Ruding Report Tax 1992

Ruding Report (1992) “Report of the Com m ittee of Independent Experts on Com pany Taxation.” Com m ission of the European Com m unities. Chapter 4 Cost of Capital – The firm must not just compute the overall cost of the asset, but also the after-tax returns that it expects the investment to generate in the future. Given the value of tax reliefs and tax rates, together with the discount rate that is applied to a particular project, the required pre-tax rate of return is the one that equalises the net costs of the project with the present value of its after-tax profits. This minimum pre-tax rate of return is widely referred to as the cost of capital. As a result of differential tax treatment, the cost of capital depends too on the industry in which an investment is undertaken, the type of asset purchased, the method of finance uses, and the tax status of the saver supplying the funds for the investment. Three rates of return are relevant for determining the impact of taxation on investment and saving: the pre-corporate tax rate of return (p); the real post rate of return received by suppliers of finance (s); and an intermediate return reflecting the real rate of return before personal taxes that must be paid by the company to suppliers of finance so as to equate the yield on an investment with the opportunity cost of finance (r). Chapter 5 Net returns on international portfolio investment are heavily influenced by domestic and foreign taxes. One important difference is that between financial and non-financial investment. Changing the location of financial investment is much easier and less costly than changing that of a non-financial investment. Consequently, financial investment is more likely to respond to short-term changes, or to difference in taxation between countries. Tax exempt investors and/or evaders of personal income play an important role in the international market for portfolio capital, since these investor groups will normally not be able to obtain a...