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Table 1. Cost of Capital for Alternative Sources of Finance” 1/The post-tax return is assumed to be 5 percent and inflation 2 percent. The numbers are unweighted averages of calculations for five different assets featuring different depreciation rates: intangibles, buildings, machinery, financial assets, and inventories. Data refer to 2007. 9/ Unweichted average.
Table 1. Cost of Capital for Alternative Sources of Finance” 1/The post-tax return is assumed to be 5 percent and inflation 2 percent. The numbers are unweighted averages of calculations for five different assets featuring different depreciation rates: intangibles, buildings, machinery, financial assets, and inventories. Data refer to 2007. 9/ Unweichted average.
Source: KPMG’s corporate and indirect tax survey 2010; ZEW and OUCBT, 2008; and IMF staff calculations. saved at higher rates. The left panel of Figure 1 shows that CIT rates fell across the board between 2001 and 2010, most notably in Europe. The lower CIT rates have generally reduced the c ost of equity relative to debt. For instance, in the EU-25 between 1998 and 2007, the cost of capital on retained earnings fell from 7.7 to 6.9 percent, while that on debt rose from 4.3 to 4.6 percent (ZEW and OUCBT, 2008). Several countries have also introduced thin capitalization rules that deny the interest deductibility beyond a certain threshold for the debt-to-equity ratio. Buetner and others (2006) report that, between 1996 and 2004, the share of O] ECD countries applying such rules grew from less than 50 to more than 75 percent. Debt bias may have also increased due to divergence of CIT rates across countries and in light of market developments. The right panel of Figure | shows that the standard deviation of CIT rates among 64 countries between 2001 and 2010 increased from 6.8 to 7.7 percent. This has increased incentives for multinationals to shift debt into high-tax countries. Moreover, innovation in financial instruments has increasingly blurred the distinction between debt and equity and might have opened new options for tax avoidance. Also, the growth of international capital flows during the past decades, driven by the expansion of multinationals, might have increased the opportunities for tax avoidance.
Source: KPMG’s corporate and indirect tax survey 2010; ZEW and OUCBT, 2008; and IMF staff calculations. saved at higher rates. The left panel of Figure 1 shows that CIT rates fell across the board between 2001 and 2010, most notably in Europe. The lower CIT rates have generally reduced the c ost of equity relative to debt. For instance, in the EU-25 between 1998 and 2007, the cost of capital on retained earnings fell from 7.7 to 6.9 percent, while that on debt rose from 4.3 to 4.6 percent (ZEW and OUCBT, 2008). Several countries have also introduced thin capitalization rules that deny the interest deductibility beyond a certain threshold for the debt-to-equity ratio. Buetner and others (2006) report that, between 1996 and 2004, the share of O] ECD countries applying such rules grew from less than 50 to more than 75 percent. Debt bias may have also increased due to divergence of CIT rates across countries and in light of market developments. The right panel of Figure | shows that the standard deviation of CIT rates among 64 countries between 2001 and 2010 increased from 6.8 to 7.7 percent. This has increased incentives for multinationals to shift debt into high-tax countries. Moreover, innovation in financial instruments has increasingly blurred the distinction between debt and equity and might have opened new options for tax avoidance. Also, the growth of international capital flows during the past decades, driven by the expansion of multinationals, might have increased the opportunities for tax avoidance.
1/ Effect of introducing ACE, accompanied with by higher VAT rate to close the government budget. de Mooij and Devereux (2011) for the EU; Keuschnigg and Dietz (2007) for Switzerland; Radulescu and Stimmelmayr (2007) for Germany. VII. TOWARD MORE NEUTRALITY
1/ Effect of introducing ACE, accompanied with by higher VAT rate to close the government budget. de Mooij and Devereux (2011) for the EU; Keuschnigg and Dietz (2007) for Switzerland; Radulescu and Stimmelmayr (2007) for Germany. VII. TOWARD MORE NEUTRALITY
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EconomicsApplied EconomicsMultinational FirmsInvestment BankingDirect TaxationINDIRECT TAXCorporate SectorDouble TaxationDividend payoutInterest Income
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