The Comprehensive Business Income Tax System: A Proposal for Ultimate Neutrality between Debt and New Equity Issues?

Transcription

1 International Journal of Sciences: Basic an Applie Research (IJSBAR) ISSN (Print & Online) The Comprehensive Business Income Tax System: A Proposal for Ultimate Neutrality between Debt an New Equity Issues? Assis. Professor Ilija Gruevski a*, Assis. Professor Stevan Gaber b *, Assis. Professor Marija Gogova Samonikov c a,b,c Goce Delcev University, Faculty of Economics, Krste Misirkov St., 10-A, Stip 1200, Republic of Maceonia a ilija.gruevski@ug.eu.mk b stevan.gaber@ug.eu.mk b marija.gogova@ug.eu.mk Abstract The majority of experts agree that taxes are istortionary in nature. This is relatively true for all of the ifferent groups of taxes, but for the corporate taxes is exceptionally obvious. The existence of corporate taxes can affect the company s behavior in a number of ways an one of them is the istortion of choice of the sources of finance. As it is known, companies usually face 2 ifferent financial alternatives to cover their investment opportunities: ebt an equity (new equity issues or alternatively, retaine earnings). Accoring to the principles of corporate taxation, since interest payments are in fact tax euctible from the corporate income tax base, the ebt source of finance is commonly consiere as tax preferre as compare to the equity source of finance. Similarly, retaine earnings are more preferre to new equities since capital gains are usually taxe upon realization or eventually exempte from taxation when reinveste. The theory suggests many varieties of corporate tax systems that sustain relative capacities to offset the excessive buren on the external equity supporte investments an thus, eliminate the ebt-equity relate istortions * Corresponing author. 30

2 From the wier literature offer, we chose to examine the comprehensive business income tax system (CBIT), a proposal of the US Treasury Department an compare it with the basic classical approach in corporate taxation. The intention is to explore its properties from the view of ity an the allocation criteria, for which purpose the basic methoology of EMTR is aitionally moifie an extene. We hope to prove that this corporate system has justifie its reputation in the sphere of our interest. Keywors: comprehensive business income tax, cost of capital, effective marginal tax rate, classical corporation tax, ebt, new equity issues, ouble taxation. 1. Introuction Recently, we ve escribe an explaine the istortions that usually arise from the isolate implementation of corporate taxes, a conition which assumes total abstraction of the personal taxes. In this article, we also inclue the personal taxes in our analysis, with intention to explore the investment ecision, not only from the company s perspective, but from the shareholer s point of view as well, a conition commonly referre as ouble taxation. This phenomenon is grante to fact that the corporate tax base (i.e. the corporate income) cannot be limite only at the corporation observe as a form of legal entity. Usually, uner the classical corporation tax regime, after the initial taxation at corporate level, corporate profits are istribute to the shareholers in a form of iviens, capital gains or interest payments, an are subject to aitional taxation at personal level. The ultimate consequence of the referre phenomenon is imposition of an aitional extra buren on total corporate profit expresse integrally from its source to its estination. Respecting that this excessive taxation of the profit is consiere unfair an coul istort the economic activity of firms, the authorities try to construct more appropriate tax systems with attributions to effectively tax the economic rents (or the extra profit) an at the same time avoi taxation of the normal return. In aition, we give a brief literature review to some integrate moalities of corporate tax systems with the esire properties, which actually allow a higher egree of ity in corporate taxation. The following tax systems are protagonists proposals of the OECD (Organization for Economic Co-operation an Development), as a part of the tax reform that was unergone recently, acknowlege as more convenient to eliminate the ifference between ebt an equity associate with the classical approach of corporate taxation: the Full Integration Tax System (FIT), the Allowance for Corporate Equity Tax System (ACE), the Allowance for Shareholer Equity Tax System (ASE), the Comprehensive Business Income Tax (CBIT) etc. It is a commonly known truth that borrowe capital is a superior source of finance from the taxpayer s point of view, as a result of the usual an wiely excepte treatment of interest payments. In practice, since companies are allowe to euct interest payments from their corporate income tax base, the system subsiizes the ebt source finance in a manner that the action reuces the opportunity cost (the iscount rate) of the ebt-finance investment. This gives a certain avantage to the ebt finance, since it is tax preferre in front of equity, which oppositely is fully taxe. The last triggers unfavorable behavior of the company, to use more borrowe capital, thus increasing the risk of bankruptcy an insolvency of the firm. The last presents the most common an 31

3 typical istortion of corporate finance, inuce by the traitional, classical treatment of corporate profit. But, as mentione above, the leaing economic organizations such as the OECD, have mae a break-through in the sphere of business taxation, proposing some alternative moels of hybri tax systems, that are much or less istinctive from the classical approach an more evenly allocate the buren across the ifferent sources of finance, for example such as the CBIT system. Initially evelope an propose by the US Treasury Department, an after accepte an promote by the OECD, this regime successfully eliminates the nee for integration between the corporate an personal taxes on equity by imposing a restriction on the possibility to euct the interest payments. In fact, interest income is no longer euctible from the corporate income tax base an at the same time is exempt from taxation at personal level. The result shoul be ity an inifference between ebt an equity. 2. The applie methoological frame We pay our attention here, exclusively on the investments finance with new equity issues (external equity). As we know from business practice, equities coul be foun in 2 (two) funamental forms: external equity (new equity issues), which provies the equity capital for the ongoing projects externally, through issues of the new company s shares on the capital market; an retaine earnings (retentions of profit), which are forme from the company s accumulate (non-istribute) profit, usually subject of reinvestment. The moels of taxation iscusse in this article, coul be easily applie in the investment scenario covere with retaine earnings as well, of course moifie with its specific circumstances. With the purpose to achieve more etaile, systematic approach in exploration of the attributions an specificities of the moels, we ecie to stuy them separately, an eicate this article only for the new equity finance. Other reasons for this are the limite space, minimizing the risk for confusion, an proviing a better comparison of the effects. The basic methoology is consiste of the effective marginal tax rates analytical frame (EMTR), which is aitionally moifie an extene to express all the newly occurre conitions that efine ouble taxation of corporate profit. With the aapte methoology of EMTR, we have manage to ientify an explain many varieties of integrate tax systems that sustain some relative (theoretical) capacities to offset the excessive buren on the external equity supporte investment. Here, we present in etail only the Comprehensive Business Income Tax System (CBIT) an compare it with the basic Classical Corporation Tax System (CCT). To recall, accoring to Devereux & Griffith [1], [2], [3], the effective marginal tax rate is efine as: ~ (1 A){ ρ + δ (1 + π ) π} F(1 + ρ) δ (1 + π ) γ (1 + π ) p (1) In orer to isolate the pure effects that arise from the imposition of the coe, as well as to simplify the calculation for the purpose of a better illustration of the effects, once again, we suggest the following assumptions: the net-present value of epreciation allowances is assume 0 (A 0), there is no inflation in the economy (π 0, ρ r), the rate of economic epreciation is assume 0 (δ 0) an the real interest rate is positive (r > 0). If we consier the previous assumptions an label m as the personal tax rate on ivien income, z as the effective personal tax rate on capital gains, m i as the personal tax rate on interest income an c 32

4 as the tax creit rate allowe for iviens pai, then the tax iscrimination variable requires the form of: (1 m ) (1 z)(1 c) γ (2) The shareholer s iscount rate transforms to: 1 m i r z 1 ρ (3) An the general form of the cost of capital rearranges to: ~ p ρ F(1 + ρ) γ (4) Recognizing the fact that uner existence of personal taxes, the financial constraints variable F NE when the project is finance with new equities is measure as: ρ(1 γ ) NE F (5) Derives a cost of capital for this alternative investment of: ~ ρ p ργ + ρ ργ ρ γ γ ρ(1 γ ) ρ ρ(1 γ ) ργ ( ρ + ργ ) γ (1 + t) γ γ γ (6) While uner the same conitions, the financial constraints variable F DE when the project is finance with ebt: γ[ ρ r(1 t)] F DE (7) Generates a cost of capital for the ebt-finance investment alternative of: 33

5 γ[ ρ r(1 t)] ~ ρ ρ [ ρ r(1 t)] ρ [ ρ r + rt] p γ (1 + t) r rt r(1 t) r (8) Before we procee, we like to refer to our main analytical tool, an that is, the investment tax wege coefficient efine as (p ~ r) [4]. Depening on the relation between the cost of capital p ~ an the real interest rate r, we can istinct 3 ifferent conitions. The first conition is when the effective tax buren is positive (p ~ > r) an as a result of that, the tax system epresses the investment activities. In terms of integrate taxation of company s income, this means that both, the economic rent an the normal return are effectively taxe. The secon conition is when the effective tax buren is equal to 0 (p ~ r), when the tax system is to the investment ecision. In other wors, uner these conitions, the normal return of corporate profit is left from taxation an only the extra profit is being subject to taxation. An the thir an the most preferable conition from the investor s point of view is when the effective tax buren is negative (p ~ < r), when the tax system supports the overall investment. Here, the investment is being effectively subsiize by the system, enabling the investor to legally escape from taxation a rate of return higher than the normal rate of return. In perfect economies without presence of taxes, the cost of capital is ientical with the real interest rate (p ~ r) an the economic agents are completely inifferent between the investment ecision an the ecision to save. The existence of the national tax system iverges the ifference between the cost of capital an the interest rate an therefore creates a positive tax wege (p ~ > r). 3. The Classical Corporation Tax System (CCT) First, we like to refer once again in etail the so-calle classical approach in corporate taxation, which has been traitionally the most use an wiely practice form of corporate tax. Actually, the classical system posts a true representation of what is known as ouble taxation an a classical example of the pure separate taxation of corporate income. It will serve as a baseline moel for comparison of the CBIT system iscusse furtherly. So, what is the classical corporate income tax system? Basically, the CCT is a ruimentary form of corporate tax that treats the corporate income in a conservative an funamental way. It s a system of taxing companies in which the company is treate as a taxable entity separate from its own shareholers. The profits of companies uner this system are therefore taxe twice, first when mae by the company an again when istribute to the shareholers as iviens an capital gains. Formally, there is no integration at all between the corporate an personal income tax uner the CCT system. In the essence of the Classical Corporation Tax is ouble taxation of corporate income. As state by Harberger [5], Such a tax system iscriminates against the incorporation of business ieas, restrains the supply of equity finance necessary for their economic utilisation, reallocates resources from the corporate sector to the unincorporate one an thus causes unefficiency loss to the whole economy. That s why, accoring to Kari an Yla-Lieenpohja [6], The nee to eliminate these rawbacks le to tax reforms aime at integrating the taxation of corporations an their owners. So, how coul we express the true nature of this typical form of 34

6 corporate tax an illustrate the effects from it in terms of the propose methoology? Technically speaking, as escribe by Devereux an Griffith [7], A Classical System makes no allowance for ouble taxation, so that ivien income is subject to corporate income tax an taxe again as personal income.the authorities impose the corporate tax at the corporate level ifferently from the personal taxes at the stockholer level an at the same time o not allow any tax creit on ivien istributions (c 0). Usually, the combination of the levels (percentage points) of the ifferent tax rates falls uner iscretion of the policy maker. Consiering this, we can ientify the CCIT system as (t, m, m i, z, c 0). 3.1 CCT in ebt-finance alternatives It is easily recognize that the CCT prouces a zero investment tax wege variable if we take in account expression (8) that the cost of capital in this alternative is equal to the real interest rate: ~ r r r 0 p (9) A conclusion is rawn that, if the integrate overall effect from corporate an personal tax is observe, in every case when the investment project is finance with external ebt, the system will be to the investment ecision, ceteris paribus. The introuction of personal taxes o not affect these investments in a ifferent way rather than the case of isolate application of corporation tax, so it is evient that the ouble taxation effect is not present here. 3.2 CCT in equity-finance alternatives The implications of the conitions of classical system in this alternative are initially foun in parameters γ an ρ: (1 m ) (1 m ) 1 m i γ an r (1 z)(1 c) (1 z) z 1 ρ (10) Incluing these in term (6), the cost of capital will become: i (1 m ) r ~ ρ (1 z) p γ (1 m ) (1 z) i (1 m ) r (1 m ) (11) An finally the investment tax wege will transform to: i i ~ (1 m ) r (1 m ) r r r 1 (1 m ) (1 t)(1 m ) p (12) 35

7 Accoringly, as state in this case by Gruevski [8], The effects from corporate taxation very often epen on the cross-effects from the personal taxation. Expression [12] shows that the investment ecision in this basic an most extene version of taxation of corporate income is etermine largely from the inter-relation between the ifferent personal tax rates (m i an m ) an the corporate tax rate t. It is also self-evient, as we can see from the absence of symbol z, that the effective personal tax rate on capital income is non-relevant for the present moel of taxation. The effect from ouble taxation is quantifie with the term (1 m i )/(1 t)(1 m ). Actually, it represents the combine corporate an personal income tax liability of the CCT, which may have variable values epening on the ifferent imensions of the relevant tax rates impose by the coe. For example, if we take the actual situation in Maceonia, where m i 0% (0,00), m 10% (0,10) an t 10% (0,10), the combine tax liability woul be 0,2345 or 23,34% an with real interest rate of 10% (0,10) woul yiel an effective tax rate on investment of 0,0234 or 2,34%.If we assume that an interest income tax of 5% has been introuce lately m i 5% (0,05), than the combine tax liability woul be 0,1728 or 17,28%, proucing an effective tax rate on investment of 0,0172 or 1,72%. On the other han, if the corporate an the ivien tax are increase on 20% t m 20% (0,20) an m i 0% (0,00), it is obvious that the investment tax wege will be aitionally increase on 0,0562 or 5,62%. In the following table some possible combinations of the relevant tax rates an the possible outcomes are presente an interprete in terms of the investment tax wege coefficient. Table 1: Illustration of the possible combinations of tax rates an their effects on investment uner the CCIT Possible combination of tax rates Example Investme nt tax wege (p ~ -r) equity finance investment normal return an economic rent corporate finance t m m i 10%,10%,10% 1,11% limiting normal favors ebt return an rent taxe t > m m i 20%,10%,10% 2,50% limiting normal favors ebt return an rent taxe t > m > m i 30%,20%,10% 6,07% limiting normal favors ebt return an rent taxe t > m < m i 20%,10%,28% 0,00% inifferent rent taxe inifferent only t > m < m i 10%, 5%,30% -1,81% stimulating subsiize favors equity t m > m i 20%,20%, 10% 4,06% limiting normal favors ebt return an rent taxe efficiency (allocation criteria) istortive istortive istortive istortive istortive 36

8 t m < m i 10%,10%,19% 0,00% inifferent rent taxe only inifferent t m < m i 10%,10%,30% -1,36% stimulating subsiize favors equity t m 0,m i 0%, 0%, 10% -1,00% stimulating subsiize favors equity t m, m i 0 10%,10%, 0% 2,34% limiting normal favors ebt return an rent taxe t m i, m 0 10%,10%, 0% 0,00% inifferent rent taxe inifferent only t 0, m i m 0%,10%, 10% 0,00% inifferent rent taxe inifferent only t m m i 0 0%, 0%, 0% 0,00% inifferent rent taxe inifferent only istortive istortive istortive Source: Author s calculations an interpretations Of course, the Classical System of Corporation Tax coul prouce in theory some favorable outcomes, espite its infamous reputation. As we can see from Table 1, an increase in corporate an ivien tax will generally increase liabilities an the buren on investment, while an increase in interest income tax will ecrease tax obligations an vice versa. If the combine liability of the corporate an the ivien tax from the enominator is higher than the interest tax liability from the nominator, the investment tax wege will be positive, with limiting, istortive effects on the equity-finance investment. It is interesting here, that a positive buren can occur even when the relevant tax rates are ientical (t m m i ), a situation which is else known as Flat Tax Rate system (see Raw 2 from Table 1). If this combine liability is equal to the interest tax liability, regarless the level of tax rates, the system will be an inifferent concerning the investment ecision. An in the thir option, every time when the combine liability is less than the nominator, with no respect to the level of tax rates, the system will create favorable conitions, stimulating the equity-finance investments trough subsiization of the normal rate of the return. Usually, the authorities avoi the last conition in orer to escape any aitional refuns, an the secon one is unlikely to be foun also. The circumstance that sustains a positive tax buren, actually represents a reflection of what is known as a true CCT system. So, the Classical Corporation Tax assumes a positive (non-zero) tax rates with a corporate income an a ivien income tax equal or higher than the interest income tax an a right to the company to euct the interest payments from the corporate income tax base. We may conclue that the CCT as we know it, prouces in total, the highest amount of taxes pai on a single unit of corporate profit, entails ouble taxation, an possess a large istortive potential on corporate finance, but as mentione, only if the interest payments are being continuously euctible from the tax base an the tax rates met with the appropriate specifications. Uner the conitions of Classical System, the normal return an the extra profit at its source an its estination are effectively streame by the means of taxing regime. But if we put 37

9 asie these limitations, certain avantages open some new frontiers an possibilities for the CCT. For instance, the incorporate principle of CCT for separate an inepenent taxation of company s income enables the corporate tax from the first stage to act as a withholing barrier for the personal taxes impose in the secon stage. Another positive attribution is the simple tax structure. The CCT s in-buil simplicity without any complex rules for exempting flow-troughs of capital income raise the iea for the Classical Corporation Tax as a global mean of tax harmonization in an international context. These present only a hanful of positive features of CCT acknowlege from the literature (for more see Kari an Yla-Lieenpohja, 2002). 4. The Comprehensive Business Income Tax System (CBIT) The Comprehensive Business Income Tax System is the first analyze moel of taxation, funamentally ifferent from the classical approach. Originally propose an promote by the U.S. Treasury Department s [9], the CBIT implements ity in the ebt-equity choice in an antagonistic way. The concept of the CBIT is base on the iea to avoi the nee for integration of corporate an shareholer level taxes by taxing the return to capital of corporations only once. Essentially, uner the CBIT tax authorities allow no euction of either interest payments or the return on equity from taxable corporate earnings. Moreover, as notifie by Brys an Heay [10], Except for the CBIT rate, no aitional withholing taxes woul be impose on istributions to equity holers or on payments of interest, thus implying the conition of (t, m i 0, m 0). As a result [11], The corporation is therefore inifferent between ebt, newly issue equity an retaine earnings as source of finance of its investment uner the CBIT. 4.1 CBIT in Debt Financing Alternatives First, we ll resume the impact of eliminate euction of interest payments from the corporate income tax base. The initial effect is loss of the tax inuce benefit from the interest payments, an an increase cost of ebt from r(1 t) on only r. If we moify expression (7) accoring to this: γ[ ρ r(1 t)] γ ( ρ r) F DE (13) An integrate it in (4), the cost of capital will change in: γ ( ρ r) ~ ρ p γ (1 + t) ρ ( ρ r) ρ ρ + r r (14) The investment tax wege will be: ~ r 1 r r r 1 (1 t) p (15) 38

10 Or more precisely, if we calculate further more: ~ 1 1 p r r 1 r (1 t) (1 t) (1 t) r r + rt rt (16) As it can be seen from expression (16) the tax wege is not zero as usual, but is ientical with the wege from the case of only corporate taxation of equity finance investment. Actually, with the impose restriction on the interest payments euctibility, the CBIT removes the inuce avantage of ebt, an creates equal preference with equity. Equation (16) illustrates the absence of the personal tax rates within the process of taxation, which means that the profit is only taxe once at corporate level uner the corporate tax rate t. The last is consiere as a certain avantage of CBIT, as the single time taxation of the whole profit at corporate level (which means at the source of profit), actually eliminates the nee for the withholing function of the personal taxes. In our example, if the interest rate was estimate 10%, as we know, the usual treatment of ebt investment woul generate a zero tax buren. But uner the CBIT, the same interest rate an a corporate tax rate of 10% woul create tax liability of 0,1111 (11,11%) an a positive buren on investment of 0,0111 (1,11%). 4.2 CBIT in Equity Finance Alternatives-With no Tax Creit Available, (t, m i 0, m 0, c 0) Next, we illustrate the alternative of equity finance investment, without an available tax creit on ivien istributions. As we sai, after the initial taxation of the profit at corporate level, the CBIT oes not impose any aitional withholing taxes at personal level. The absence of personal taxes imply value of unity for the tax iscrimination variable (γ 1), equalization of the shareholer s iscount rate with the real interest rate (ρ r) an accoringly new equation for the cost of capital: ~ p ρ γ r (17) This will implicate the investment tax wege as well: ~ p r 1 rt r r r 1 (1 t) (1 t) (18) It is obvious from expression (18) that the ouble taxation effect is ize with the implementation of this system an the nee for integration is effectively avoie. 4.3 CBIT in Equity Finance Alternatives - With no Tax Creit Available, version (t, m i m 0, c 0) Similar effect coul be provie if the personal tax rates are equal an at the same time ifferent from zero: 39

11 i (1 m ) (1 m ) 1 m 1 m γ an r r (1 z)(1 c) (1 z) z z 1 1 ρ (19) ~ p ρ γ (1 m ) r (1 z) (1 m ) (1 z) r (20) ~ p r 1 rt r r r 1 (1 t) (1 t) (21) From the last we can conclue that the implementation of CBIT not necessarily requires the conitionality of zero personal income tax rates, but rather the conitionality of equal (proportional) personal tax rates. Yet, this rare theoretical form is not popular, since it s not compatible with the principals of the CBIT system. 4.4 CBIT in Equity Finance Alternatives With a Tax Creit Available, (t, m i 0, m 0, c t) Although the purpose of CBIT is to istribute the buren evenly among the ifferent sources of finance, the concept of non-euctibility coul create a certain preferences to equity only in the presence of a tax creit. Regarless that this combination, represents once again, only a theoretical possibility because of its contraictory nature, hypothetically the effect is present an coul be capture with a slight methoological moification. Therefore, if we incorporate plus the conition of c t, than: 1 γ (22) ~ ρ r p r γ 1 (23) ~ r r r 0 p (24) From here we can see that in this scenario the buren is zero, which is less than the positive buren of the investment covere with ebt. Inee, the metho of taxation of interest payments really provies ity between the sources of finance, but also initiate some serious consequences majorly, for the big leners in capital market. As escribe by Brys an Heay [12], A large part of total interest income is effectively not taxe in most countries for instance because tax exempt institutional investors invest a large part of their portfolio in ebt. The introuction of a corporate income tax on interest payments might then strongly increase the cost of ebt finance for 40

12 corporations. This not only will reuce the amount of investment projects that will be unertaken, but it might force corporations into bankruptcy. The CBIT might therefore require a rather low corporate income tax rate. Accoringly, higher cost of ebt is the leaing limitation of this source-base form of tax. The taxation of interest income at the source will negatively impact investors which in compensation will require a higher before-tax rate of return such that, after imposing the CBIT, they ll earn an after-tax return at least equal to the real interest rate. To relieve the situation, except the requirements for lower corporation tax rates, the officials might want to introuce the concept of CBIT graually, phasing the implementation over a longer perio of time. Another problematic issue is the inability of CBIT to secure equality among wage earners, which usually fall uner the progressive tax rate scheule, an the self-employe, mostly treate uner the CBIT s proportional rate. To o so, the income of self-employe nee to be separate into a capital income component an a labor income component, which is the proceure otherwise known as income splitting. However, [13], The choice between capital income an labor income woul therefore continue to be istorte uner a CBIT system, since they are inepenently treate uner the two ifferent taxing regimes. Aitional critics are place on the impose level of buren an the way how CBIT taxes the profit rate as a whole. Namely, the level of tax buren is higher than the alternative systems with a gross return on ebt an equity-finance investment fully taxe at the corporate tax rate. The last means that the economic rent incluing the normal rate of return are being effectively charge by the CBIT regime. In orer to bring in some alleviation, at least for the normal return, the CBIT might be accompanie with a kin of relieving or incentive measure, for example, such as the immeiate expensing of investment [14]. Summarizing Table 2 is a reminer of the possible effects from the CBIT system on investment. Table 2: Illustration of the possible effects of CBIT on investment CBIT Variants Example Investment tax wege equity finance investment normal return an economic rent (p ~ - r) t, m i 0, m 0, c 0 10%, 0%, 0% 1,11% limiting normal return an rent taxe t, m i m 0, c 0 10%, 20%, 20% 1,11% limiting normal return an rent taxe t, m i 0, m 0, c t 10%, 0%, 0% 0,00% inifferent rent taxe only Effects on corporate finance inifferen t inifferen t favors equity efficiency (allocation criteria) istortive Source: Author s calculations an interpretations 41

13 At the finishing point, the effects from taxation on investment performance are summarize in Table 3, an the qualitative attributions of the analyze basic moel tax systems are given in Table 4. Table 3: The effects from taxation on investment performance Classical Corporation Income Tax System (CCT) Debt New equity issues Comprehensive Business Income Tax System (CBIT) Debt New equity issues: Basic moel of CBIT without a tax creit (t, m i 0, m 0, c 0) New equity issues: Moel of non-zero rate CBIT without a tax creit (t, m i m 0, c 0) New equity issues: Basic moel of CBIT with a tax creit 0 i (1 m ) r (1 t)(1 m 1 r 1 (1 t) 1 r 1 (1 t) 1 r 1 (1 t) 0 or or or 1 ) rt ( 1 t) rt ( 1 t) rt ( 1 t) (t, m i 0, m 0, c t) Source: Summary an review of author s calculations Table 4: Summary of qualitative attributions of basic moel tax systems Moel of Effects Effects Withhol- Location Overall tax system ebt finance new equity finance on economic rent on normal return ing function criteria specific criteria allocation criteria withhols source & (CCT) favors iscriminates taxe taxe rents an normal resience- istortive return base no (CBIT) (inifferent) (inifferent) taxe taxe withholing function at all sourcebase Source: Author s interpretations 42

14 5. Conclusion In this article, we explore the properties of the Comprehensive Business Income Tax system, a proposal of the US Treasury Department for corporate tax, accepte an promote by the OECD. Uner the classical corporation tax regime, after the initial taxation at corporate level, corporate profits are istribute to the shareholers in a form of iviens, capital gains or interest payments, an are subject to aitional taxation at personal level. At the same time interest payments are euctible from the corporate income tax base. The consequence is imposition of extra buren on total corporate profit from its source to its estination. Since this is consiere unfair an coul istort the economic activity, the officials of the OECD propose more appropriate tax systems with abilities to sustain lower tax buren such as the CBIT system. Inee, the performe examination of the properties of Comprehensive Business Income Tax System, through the applie methoology of EMTR, reveale satisfactory results in the terms of ity in contrast to the traitional Classical Corporation Tax, opening the possibilities for its alternative utilization. References [1] M. P. Devereux an R. Griffith, The taxation of iscrete investment choices, The institute of fiscal stuies, Warwick University; [2] M. P. Devereux, R. Griffith an A. Klemm, Corporate Income Tax Reforms an International Tax Competition, Economic Policy publications, no. 35; [3] M. P. Devereux an R. Griffith, Evaluating tax policy for location ecisions, International Tax an Public Finance; [4] W. Leibfritz, J. Thornton an A. Bibbie, Taxation an economic performance An OECD stuy, p.23; [5] A. C. Harberger, The Incience of the corporation income tax, Journal of Politica leconomy, University of Chicago press, p ; [6] S. Kari, J. Yla-Lieenpohja, 2002, Classical corporation tax as a global means of tax harmonization, CESifo working paper, Munich, p.1; [7] M. P. Devereux an R. Griffith, The taxation of iscrete investment choices, The institute of fiscal stuies, Warwick University, p.49; [8] I. Gruevski, Corporate taxes an their potential effects on investments, Economic Development, Skopje, p.154; [9] Department of the U.S. Treasury. Integration of the iniviual an corporate tax systems Taxing business income once, Washington D.C., 1992; 43

15 [10] B. Brys, C. Heay. Funamental reform of corporate income tax in OECD countries. A tax policy stuy, Paris, 2007, p.21; [11] OECD. Funamental corporate tax reform, A tax policy stuy, Paris, 2007, p.89; [12] B. Brys, C. Heay. Funamental reform of corporate income tax in OECD countries. A tax policy stuy, Paris, 2007, p.22; [13] B. Brys, C. Heay. Funamental reform of corporate income tax in OECD countries. A tax policy stuy, Paris, 2007, p.22; [14] B. Brys, C. Heay. Funamental reform of corporate income tax in OECD countries. A tax policy stuy, Paris, 2007; [15] Corporate Income Tax Coe of the RM. [16] Personal Income Tax Coe of the RM. [17] Ministry of finance of the RM. 44