Italy's Ace Tax and its Effect on a Firm's Leverage

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may University of BresciaAbstract This article describes the new ACE-type system implemented in Italy since 2012. The authors first show that this system reduces but does not eliminate the financial distortion due to interest deductibility. Using a dataset of Italian companies, the authors analyze the impact of this relief on Italian firm capital structure. Despite the permanence of a tax advantage and its gradual implementation, the ACE relief is estimated to reduce significantly leverage. By decreasing default risk it is also expected to reduce systemic risk. JEL H25, H32

Fiscal Reforms During Fiscal Consolidation: The Case of Italy

“…As regards the first aim, by allowing the deduction of both interest expenses and the imputed income from equity capital, the new system could eliminate the tax advantage for debt finance and thus encourage a company to retain more profit or issue new equity. Panteghini et al (2012) (Alworth and Arachi, 2012).…”

Distinguishing between “normal” and “excess” returns for tax policy

“…overview of the systems introduced in various countries, showing the tax base and rate of return used to calculate notional interest deductions for ACE. 19 In an analysis of the ACE system employed in Italy, Panteghini (2012) states that "Ordinary return, approximating the opportunity cost of new equity capital, is exempt, while exceeding income is taxed at the corporate level." The "ordinary" return is compared to the cost of new equity, not debt, in Italy.…”

“…The Netherlands has a presumptive capital tax and Norway has an allowance for shareholder equityboth involve assignment of threshold rates of returns. 20 For more information on the ACE in Italy, as well as the previous dual income tax system (1997-2003), see Panteghini (2012) and Zangari (2014). 21 In Belgium, linear bonds, or OLOs (Obligations Linéaires Ordinaires) are medium, long-term and very longterm securities with a fixed or floating interest rate representing a State Loan, and are issued in tranches.…”

Debt Shifting and Thin-Capitalization Rules – German Experience and Alternative Approaches

“…Empirical analyses show that for both Belgium and Italy, the introduction of an ACE system significantly decreased leverage in firms registered in these countries by about 3 to 5% on median -although in both countries. The allowances are insufficient to fully eliminate the tax preference given to debt; see Princen (2012) and Panteghini et al (2012), respectively.…”