The European Economic and Social Committee (EESC) is contributing to the ongoing public debate with an event on the debt-equity bias; it assesses core elements such as the effects of this bias, its economic and social costs and ways of reducing it.
Debt-equity bias in corporate taxation should be mitigated so that companies are given the proper incentives for helping secure a greener, sustainable and digitalised economy. This is the key idea behind the online public hearing on “The role of corporate taxes in corporate governance – addressing the debt-equity bias”, held by the Section for Economic and Monetary Union and Economic and Social Cohesion (ECO) on 8 October 2021.
With regard to the EESC’s view on the challenges relating to the debt-equity bias, ECO section president, Stefano Palmieri, said: “The EESC stresses that debt-equity bias is an important issue that needs to be addressed in order to help the EU economy towards green investment”.
Echoing his words, Krister Andersson, rapporteur for the EESC opinion on “The role of corporate taxes in corporate governance” that is currently in the pipeline, added: “Private investment is crucial for a green and digitalised economy. Companies should be allowed to decide on the best ways to finance the green transition”.
Investment must support environmental goals and remove obstacles to corporate dividend policy-making and payments in a fair way. This is vital for reshaping the European economy with a view to achieving the European Commission’s objectives for a more sustainable, greener and digitalised economy.
Among many other factors, the debt-equity bias in corporate tax systems affects both the leverage of firms and corporate governance. This happens because in many corporate tax systems, interest payments on debt-financing are tax-deductible, while costs relating to equity financing are not deductible. This asymmetric tax treatment of financing costs induces a bias in the financing of investment decisions towards debt financing, which can contribute to an excessive accumulation of debt for non-financial corporations.
For this reason, the EESC welcomes the recent public consultation on a new initiative to mitigate the debt-equity bias in corporate taxation launched by the European Commission. Entitled “Debt Equity Bias Reduction Allowance” (DEBRA) and announced in the May 2021 Communication on Business Taxation for the 21st Century, the proposal was set out during the hearing by Alain Clara, from the European Commission’s DG TAXUD. It allows timely action to be taken by reducing the debt-equity bias through a corporate equity allowance system, providing for a common approach to mitigating the debt bias, and by alleviating distortions for equity financing.
Christoph Spengel, of the University of Mannheim, was of a different opinion; he stated that the debt-equity bias should be addressed at national level rather than at EU level, through a dual income tax. First, business income would be taxed at corporate level, and any interest payments would be deductible. Then, a personal income tax would be levied at national level. From this perspective, the debt bias would be best addressed at national level since income taxes are a national competence.
Finally, Mindy Herzfeld, representing the University of Florida, presented recent experience in this area in the United States; she pointed out that it did not make much sense to talk about changing debt and equity rules in isolation, without considering incentives and deterrents created by other tax rules.
The conclusions of the debate will now feed into the EESC opinion which is scheduled for adoption at the December plenary session.