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Issues in the design of the ACE

Issues in the design of the ACE. Ernesto Zangari (European Commission). Conference " Corporate Debt Bias: Economic Insights and Policy Options" Brussels, 23-24 February 2014. Views are the author's alone and should not be attributed to the European Commission.

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Issues in the design of the ACE

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  1. Issues in the design of the ACE Ernesto Zangari (European Commission) Conference "Corporate Debt Bias: Economic Insights and Policy Options" Brussels, 23-24 February 2014 Views are the author's alone and should not be attributed to the European Commission

  2. Outline • Main features of the ACE • Focus on Belgium and Italy • Insights for tax design • The definition of the ACE base • The anti-avoidance framework • Scope. Destination of funds. Definition of equity

  3. Main features of the ACE • ATTRACTIVE FEATURES • Neutrality between debt and equity • No distortions on the "marginal" investment • No distortions from the difference between accounting and tax books • Already implemented several times • DRAWBACKS • Narrower tax base • Capital outflow/Profit shifting if CIT rate increases

  4. The Belgian ACE: main features • Introduced in 2006 for the corporate sector. • Motivations: addressing the debt bias and especially replacing the coordination centre regime (Valenduc, 2009; Aujean, Ceriani, Valenduc, 2014). • Close to a "textbook" ACE: • ACE base = "Adjusted" stock ofaccountingequity; • ACE rate based on interest rates on 10-yrs public bonds with a cap (+0.5% for SMEs). • No carry-forward of unused ACE deductions (as for 2012). • Anti-avoidance framework: Specific anti-avoidance provisions + General anti-avoidance provision + Administrative provisions for targeting specific abuses. No targeting of intra-group transactions: No provisions for intra-group loans.

  5. The Belgian ACE: assessment • Financial structures. Industrial sector (Princen, 2012; Van Campenhout and Van Canegnem, 2012; Kestens et al. 2012; Panier et al., 2013; ausdem Moore, 2014): expected effect, more pronounced for big firms (not clear for SMEs). Financial sector (Schepens, 2013): equity ratio up by 0.9%; stronger effects for low capitalized banks  good for financial stability. • "International objectives": from descriptive evidence, expected results (National Bank of Belgium, 2008); • Investment: not clear (Princen, 2012; ausdem Moore, 2014); • Revenue losses: from 1.8 bn in 2006 (16% CIT) to 6.1 bn in 2011 (56% of CIT); 3.8 bn in 2012 (32% of CIT) (Chambre des représentants de Belgique, 2014); • Tax planning: the ACE as a tax planning device (Vanhaute, 2008; Valenduc, 2009; Colmant et al. 2006, Zangari, 2014); • Legislative instability (ConseilSuperieur des Finances, 2014, Box 6, p. 163): as an example, the "Fairness Tax".

  6. The Italian ACE: summary • Introduced in 2011 for all business income. • Motivations: promoting firms' capitalization and boosting growth. • ACE Base: incremental. No equity contributions in kind. • ACE rate: average returns on Treasury Bonds + up to 3% for risk (until now it has been set by the law; for 2015-2016: 4.5%-4.75%). • No conditions on the asset side of the balance sheet. • Carry forward of unused ACE deductions. • Anti-avoidance framework: Specific anti-avoidance provisions for transactions between related parties (including intra-group loans) + General anti-avoidance rule

  7. The design of the ACE (1) • The definition of the ACE base • An incremental ACE system is preferable: • More efficient since there are no windfall gains for installed capital • More viable given a better dynamic matching between costs and benefits • The anti-avoidance framework • A stricter anti-avoidance framework is preferable. • The issue of “ACE cascading” • Specific vs. General Anti-avoidance provisions

  8. The design of the ACE (2) • Scope of the ACE • A broader scope appears preferable: • It lowers the distortions in the choice of the organizational form • More generally, it brings the tax system closer to a DIT • Destination of funds: • is there a case for conditions on the asset side of the balance sheet? • PROS: reduced revenue costs and targeting the "best" investments; • CONS:system more complicated and ineffective investment targeting • Conclusion: Not clear! Definition of equity • Correction of the ACE base for the equitycompulsory by law • Tax- vs. Accrual-based ACE base and the neutralityproperties

  9. Thank you!

  10. References Aujean, M.,Ceriani V. and C. Valenduc, (2014), "Financement de l’investissement et neutralité fiscale : la déduction pour capital à risque en perspective", Reflets et perspectives de la vie économique 2014/1 Banque Nationale de Belgique (2008), Impact macroéconomique et budgétaire de la déduction fiscale pour capital à risque, 22 July. Caiumi, A., Di Biagio, L., Rinaldi, M. and A. Zeli (2014) « The redistributive effects of an ACE Tax: the case of Italy”, mimeo Caiumi, A. and L. Di Biagio (2015), "ISTAT – MATIS Corporate Microsimulation Model for Italy", ISTAT Working Paper. Chambre des représentants de Belgique, Inventaire des exonérations, abattements et réductions qui influencent les recettes de l’État (2010, 2011, 2012, 2013). Colmant, B., Minne, P. and T. Vanwelkenhuyzen (2006), Les intérêts notionnels: Aspects juridiques, fiscaux et financiers de la déduction pour capital à risque, Editeur: Larcier. Conseil supérieur des Finances (2014), Un tax shifting en faveur du travail et des bases imposables plus larges ; scénarios pour une réforme fiscale globale et significative, SPF Finances, Bruxelles. www.docufin.be ISTAT (2014), Rapporto Annuale. Kestens, K., Van Cauwenberge, P. and J. Christiaens (2012), "An investigation of the effect of the notional interest deduction on the capital structure of Belgian SMEs", Environment and Planning C: Government and Policy 30(2): 228 – 247 Panier, F., Perez-Gonzales, F. and P. Villanueva (2013), Capital structures and taxes: what happens when you (also) subsidizes equity?, mimeo Panteghini, P,. Parisi M-L., Pighetti F., (2012), “Italy’s ACE Tax and its Effect on a Firm’s Leverage, CESIFO Working Paper 3869. Princen S., (2012), Taxes do affect corporate financing decisions: the case of the Belgian ACE, CESIFO Working Paper. Valenduc C. (2009), Les intérêts notionnels : une réforme fondamentale et controversée, Courrier hebdomadaire du CRISP, No 2018. Vanhaute, P.A.A. (2008), Belgium in international tax planning, 2nd edition, IBFD. Van Campenhout, G. and T. Van Caneghem (2013), "How did the notional interest deduction affect Belgian SMEs’ capital structure?", Small Business Economics, Vol. 40(2): 351-373. Zangari E. (2014), Addressing the Debt Bias : A Comparison between the Belgian and the Italian ACE systems, Taxation papers, No 44, European Commission, Taxud.

  11. The ACE in the EU PAST EXPERIENCES: Croatia: 1994-2000 Italy: 1997-2003 Austria: 2000-2004 Latvia: 2009-2013 CURRENT SYSTEMS: Belgium: since 2006 Italy: since 2011 Portugal: since 2008 (for SMEs, with limitations)

  12. Belgium ACE: a comparison with the CCR

  13. The Italian ACE: assessment • Which type of CIT system? ACE + CBIT • Impact on tax rates: gradual reduction of the average tax rate on the return to capital, differentiated on the basis of firm's financial policy • Financial structures: expected positive effects (Panteghini et al., 2012). • Tax revenue impact: • Short-run: in 2011-20012, between 1/5 and ¼ of companies did benefit; in 2011: ACE = 1.8bn (revenue loss about 0.4 bn; 1.3% of CIT); in 2012: ACE = 4.2bn (revenue loss about 1bn; 2.8% of CIT); • Medium and long-run: in five years, about 1/3 of companies will benefit and the tax rate down by 2.9%; in the long-run, about 50% of the companies will benefit and the tax rate down by 8.5% (ISTAT, 2014; Caiumi et al. 2014; Caiumi and Di Biagio, 2015); • Speed of adjustment: after 5 years, the ratio between the ACE base and total equity will range from 20% to 50% and it is decreasing with the class of firms' revenues (ISTAT, 2014; Caiumi et al. 2014).

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