Firm Financing in Chile after the 2014-15 Tax Reform : Debt or Equity?
This paper analyzes the effects of the 2014-15 Chilean tax reform on firms' incentives to retain earnings and finance their operations with equity versus debt. The analysis comprises a comparison with the situation of the pre-reform period, an...
| Main Author: | |
|---|---|
| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/10/26867940/firm-financing-chile-after-2014-15-tax-reform-debt-or-equity http://hdl.handle.net/10986/25305 |
| Summary: | This paper analyzes the effects of the
2014-15 Chilean tax reform on firms' incentives to
retain earnings and finance their operations with equity
versus debt. The analysis comprises a comparison with the
situation of the pre-reform period, and draws some
conclusions about firms' valuation. The approach
consists of analyzing the effects of the tax reform on total
taxes paid and cash flows received by investors. Although
the final effects are specific to the firm and investor, as
they depend on the firm's dividend payout ratio and
each investor's personal income tax rate, the results
show that in general the reform reduced the value of firms
and lessened the incentives to retain earnings. The
simulations show that the majority of firms would choose the
accrual or "attributed" tax–based system. However,
if the latter is not permitted, firms will choose debt over
equity. The cash-based or semi-integrated system becomes the
preferred option only when elusion (or tax avoidance) is possible. |
|---|