Depreciation Allowances Research Articles

Rising allowances, rising rates — Can growth arise through business income tax reform despite government debt limit?

The system of business income taxation consists of two instruments, namely a statutory tax rate and a depreciation allowance on investment. We will show in this paper that by acting on both instruments simultaneously it is possible to achieve both a growth and a fiscal net revenue target even in cases when a trade-off prevails when each instrument is used individually.As will be shown in the paper, depreciation allowances have a more favorable trade-off between growth and net revenue in the long run compared to statutory business income tax rates. Thus, by rising depreciation allowances and the statutory tax rate at the same time, it is possible to both increase growth and fiscal space.In a model simulation calibrated to the German economy and tax system, an increase of the tax depreciation rate for all investments from 10% to 25% leads to a more than 2 percent GDP increase and more than 6 percent higher private investments in total. Whereas GDP and investment rise steadily over time, the government budget becomes negative in the short run. In the long run, the sign of the fiscal budget effect is determined by the indexation of government consumption to GDP. However, according to our findings, slight adjustments in the statutory business income tax rate could balance out these deficits and generate additional fiscal space.

The macroeconomic effects of business tax cuts with debt financing and accelerated depreciation

This paper studies the macroeconomic effects of business tax cuts using a dynamic general equilibrium model that incorporates endogenous debt and equity financing, interest deductibility, and accelerated capital depreciation. A cut in the tax rate stimulates business investment and output persistently, but the size of the effects is small. On impact, a ten percentage point permanent tax cut raises investment and output by 2 percent and 0.4 percent, respectively. The cumulative tax multiplier ranges from −0.4 in the initial year to −0.6 after ten years. The model would predict more expansionary effects without debt financing and accelerated depreciation. The multiplier of investment tax credits is larger in absolute value than the tax rate multiplier. The multiplier of depreciation allowances is much smaller on impact than at long horizons.

Depreciation allowances for tax purposes in periods of less than a year

In tax legislation, a depreciation allowance is applied in three provisions and results in a reduction of taxable amounts. A depreciation allowance is calculated for the period an employer owned a vehicle prior to granting the right of use to an employee (paragraph 7(1) of the Seventh Schedule to the Income Tax Act and section 10(13) of the Value-Added Tax Act) or the period an asset was leased prior to acquisition by the lessee (section 8(5)(bB) of the Income Tax Act). Both periods could consist of or include a period of less than a year. The uncertainty of interest in this article is whether a depreciation allowance should be disregarded or not when a period of less than a year is concerned. The tax implications, wording, and context of the three tax provisions were considered with due regard for the limited current guidance offered by the SARS. The findings of this article suggest that a taxpayer following current guidance in the application of all three tax provisions would not be correct. In line with current guidance relating to paragraph 7(1) of the Seventh Schedule to the Income Tax Act, the depreciation allowance contemplated in section 10(13) of the Value-Added Tax Act should disregard a period of less than a year. Contrary to current guidance, the different context of the depreciation allowance contemplated in section 8(5)(bB) of the Income Tax Act is argued as affording the opportunity to apply the depreciation allowance when a period of less than a year is concerned. A depreciation allowance applied for a period of less than a year would result in a lower recoupment for inclusion in taxable income for normal tax purposes and, as a result, argued as beneficial to taxpayers.

Tax incentive and firm investment: Evidence from the Income Tax Revenue Sharing Reform in China

AbstractHow to stimulate enterprise investment is a dilemma facing most countries, and tax incentives are frequently used as a solution. This study explores how China's Income Tax Revenue Sharing Reform affected enterprises' fixed asset investment (FAI). This reform did not modify the nominal tax rate or depreciation allowance directly but changed the effective enterprise income tax (EIT) rate via switching tax administration indirectly. And the change in the effective EIT rate should affect firm investment. This paper uses a regression discontinuity (RD) design to conduct a quasi‐natural experiment of the reform in 2002 based on an enterprise‐level dataset from the Annual Survey of Industrial Enterprises (ASIE). After the reform, the effective EIT rate (ETR) of enterprises collected by the State Administration of Taxation (SAT) was 11% lower than that collected by the Local Administration of Taxation (LAT). FAI improves by 0.7% for every 1% decrease in ETR. Tax avoidance is a key channel for the ETR to affect FAI. The FAI of smaller companies, non‐state‐owned enterprises (SOEs) and companies with high size‐age (SA) indexes has responded more significantly to the change in ETR brought about by reform.

Capital depreciation allowances, redistributive taxation, and economic growth

AbstractAre capital depreciation allowances when coupled with capital income taxes good instruments for redistribution in the long run? In a simple two‐agent‐economy I find that accelerated depreciation is good for growth, but bad for redistribution. The opposite holds for capital income taxes. However, in a feedback Stackelberg equilibrium, where the government is the leader and the private sector the follower, the depreciation allowance is maximal in the long run, time‐consistent optimum. This removes the accumulation distortion of capital income taxes. Furthermore, the latter, and so redistribution, is found to be generically nonzero in the time‐consistent optimum, and depends on the social weight of transfers receivers, the pretax factor income distribution, the intertemporal elasticity of substitution and the time preference rate. Thus, accelerated depreciation allowances are an important indirect tool for redistribution. The tax scheme allows for a separation of “efficiency” and “equity” concerns for redistributive policies.

Tax incentive and corporate financial performance: Evidence from income tax revenue sharing reform in China

How to stimulate corporate performance is a crucial issue of general concern in all countries. This paper examines how China’s Income Tax Revenue Sharing Reform in 2002 affects corporate financial performance. Unlike general tax policies that directly adjust the nominal tax rate or depreciation allowance, this reform indirectly affects the effective Enterprise Income Tax (EIT) rate by switching tax administration, thereby affecting corporate financial performance. We use a firm-level data-set from Annual Survey of Industrial Firms (ASIF), and test the impact by using a quasi-natural experimental design through regression discontinuity design (RDD). We find that after the reform, the effective EIT rate (ETR) of enterprises collected EIT by State Administration of Taxation (SAT) was 10% lower than that of enterprises collected EIT by the Local Administration of Taxation (LAT). If the ETR reduces by 1%, corporate financial performance, more specific, Return on Asset (ROA), increases by 1.7%. There are two available channels: increasing fixed asset investment (FAI), and alleviating external financial constraints. Additionally, the impact can be weakened for locally SOEs, large firms, firms with low SA index and those in less competitive industries.

Temporary Super Depreciation Allowances for Green and Digital Investments

Temporary Super Depreciation Allowances for Green and Digital Investments

The Factors Affecting Accounting Estimation" Depreciation Allowance" and Its Effect on Reliability of Financial Reports – Applied Study in Yemen Corporates, Hadramout –: أثر التقدير المحاسبي لمجمع الإهلاك في مصداقية التقارير المالية – دراسة ميدانية على الشركات اليمنية بحضرموت –

The study aimed to identify the effect of the accounting estimate on the reliability of the financial reports. The study identified three factors that affect the accounting estimate, which are the subject of the estimation, the estimation tool, and the estimator, in the estimation of depreciation provisions, the researchers adopted the descriptive analytical approach; By following the studies and literature in accounting thought, and designing a questionnaire that was distributed to the sample selected for the study. The study reached a set of results, including that the reliability of the financial reports is affected by the subject of the estimation, the estimation tool and the estimator. The depreciation provision is affected by factors including the efficiency of determining the useful life of the asset, the extent to which the asset is used in production, the efficiency of estimating the residual value. One of the most important factors affecting the estimation tool is the flexibility in applying accounting principles and standards, the large size of companies and the size of the profits obtained by the establishment. The most important factors affecting the estimator are the availability of the necessary expertise for those in charge of accounting estimates, the nature and size of the activities that the companies engage in, the extent of the accountant’s knowledge of them, and the absence of an independent Yemeni reference body or organization that trains, qualifies and protects those responsible for accounting estimates. The study recommended the necessity of working on qualifying and training the estimators and finding a reference for them to protect them from management interventions in a way that achieves effective and efficient performance and protects them from legal accountability.

Depreciation allowances in South Africa

Since the 1980s, tax depreciation allowances are used less as instruments of macroeconomic stabilization and more as long-term measures to stimulate investment. This paper tabulates the types of accelerated depreciation allowances in South Africa and calculates the magnitude of these benefits in addition to standard across-the-board accounting depreciation by companies. Using anonymized tax assessment data from the South African Revenue Service, the analysis generates the aggregate and sectoral composition of tax depreciation and tax investment allowances for 2014–2017. An estimate is offered of the cost to the treasury of these tax expenditures, and the reduction in the statutory corporate income tax rate should these depreciation allowances be terminated.

METHODS OF ACCOUNTING FOR THE PROCESSES OF REPRODUCTION OF FIXED ASSETS OF THE ENTERPRISE AS A SOURCE OF INTERNAL INVESTMENT FOR THE ENTERPRISE

The article is devoted to the research of current state of amortization policy in Ukraine. The article examines depreciation reforms carried out starting from 1997 up to the present time and makes the conclusion that they only brought the national depreciation policy closer to the countries with the market economy, but the real accumulation of funds for fixed assets was not achieved. Consequently, depreciation allowances are not only unable to stimulate the development of the economic entity, and are not able to even provide simple maintenance of basic (even manufacturing) facilities, which leads to their depreciation, and money for renovation or repair is not. In the work is stated that the use of a particular method of accrual of depreciation of fixed assets is appropriate to choose depending on the corrosiveness of the management functions, the objectivity, etc. The result will be to achieve the maximum effect from the application of the appropriate method of accrual of depreciation. The end result will be willingness of the subjects of management to the production of products (services). Examining current amortization policy, which was formed at the present stage of economic development in our state, continues to be ineffective. In our view, the current amortization policy does not fulfill its main function - motivation to the real accumulation of funds for renewal of worn and morally and technically outdated main assets of the enterprise. Today no company is not able during the regulatory period of service of fixed assets to offset their costs for their renewal, but for the need for renewal. We believe that the feasibility of choosing a method of accrual of depreciation must be carried out taking into account the correlation for the management functions, the objectivity and feasibility of use by a particular entity of management. Our proposed mechanism for selecting the optimal depreciation policy by the management of the enterprise, based on the real accumulation of "real" money can be a source of internal investment for renewal and renovation of basic assets of the state. The obtained results of the research is relevant in an environment where the deterioration of the basic equipment of enterprises is sometimes up to 90%, and the necessary funds for renovation and repair of the basic equipment of the enterprise.

Technical and Economic Assessment of the Condition of Fixed Assets and the Criterion of the Validity of Recovery Investments

The article analyzes the methodology for calculating depreciation and assessing the condition of fixed assets. The absence of conditionality of the period of use and depreciation allowance of fixed assets due to their physical wear and tear in specific production conditions is revealed. Thus, it is concluded that the theoretical estimates of the condition of fixed assets do not correspond to their actual physical wear and tear. The internal contradictions of the indicator of return on capital are investigated, its inconsistency with the essence of production is revealed. The absence of a criterion for the need for renovation investment is mentioned as one of the negative consequences of the existing methodological approaches to assessing the condition of fixed assets. In order to overcome the shortcomings and negative consequences of the methodology for assessing the condition of fixed assets, the relationship between the depreciation coefficient, the technical accelerator and the integral indicator of physical wear is revealed. To characterize the dependence of the volume of production and operating costs on the physical depreciation of fixed assets, a conversion factor is substantiated and introduced. Formal models of indicators of production and return on capital are presented. They reflect partial and generalizing coefficient of conversion of fixed assets as well as the interest rate and the level of inflation. The moment of zero efficiency of fixed assets is substantiated as a criterion of necessity and timeliness of renovation investments. In addition, the concept of the period of their effective use is introduced.

The Role of Leasing in the Effectiveness of Corporate Tax Policy: Evidence from the 2002 Bonus Depreciation

Firms can use capital that they either purchase or lease, but these alternatives are treated differently for tax purposes. This paper derives the demand for leased capital as a function of tax parameters, and uses the model to estimate the responsiveness of leasing to the 2002 bonus depreciation, finding strong evidence that depreciation allowances influence leasing patterns. Firms that stood to benefit the least from depreciation allowances were the most likely to lease capital during the temporary bonus depreciation period. Specifically, we find that a lessee with a marginal tax rate of zero increases the fraction of leased investment by up to 10 percentage points during the period, compared to a fully taxed lessee.

The Impact of Investment Incentives: Evidence from UK Corporation Tax Returns

Using UK corporation tax returns, we provide evidence on the effects of accelerated depreciation allowances on investment, exploiting exogenous changes in the qualifying thresholds for first-year depreciation allowances (FYAs) in 2004. The investment rate of qualifying companies increased by 2.1–2.5 percentage points relative to those that did not qualify. We exploit variation in the timing of tax payments to show that this effect is primarily due to the change in the cost of capital, rather than a relaxation of financial constraints. Discontinuity at notches in the cost of capital at the qualifying thresholds does not affect our results. (JEL D25, G31, H25, H32)

The Relevance of Depreciation Allowances as a Fiscal Policy Instrument: A Hybrid Approach to CCCTB?

A major goal of the EU Commission in the area of direct taxation is the introduction of a common consolidated corporate tax base (CCCTB) in Europe. While hardly discussed in the literature, such a system would limit national discretion over tax depreciation. In a sample of up to 47 countries, we find that the probability of a tax reform that improves the depreciation allowances increases, if the macroeconomic situation is weak. This suggests that changes in depreciation allowances are used as a fiscal instrument for stabilization. A common consolidated tax base deprives national governments from implementing investment incentives via accelerated depreciation. This paper discusses the possible implementation of a hybrid system that combines features of formula apportionment and separate accounting. Such a hybrid system may substantially mitigate transfer pricing problems and other tax planning issues, whilst preserving national discretion over depreciation allowances.

The relevance of depreciation allowances as a fiscal policy instrument: A hybrid approach to CCCTB?

A major goal of the EU Commission in the area of direct taxation is the introduction of a common consolidated corporate tax base in Europe. While hardly discussed in the literature, such a system would limit national discretion over tax depreciation. In a sample of up to 47 countries, we find that the probability of a tax reform that improves the depreciation allowances increases, if the macroeconomic situation is weak. This suggests that changes in depreciation allowances are used as a fiscal instrument for stabilization. A common consolidated tax base deprives national governments from implementing investment incentives via accelerated depreciation. This paper discusses the possible implementation of a hybrid system that combines features of formula apportionment and separate accounting. Such a hybrid system may substantially mitigate transfer pricing problems and other tax planning issues, whilst preserving national discretion over depreciation allowances.

Accelerated Depreciation, Default Risk and Investment Decisions

In this article we focus on a representative firm that can decide when to invest under default risk. On the one hand, this firm can benefit from generous tax depreciation allowances, on the other hand it faces a default risk. Our aim is to study the effects of tax depreciation allowances in a risky environment. As will be shown in our numerical analysis, generous tax depreciation allowances lead to a decrease in a firm’s leverage and, in most cases, cause a reduction in default risk. This result has a strong policy implication, in that it shows that an investment stimulus pack is expected neither to increase the default risk nor to cause financial instability.

Accelerated depreciation, default risk and investment decisions

In this article we focus on a representative firm that can decide when to invest under default risk. On the one hand, this firm can benefit from generous tax depreciation allowances, on the other hand it faces a default risk. Our aim is to study the effects of tax depreciation allowances in a risky environment. As will be shown in our numerical analysis, generous tax depreciation allowances lead to a decrease in a firm’s leverage and, in most cases, cause a reduction in default risk. This result has a strong policy implication, in that it shows that an investment stimulus pack is expected neither to increase the default risk nor to cause financial instability.

Housing and Tax Policy

This paper investigates the effects of housing‐related tax policy measures on macroeconomic aggregates using a dynamic general‐equilibrium model featuring borrowing and lending across heterogeneous households, financial frictions in the form of collateral constraints tied to house prices, and a rental housing market alongside owner‐occupied housing. We analyze the effects of various tax policies and find that they all lead to significant output losses, with large long‐run tax multipliers of around 2. Among them, reducing the mortgage interest deduction is the most effective in raising tax revenue per unit of output lost, whereas reducing the depreciation allowance for rental income is the least effective.

Accelerated Depreciation, Default Risk and Investment Decisions

In this article we focus on a representative firm that can decide when to invest under default risk. On the one hand, this firm can benefit from generous tax depreciation allowances, on the other hand it faces a default risk. Our aim is to study the effects of tax depreciation allowances in a risky environment. As will be shown in our numerical analysis, generous tax depreciation allowances lead to a decrease in a firm’s leverage and, in most cases, cause a reduction in default risk. This result has a strong policy implication, in that it shows that an investment stimulus pack is expected neither to increase the default risk nor to cause financial instability.

Network depreciation and energy market disruption: Options to avoiding passing costs down the line

Traditional monopoly regulation as applied to the Australian electricity and gas network sector effectively presumes future consumers will meet a substantial proportion of the capital costs of long-lived network investments made today. Yet changes in demand, technology and cost conditions make this presumption less certain than in the past. These changes are potentially putting current approaches, and effectively the traditional ‘regulatory compact’, under pressure.Regulatory economic theory and practice suggest a range of hypothetical options. The particular characteristics of the current regulatory framework have implications for what will be a workable option. Analysis of the set of options suggests that the primary goal of the economic regulatory regime, the long-term interests of consumers, may be promoted by the more active use by economic regulatory bodies of flexible depreciation allowance provisions, and movement to more flexible regulation.