Allowance for Shareholder Equity – Implementing a Neutral Corporate In - come Tax in the European Union

This paper proposes the introduction of a consumption-based corporate income tax in the European Union. Our proposal would guarantee neutrality regarding investment decisions and at the same time increase cost-efficiency. The proposal is based on the S-base cash flow tax, where transactions within the corporate sector are not at all taxable and only transactions between shareholders and corporations are subject to tax. In contrast to existing S-base cash flow tax systems, tax deductibility of investments is deferred. Rather, the acquisition costs and capital endowments are compounded at the capital market rate and are set off against future capital gains. Dividends and withdrawals are fully taxable at the shareholder level. Because of the similarities to the Allowance for Corporate Equity (ACE) tax our proposal is called Allowance for Shareholder Equity (ASE tax). The ASE tax exhibits the same neutrality properties as the traditional cash flow tax. Moreover, the compounded inter-temporal credit method ensures that it is neutral with respect to the decision between domestic and foreign investment. To increase acceptance of the ASE tax, current taxpayers’ documentation requirements will be reduced rather than extended. Our proposal is shaped in a way that it could be realized in a single EU country or in all member states of the EU. Authors: Deborah Knirsch Rainer Niemann WHU – Otto Beisheim School of Management Karl-Franzens-Universität Graz Chair of Taxation and Accounting Institute for Taxation and Accounting Burgplatz 2 Center for Accounting Research 56179 Vallendar Universitätsstraße 15 / FE Germany 8010 Graz Tel.: +49-261-6509-350 Austria Fax: +49-261-6509-359 Tel.: +43-316-380-6444 eMail: [email protected] Fax: +43-316-380-9595 www.whu.edu/steuer eMail: [email protected] www.uni-graz.at/steuer Allowance for Shareholder Equity – Implementing a Neutral Corporate Income Tax in the European Union