Policy Research

# **Country Operations**

# WPS 892

This paper---a produict ofthe Country Operations Division, Coultr\ lDcpartiment I. Latin Americ.a **:nd** the Carihbcan Rcgion is part olf a lari-ge, effort in the rcoion to assist thtc government oi **Brail In** incformlinlg its tax system. Copics olhic paper are available **frcc** I ronm the W'orld Bank 1S1 8 II Slieci NW' Wash;ington, DC 20433. Please contact Antonio lIstache, room LI- 1() OX, cxlcnsion X 1-442 (April 1992, 2'8 pages).

In many countiies, well-meant ad ho. taX incentives proli ferate over tilnc. creatiri! _n111_ opaque corporate tax structurc and manN unaii ticipated tax loopholes. Tax authorities in several countries havc considcrcd and sometimes introduced minimum corporate taxes. Thesc are designed to rcduce losses in revenues and distortions in thc allocationi of resources thatl result fronl Lhe interactio,i of various cicldils. **exemptions,** and so on.

Iiability unider suchi a tax is sonctinics linked to profiis hut more 01o n, lo assets, a1S Ihese arc hiarder to manipulate. Es;taLhe italni Vail Wijnbergen reeicr to such a tax as a inininitimn asset tax (MAT).

The assessment of a miniiii in tax is usually bitsed on1 the computationi of thc changes thc mininium tax A ill introduce in marginal effective tax rates, using die slandard Kin-Fullerton methodolngy This met` odologe has great limnitations as it does not deal willh tihe reenjac effects of the loopholes atnd c'animot hanidle uncertainty. This is a serious shortcominig as Ithe impact of' thc MAT depends on the stochastic characteristics of the liink between assessed asset value and assct income in each period.

Estachc and van Wijnbergcn sugg,est an allernative approach based on OptioIn pricing. an approach (designed to incorporate the impact of' ratc-of-return uncertainly on thc burdeln a NMAT will impose. This approach **alIlok s** tiec assessmcnt of the nmilliniuT'S tax's eCXpcted itax blurden. It also yields a measure of ifle valuc of a miniuiimL tax to **a** povernment laced with greatl uncerainity about revenue pi osprecs of fca 'se

> the pi oil ieat ion of tax incentives. They ase their mrnethodolog to asscss a ieccnrt Brazilian MAT proposal usina secroral dt a on corporate income t.ix rev eIIuC and asset value. 'l1e conIcludc.

lt nc. iacin should pla\ an explicit rolc in evaluations of M1AT proposals and(i corporate taxes generalkl I lTc oplion1 charactClioics, ol' tie coryvrate, tax complctl **d** I ooInatetC thC illninaCt of various lta prox ii ours on the in 1rit _iiil_ f _(CClC;\e_ tax ra1te tN1f-R! tliltRri tOll crtiint\.

> **o** 'I'he MAT \k iih its s impltx code and ronar-;itl impact onU the M1IiRT. is an appealing short cut to comruriophen,sivye ta1x rcloninl - and tilh re cone effets in B3ratrl could hc suhbtantial. In couInt iCs like i a/il vkhcre rate-of-return unceClaint' is monre likely to be ncrc ascd h\ macroccolnooric unccrtainty than 1)b introduction

> of a; N' - if a MAT could reduce fiscal inibalances and thus or aCIocconomic uilCertaint\ ji mighl alsoi indirecily help lowcr the %IELRT nore tihan it \N uld ratise it directl \

> 1Two conillnil assullnplions tnle(d olit n0o **t** o be true. FiYrst, hecause Capitl intenllsi vaIiCe giveatlk across sectors, thc MATl does _not_ reduce scctoial distortions. Thc standard dcviation of' thc MERT is hhilicr with MATI' than wvithout.

Second, although iia; variation gives Ihc NIAT a higher maroinal impactI it is n0ot true thal high-risk finns are hardcst hit h\ the MAT'. I[ighl rism tedI(] to bc high-irale-ol-retumn \los. which reduces MAT's impact. Concern that the MATF would discriminate btcmci the mot inlilo\ ati\e but rsit fl llrml **s** eem I to be uA zarrarited

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