OECD Taxation Working Papers N. 34 – STATUTORY TAX RATES ON DIVIDENDS, INTEREST AND CAPITAL GAINS. THE DEBT EQUITY BIAS AT THE PERSONAL LEVEL
OECD Taxation Working Papers N. 34 – STATUTORY TAX RATES ON DIVIDENDS, INTEREST AND CAPITAL GAINS. THE DEBT EQUITY BIAS AT THE PERSONAL LEVEL. This paper presents statutory tax rates on several forms of capital income, including dividends, interest on bonds and bank accounts, and capital gains on shares and real property, including integration between the corporate and personal levels. It updates the rates from an earlier tax working paper (Harding, 2013) and extends the analysis to consider the debt-equity bias of the tax system when the personal level of taxation is considered. 1. In addition to labour and business income, many individuals also receive capital income, for example, from holding funds in deposit accounts or bonds, or from the ownership of shares or real property. The tax rules applied to these forms of income differ within and across countries according to the nature, timing and source of the revenue, and the income level and characteristics of the income-earner. 2. Taxation of Dividends, Interest and Capital Gain Income (Harding, 2013) provides an analytical framework and the statutory tax treatment of three simple types of capital income earned by resident individuals in a domestic setting: dividend income from ordinary shares; interest income from cash deposits; and capital gains realised on long-term real property and shares. The paper traced the impact of different tax treatments from pre-tax corporate income, through the relevant corporate and personal tax systems, to the post-tax income received by an illustrative top-rate taxpayer. The descriptions were supplemented with diagrammatic and algebraic presentations and illustrative examples for each OECD country as at 1 July 2012. 3. This paper draws on responses to a questionnaire distributed in February 2016 (Questionnaire for Tax and Debt Bias in Corporate Financing Analysis). It updates the information presented in Harding (2013) to 1 July 2016 and extends the analysis to two new types of capital income: interest income from corporate bonds, and capital gains on short-held shares. As in the previous paper, the tax rates represent the maximum possible burden on capital income under the relevant tax systems and are statutory, rather than effective, tax rates. Finally, the paper compares the tax treatment of the returns to debt and equity at both the corporate and individual levels to determine whether there is a tax-created bias toward debt when personal taxation is taken into account. Assumptions 4. The paper discusses five types of capital income from personal savings. For each, the most basic form of the income type has been considered, as the tax treatment of these sets the foundation from which the tax treatment of more complex forms of the same type of income may vary. The pre-tax nominal rate of return on corporate equity is assumed to be 4%, which affects the tax rates shown for Belgium, Italy and Turkey (for new equity only), the Netherlands, and Norway. The report considers taxes on the income from these assets but not taxes on the value of the investment (wealth taxes), which would increase the tax burden on these assets. 5. The paper makes a number of assumptions about the investor. First, it assumes that the investor is resident in the particular country; secondly, that they are not a substantive shareholder; and finally that the income is not related-party income. The investor considered is assumed to pay the top rate of any progressive rate scale applicable. Financial assets are assumed to be held outside tax-preferred accounts (such as pensions, retirement accounts or investment funds). As the importance of these accounts varies across countries, cross-country comparisons should be made with this in mind. The impact of inflation on the real amount of the post-tax return is described but not taken into account in the calculation of the combined rates. The impact of the holding period test on the combined rates is not considered. Capital gains on shares are assumed to derive entirely from retained profits, whereas capital gains on property are assumed to derive from property that is directly held by the investor. For federal countries, personal and corporate tax rates encompass both federal and state rates (the latter on a weighted or representative basis), as provided in the questionnaire responses. 6. The paper draws on responses to the questionnaire distributed in February 2016, supplemented by the IBFD Tax Database; consultations with member countries; reference to the previous working paper; and where necessary, country-specific data. 2. Dividend income 7. Dividends are typically taxed first as corporate income and then distributed to the shareholder where they may be taxed again as personal income. The integration between the amount of corporate tax paid and the tax paid at the individual level is thus a critical factor in determining the combined statutory tax rate on dividend income. Countries that replied to the questionnaire use a range of approaches to integrate corporate and personal tax systems. (Michelle Harding, Melanie Marten, 2018).