The Croatian profit tax: an ACE in practice

Abstract

Abstract This paper discusses the experience of Croatia in applying, from 1994 to the beginning of 2001, a profit tax that was charged only on equity income in excess of an imputed normal return ‐ and was thus, in essence, an ‘Allowance for Corporate Equity’ (ACE) scheme of the kind advocated by the IFS Capital Taxes Group and others. The computation of taxable profit under this system is summarised, and the theoretical attractions of the system are described. The paper then discusses a variety of criticisms that were made of the system in Croatia, including an alleged bias in favour of capital‐intensive enterprises (and, in particular, large State‐owned enterprises with overvalued assets), international complications, the complexity of the computations of taxable profit, the possibility that the rate of protective interest was set at an inappropriate level, and excessive revenue cost.

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