A destination-based allowance for corporate equity


Following renewed academic and policy interest in the destination-based principle for taxing profits—particularly through a destination-based cash-flow tax (DBCFT)—this paper studies other forms of efficient destination-based taxes. Specifically, it analyzes the Destination-Based Allowance for Corporate Equity (DBACE) and Allowance for Corporate Capital (DBACC). It describes adjustments that are required to turn an origin into a destination-based version of these taxes. These include adjustments to capital and equity, which are additional to the border adjustments needed under a DBCFT. The paper finds that the DBACC and DBACE reduce profit shifting and tax competition, but cannot fully eliminate them, with the DBACE more sensitive than the DBACC. Overall, given the potential major political cost of switching from an origin to a destination-based tax system, we conclude that advantages of the DBCFT are likely to outweigh the transitional advantages of the DBACE/DBACC.

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Fig. 1


  1. 1.

    See Auerbach et al. (2010) for an overview of issues in the design of taxes on corporate income and a summary of major CIT systems. See Weichenrieder and Klautke (2008) and Sørensen (2017) for estimates of the deadweight loss associated with debt bias.

  2. 2.

    The ACE/C is also neutral with respect to the chosen depreciation allowance. It therefore encompasses the cash-flow tax as a special case: if an asset is fully depreciated on purchase, it does not represent equity, so in that case there is automatically no allowance.

  3. 3.

    There is a small but growing literature on the DBCFT. For example, Becker and English (2019) and Bond and Gresik (2018) study the economic effects of a unilateral adoption of a destination-based tax. Gaertner et al. (2019) study shareholder wealth effects of border adjustment taxation.

  4. 4.

    As we will show, this is particularly possible if the implementation is through border taxes.

  5. 5.

    By the same argument, there is an incentive to change the base against which to count new equity occasionally to focus always on investment going forward without losing revenues on past investment. This is a classical time-inconsistency issue, and such changes would erode the credibility of the system.

  6. 6.

    If debt-financed, \( - \tau \frac{{i - \hat{i}}}{r + \delta } \) would need to be added, but this would be zero under the assumption of the notional rate matching the interest rate on debt.

  7. 7.

    Moreover, in practice, as discussed by a number of papers, firms may use a different discount rate from what is predicted by theory. For instance, Lund (2014) shows that investment projects would be undervalued under an ACE if firms use the same discount rate under any tax system. Bulow and Summers (1984) underscore that firms typically use the after-tax cost of capital as a uniform discount rate without conditioning on the risk characteristics of future flows. Jagannathan et al. (2016) find that some firms use high discount rates relative to their cost of financial capital when they face “operational constraints.”

  8. 8.

    If a firm in a DBACE/C(BT) country with the notional interest rate below the discount rate imports from an origin-based country, there is an unambiguous incentive to understate the import price, which reduces tax liabilities in both countries. If importing from a destination-based country, the export has no tax implications, and only taxes in the importing country need to be considered.

  9. 9.

    This would include countries with a traditional CIT system, which is equivalent to a notional rate of 0%.

  10. 10.

    There could still be strategic interactions over other aspects of the tax system, if the tax base can deviate from a pure cash flow definition, e.g., if countries offer super deductions for some assets.

  11. 11.

    Such policy would be inefficient and lose revenue, but some countries may perceive positive externalities from additional investment.

  12. 12.

    The relevant rate is not the statutory CIT rate, but the effective one, which may be zero if debt is held by tax-exempt investors.

  13. 13.

    Barbiero et al. (2018), in a dynamic general equilibrium analysis, find that an unanticipated DBCFT leads to appreciation of the US dollar by almost the amount of the tax adjustment. However, the dynamics is complex (depending on anticipation and exact implementation, inter alia), and eventually adjustment can be incomplete. See also Buiter (2017).

  14. 14.

    Auerbach et al. (2017a) also discuss subtle differences that depend on whether adjustment is through the price level or the exchange rate.

  15. 15.

    Auerbach et al. (2017a) also point out some subtleties, in particular that if banks’ cost of capital is lower than borrowers’ discount rates, that part of the rent would go untaxed, unless an R + F cash-flow tax is implemented.

  16. 16.

    As long as there is a personal income tax, which does not allow an interest deduction, this would still not go entirely untaxed.

  17. 17.

    Denmark is considering an ACE (see, Klemm et al. 2018). Switzerland, in the tax reform of 2019, allowed a form of an ACE at the cantonal level (which will be most likely provided only in Zurich).


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Correspondence to Shafik Hebous.

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We are grateful for comments by Ronald Davies, Ruud de Mooij, Michael Keen, and seminar participants at the IMF and the Cnossen Forum in Rotterdam.

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Hebous, S., Klemm, A. A destination-based allowance for corporate equity. Int Tax Public Finance 27, 753–777 (2020). https://doi.org/10.1007/s10797-019-09583-4

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  • Destination-based taxation
  • ACE
  • ACC

JEL Classification

  • H21
  • H25