Business and Economics > Corporate Taxation

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Ruud A. de Mooij and Mr. Shafik Hebous
Tax provisions favoring corporate debt over equity finance (“debt bias”) are widely recognized as a risk to financial stability. This paper explores whether and how thin-capitalization rules, which restrict interest deductibility beyond a certain amount, affect corporate debt ratios and mitigate financial stability risk. We find that rules targeted at related party borrowing (the majority of today’s rules) have no significant impact on debt bias—which relates to third-party borrowing. Also, these rules have no effect on broader indicators of firm financial distress. Rules applying to all debt, in contrast, turn out to be effective: the presence of such a rule reduces the debt-asset ratio in an average company by 5 percentage points; and they reduce the probability for a firm to be in financial distress by 5 percent. Debt ratios are found to be more responsive to thin capitalization rules in industries characterized by a high share of tangible assets.
Ms. Janet Gale Stotsky and Ms. Asegedech WoldeMariam
Central American tax systems are modern in their orientation, though there remains scope for beneficial reform. Value-added taxes are the mainstay of collections, but their performance varies. Income and property taxes remain relatively underused and should apply to higher income taxpayers more comprehensively. Tax reform needs to be mindful of global competition. Continuing improvement in administrative performance is also essential.
Mr. Olivier P. Benon, Ms. Katherine Baer, and Mr. Juan Toro R.

Abstract

One area that has not been reviewed in developing countries is the growing focus on different segments of the taxpayer population-including the large taxpayers-as a way to encourage greater stability in public revenue flows, improve the effectiveness and efficiency of tax administration, and introduce innovations in the public sector. Based on a sample of about 40 countries, this paper provides an overview of country practices in terms of the organization, systems, and procedures used by tax administrations to monitor the compliance of the large taxpayers. The paper also reviews the effectiveness of large taxpayer operations in selected developing and transition countries where the IMF has recommended their establishment.