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JCP Interest On Net Equity

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JCP Interest On Net Equity
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EconomiA 14 (2013) 185–198

The influence of interest on net equity and interest rates on tax neutrality – a case study of the Brazilian corporate taxation
Aloísio Flavio Ferreira de Almeida a , Nelson Leitão Paes b,∗ b a Funda¸ cão Getúlio Vargas, EAESP, Brazil
Programa de Pós-Gradua¸cão em Economia (PIMES/UFPE) e CNPq, Brazil

Abstract
In this paper we visit the capital income taxation in Brazil to know whether and to what extent interest on net equity (INE) has an influence on tax neutrality, i.e., if it helps reducing debt financing advantage over equity. The paper also addresses the persistent
Brazilian high interest rates influence on the cost of capital, especially for small and medium enterprises (SME), given that big companies are usually allowed to access low interest rates from BNDES, the National Public Development Bank in Brazil. Based on King and Fullerton methodology for computation of effective tax rates, this paper derives the pre-tax and post-tax rates of return on investment, the tax wedges and the correspondent effective tax rates in Brazil, comparing three sources of finance (debt, retained earnings and new equity) and three types of assets: machinery, buildings and inventories. Our simulations show that INE reduces the cost of capital for new equity by 40% but it cannot offset the debt advantage. On the other hand, very high interest rates as found in Brazil make debt finance the worst option, forcing SME to finance themselves.
© 2013 National Association of Postgraduate Centers in Economics, ANPEC. Production and hosting by Elsevier B.V. All rights reserved. JEL classification: H22; H25; H32
Keywords: Corporate taxation; Investment; Profit; Equity; Debt

Resumo
Este artigo analisa a tributac¸ão do capital no Brasil com o intuito de avaliar a influência dos juros sobre o capital próprio (JCP) na neutralidade tributária, isto é, se ele ajuda a reduzir a vantagem do financiamento por


References: Australia Government, 2006. International Comparison of Australia’s Taxes. Australia Government, Canberra. Brazilian Central Bank (BCB), 2011. Annual Report 2010, Available in http://www.bcb.gov.br/?BOLETIMANO, visited in November. Brazilian Service to Support Micro and Small Enterprises – SÃO PAULO BRANCH (SEBRAE-SP), 2009. O Financiamento das Micro e Pequenas Empresas (MPEs) Paulistas, Available in www.biblioteca.sebrae.com.br/bds/bds.nsf/97cc241db9bd939e03257170004bcd72/ Devereux, M., Griffith, R., Klemm, A., 2002. Corporate income tax reforms and international tax competition. Economic Policy 17 (35), 451–495. European Comission, 2009. Effective Tax Levels: Using the Devereux-Griffith Methodology. Project for EU Commission TAXUD/2008/CC/099. FEU, A., 2004. Avaliac¸ão da Produtividade de Capital no Brasil no Século XX, Available in http://ecen.com/eee43/eee43p/produtiv cap secxx.htm, site visited in June. Institute for Fiscal Studies (IFS), 1997. Taxing Profits in a Changing World. Institute for Fiscal Studies, London. Institute for Fiscal Studies (IFS), 2010. Mirrlees Review: Dimensions of Tax Design. Institute for Fiscal Studies, London. Institute for Fiscal Studies (IFS), 2011. Corporate Tax Rate Data, Available in www.ifs.org.uk/publications.php?publication id=3210. Viewed in December. King, M., Fullerton, D., 1984. The Taxation of Income from Capital: a Comparative Study of the US, UK, Sweden and West Germany. University of Chicago, Chicago. Organisation for Economic Co-Operation and Development (OECD), 1991. Taxing Profits in a Global Economy: Domestic and International Issues. Polito, V., 2010. Up or Down? Capital Income taxation in the United States and the United Kingdom. CES-Ifo Working paper n. 3260, November.
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