Part 1 - AL-Tax

International Taxation HandbookIt follows from equations (2.7) and (2.8), and (2.11), (2.12) or (2.13), that in theabsence of taxes, p s r.The general formulas for the different sources of finance are not free of criticism.Scott (1987) reformulates the expression for debt and equity finance consideringthat the company wishes to maximize the present value of all net payments madeto its shareholders and, therefore, they receive the same net of tax rate of return independentlyof the way they finance the firm. In the case of debt finance, he attacksthe flaw that the firm’s discount rate is independent of the shareholders. Forequity finance, the expressions of King and Fullerton seem to ignore real returnsin new shares and the problem of realization on accrued capital taxes.King and Fullerton consider a domestic investment financed by domestic saving.However, the methodology can be extended to the complex taxation of internationalinvestments and multinational companies, as was done by Alworth (1988),OECD (1991), Gérard (1993), Devereux and Griffith (1998), and Devereux (2003),including in this framework the different methods of double taxation relief, 9 withholdingtaxes, transfer prices, etc.Overall, a forward-looking METR constitutes a useful tool to simulate howchanges in specific tax provisions affect the effective tax rates and to observe estimatesisolated from other economic factors. However, the METRs that we obtainwith this approach are not valid for all the investment projects of the economy,neither for an industry as a whole nor for changes in the sources of finance overtime. It depends on the type of asset and industry composition of the investment,the way the project is financed, and the saver who provides the funds. To obtaina summary measure for the whole country, it is necessary to generate a weightedaverage of all possible combinations, having as weight a variable such as the proportionof capital stock for each particular choice. An alternative approach is toaverage the parameters before the effective tax is computed, as in Boadway et al.(1984) or McKenzie et al. (1997), who consider an average over sources of finance.2.2.3 A simple extension to the marginal effective taxA point completely ignored so far in the determination of the marginal effectivetax is the static nature of the production function. In other words, we have neglectedthe existence and variation of technological progress that can have an importantinfluence on the incentives to invest in a particular location and on the constructionof an effective tax series comparable across countries.For the sake of concreteness, let us assume that the technological progress ispurely capital augmenting, i.e. F(G t K), where G represents the state of the art.20