JCP Interest On Net Equity

Topics: Taxation, Tax rate, Progressive tax Pages: 14 (8202 words) Published: April 19, 2015
Available online at

EconomiA 14 (2013) 185–198

The influence of interest on net equity and interest rates on tax neutrality – a case study of the Brazilian corporate taxation Aloísio Flavio Ferreira de Almeida a , Nelson Leitão Paes b,∗ b

a Funda¸
cão Getúlio Vargas, EAESP, Brazil
Programa de Pós-Gradua¸cão em Economia (PIMES/UFPE) e CNPq, Brazil

In this paper we visit the capital income taxation in Brazil to know whether and to what extent interest on net equity (INE) has an influence on tax neutrality, i.e., if it helps reducing debt financing advantage over equity. The paper also addresses the persistent Brazilian high interest rates influence on the cost of capital, especially for small and medium enterprises (SME), given that big companies are usually allowed to access low interest rates from BNDES, the National Public Development Bank in Brazil. Based on King and Fullerton methodology for computation of effective tax rates, this paper derives the pre-tax and post-tax rates of return on investment, the tax wedges and the correspondent effective tax rates in Brazil, comparing three sources of finance (debt, retained earnings and new equity) and three types of assets: machinery, buildings and inventories. Our simulations show that INE reduces the cost of capital for new equity by 40% but it cannot offset the debt advantage. On the other hand, very high interest rates as found in Brazil make debt finance the worst option, forcing SME to finance themselves. © 2013 National Association of Postgraduate Centers in Economics, ANPEC. Production and hosting by Elsevier B.V. All rights reserved.

JEL classification: H22; H25; H32
Keywords: Corporate taxation; Investment; Profit; Equity; Debt

Este artigo analisa a tributac¸ão do capital no Brasil com o intuito de avaliar a influência dos juros sobre o capital próprio (JCP) na neutralidade tributária, isto é, se ele ajuda a reduzir a vantagem do financiamento por dívida em relac¸ão à capitalizac¸ão. O artigo também analisa a influência dos juros elevados no Brasil sobre o custo do capital, especialmente para as pequenas empresas, já que as empresas maiores tem mais facilidade de acesso a recursos com juros mais baixos do BNDES. Baseado na metodologia de King–Fullerton para o cálculo de taxas efetivas, este artigo deriva as taxas de retorno do investimento antes e depois da tributac¸ão, a cunha fiscal e as alíquotas efetivas no Brasil, comparando três tipos de financiamento (dívida, lucros retidos e capitalizac¸ão) e três tipos de ativos – máquinas, estoques e construc¸ões. As simulac¸ões indicam que o JCP foi capaz de reduzir o custo do capital na

Corresponding author.
E-mail address: (N.L. Paes).
Peer review under responsibility of National Association of Postgraduate Centers in Economics, ANPEC.

1517-7580 © 2013 National Association of Postgraduate Centers in Economics, ANPEC. Production and hosting by Elsevier B.V. All rights reserved.


A.F.F. Almeida, N.L. Paes / EconomiA 14 (2013) 185–198

capitalizac¸ão em mais de 40%, mas não anulou a vantagem tributária do endividamento. Este resultado é alterado pelas altas taxas de juros no Brasil, que tornam o endividamento a pior opc¸ão e levam as pequenas empresas a recorrerem ao capital próprio. © 2013 National Association of Postgraduate Centers in Economics, ANPEC. Production and hosting by Elsevier B.V. All rights reserved.

Palavras clave: tributación; inversión; ganancias; interés; endeudamiento

1. Introduction
The purpose of this paper is to study the Brazilian model of capital income taxation in order to find out to what extent it is neutral to domestic investment decisions. The analysis was guided to achieve capital tax neutrality and to improve the tax system efficiency. Neutrality matters because taxes may distort investment decisions. An investment that would be...

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