Real-World ACE Reforms and the Italian Experience. Towards a General Trend?

Abstract

In this article, the authors analyze the allowances for corporate capital equity ('ACE') currently adopted in some countries. In the economic literature ACE properties are well known: ACE makes corporation income tax systems neutral with respect to the financing options of firms, since this incentive addresses the tax-induced debt bias by granting an allowance for the cost of equity, normally consisting in the notional return on equity invested by firms. In the last two decades some European countries implemented ACE-like measures, but abolished them after a few years, that is, Italy (with DIT legislation, in force from 1997 to 2003), Croatia and Austria. The authors compare, from a corporation tax law perspective, the existing ACE legislations (Belgium, Brazil, Latvia, Portugal, Leichtenstein) with the new Italian ACE regime (introduced in 2011). Finally, the analysis shows common features and drawbacks of these incentives as well as the perspectives of enacting an EU-wide ACE legislation.