The Italian ACE
Vieri Ceriani
EC -IMF Conference
“Corporate debt bias: Economic
Insights and Policy Options”
Bruxelles, 24th February 2015
The fiscal package 2012-2014
•
December 2011: ACE introduced by the Monti government with the socalled Salva-Italia decree
•
In Salva–Italia decree tax relief both on capital through the ACE and on
labour, increasing the deductibility of labour costs from the local business
tax (IRAP) and from income taxes. Benefits financed with increases of
consumption and wealth taxes
•
Measures included in the tax package were broadly in line with the
growth-friendly policy recommendations by EU Commission, IMF, OECD 
i.e. “fiscal devaluation”
•
The ACE allows the deduction of a notional return on equity
1991)
•
It is aimed at fostering firms’ capitalisation through new equity capital and
retained earnings, hence promoting investment and growth  Aiuto alla
Crescita Economica (Aid to Economic Growth).
(see IFS
ACE features/1
The Italian ACE has the following main features:
•
•
•
it is of the incremental type, i.e. the ACE base is equal to the flows of net
increments to the equity capital existing at the end of 2010;
it gives full relief of the notional return set by the Minister of finance
considering the government bond rate; for the first three years a 3 percent
rate was applied to the ACE base; the Stability Law for 2014 has increased
the rate to 4 percent, 4,5 percent and 4,75 percent in 2014, 2015 and 2016
respectively;
it can be deducted up to taxable income and excess can be carried forward
indefinitely; since 2014, the excess can be transformed in tax credit to offset
the local business tax (IRAP)
•
since 2014 new listed companies can multiply Ace base by a coefficient 1.4
for the first three years since the admission to regulated market
•
since 2014 incentive to go public by allowing new listed companies to
multiply the ACE base by a coefficient equal to 1.4 for the first three years
from the admission to the regulated markets.
ACE features/2
•
•
•
The ACE base is the algebraic result of some financial “flows”:
 positive components are the contributions in cash to the equity
capital (for permanent establishments, the contributions to the
endowment from the parent company) and the profits retained
as reserves that can be distributed and /or used to cover losses;
 decreases of the ACE base are the distributions of profits or
reserves from retained profits, in cash or in kind.
All components of the ACE base are incremental with respect to the
situation at the end of 2010. The ACE is therefore incremental
and cumulative for corporations.
For new resident companies (incorporated after 2010) the entire
initial contribution to equity capital enters the ACE base; for
permanent establishments, the initial endowment from the parent
company is considered.
The ACE deduction cannot exceed the taxable profit: hence, it
cannot produce a fiscal loss.
Anti-avoidance provisions
•
In order to avoid cascading effects and easy conversion of “old” capital
into “new” capital, the ACE base is reduced for:

contributions made to controlled companies;

acquisitions of business (or part of a business) which belonged to
group companies;

increases of financial credit to companies of the same group.
•
Also contributions to the equity capital received by non resident entities
controlled by resident entities are deducted from the Ace base, as well
as contributions from entities resident in jurisdictions which do not allow
an appropriate exchange of information.
•
The notion of group is very wide: it comprises indirect control and is not
limited to corporations, but considers all relations between corporations,
self-employed and partnerships.
•
The taxpayer may submit an advance ruling to the tax authority and
request the disapplication of the anti-avoidance provisions.
ACE vs DIT
•
ACE very similar to DIT, in force from 1997 and abolished in 2004
•
The DIT also was of the incremental type, applied to all
enterprises and had anti-avoidance provisions, alike the ACE.
•
Main difference is that under the DIT the notional return on equity
was not fully deductible, but taxed at a reduced rate of 19 percent
•
Until 2000 the ordinary statutory rate of the corporate income tax
was 37 percent, whereas since 2008 the rate is 27,5 percent.
ACE Take-up
Tax year 2011-2012
Legal forms
Corporations
n. of taxpayers
(thousands)
ACE
beneficiaries
(thousands)
take-up rate
2011
2012
2011
2012
2011
1,097
1,097
205
239
2012
18.7% 21.8%
Source: Department of Finance - Tax returns statistics
Note: ACE beneficiaries include also the taxpayers which cannot immediately deduct the ACE due to net taxable
income smaller than ACE deduction or due to tax losses.
ACE
7
Corporation by revenues classes
ACE take-up rate (tax year 2012)
Tax year 2012
Revenue classes in euros
ACE
All
corporations
Beneficiaries
Take-up rate
Amount
Up to 50,000
414,545
40,731
10%
425,339,423
From 50,000 to 100,000
91,213
17,714
19%
45,594,916
From 100,000 to 200,000
115,939
24,549
21%
66,698,790
From 200,000 to 500,000
164,157
38,693
24%
151,790,080
From 500,000 to 1,000,000
108,884
31,041
29%
122,518,004
From 1,000,000 to 5,000,000
146,952
55,052
37%
411,292,576
From 5,000,000 to 10,000,000
26,624
13,403
50%
225,093,327
From 10,000,000 to 25,000,000
17,190
10,073
59%
325,422,865
From 25,000,000 to 40,000,000
4,480
2,808
63%
165,102,636
From 40,000,000 to 50,000,000
1,453
943
65%
120,259,156
Over 50,000,000
5,994
3,905
65%
2,137,516,425
1,097,431
238,912
22%
4,196,628,198
TOTAL
Source: Department of Finance - Tax returns statistics
ACE
8
Revenue effects on CIT
CIT base (millions)
2011
Corporations
148,604
2012
157,951
ACE amount
(millions)
Potential tax revenue loss
(millions)
2011
2012
2011
1,829
4,197
503
2012
1,154
Potentiale rate
reduction
2011
2012
0.34%
0.73%
Source: Department of Finance - Tax returns statistics
Note: potential tax revenue losses are calculated multiplying the ACE amount by the statutory tax rate (27,5%).
The effective revenue losses depend on the possibility to deduct the whole ACE amount from taxable income.
In 2011, about 30.000 corporations could not deduct the ACE for an amount of
300 million euros; in 2012, this amount raises to 1 billion euros. This would
imply a 420 million euro loss in 2011, and almost 900 million euro in 2012, with
a resulting effective reduction in the tax rate of 0.30 and 0.56 pp respectively.
Tax revenue and tax rates effects
5-years effects
long-run effects
beneficiaries (%)
31.4
49.0
average tax rate
24.6
19.0
Rate reduction
2.9
8.5
tax rate reduction tax rate reduction tax rate reduction
in 2012
after 5 years
in the long run
Turnover
<1
1-500.000
500.000-2 mln
2-10 mln
10-50 mln
>50 mln
2.2
1.7
1.1
1.0
0.8
0.6
6.3
5.9
4.2
3.4
3.0
1.9
9.0
9.9
8.0
7.6
8.1
8.8
Source: Caiumi et al. (2014)
Note: 5- years simulation uses 2008-2012 tax years; long run simulation assumes the ACE applies to
the entire capital stock.
Cost of capital in Italy according to the
source of funding
Source: Caiumi et al. (2014)
Note: Devereux-Griffith forward looking methodology.
International comparisons –
effective tax rates
•
Bilicka and Devereux (2012): based on 2012 legislation, Italy’s statutory rate at
30.3% (27th out of 33 countries), but EATR 18th (23 percent) and the EMTR ranks
1st, with a -10% rate. The negative value of the EMTR is mainly the effect of the
ACE.
•
The overall EMTR is negative, implying a net tax subsidy for a marginal investment.
•
This is because the ACE base depends on retained earnings as measured by
accounting rules rather than tax rules. This overcompensates the fact that the rate
of return used in calculating the ACE is slightly lower than the risk-free interest rate.
•
Bilicka, Devereux and Maffini (2012) compare Italy and the UK. In 2011 the UK
reduced the statutory tax rate from 28 to 26 percent, while Italy kept its rate at 27,5
percent (31 percent including IRAP) and introduced the ACE.
•
Although both reforms have reduced the cost of capital, the reduction in the tax rate
does not correct the tax bias in favour of debt and against equity financing.
•
In the UK the reduction has been mainly on very profitable investment, while in Italy
the firms that have benefited most are those with lower profitability. The Italian
EATR is lower than the UK EATR for levels of profitability up to 25 percent, whilst the
UK EATR is lower than the Italian for higher levels.