Notional interest on equity - the key to greater crisis resilience Blümel: Our aim is to give equity and debt capital equal tax status
The Covid-19 crisis has delivered a stark demonstration of how important it is for businesses to have a solid equity base. Precisely during times of crisis, this is the key to competitive ability and resilience.
"As a result of the pandemic, we have made some important findings. We must now ensure that we turn the lessons learned into an opportunity. Although we have been able to provide active support, with just over EUR 37 billion in aid having been either already paid out or pledged, nevertheless we have seen that the crisis is leading to significant falls in equity for Austrian businesses. Their equity position is therefore relatively vulnerable. Here, we must take action so as to equip companies as effectively as possible to face future challenges," declares Finance Minister Gernot Blümel.
A study recently carried out on behalf of the Federal Ministry of Finance by EcoAustria undertook a more detailed analysis of the equity situation in Austria and also evaluated proposals for relevant economic solutions. "Over an international comparison, the level of equity held by Austrian companies is high, with the country ranking in the top 33 %. In Austria, the ratio of debt to equity is around twice as high as in Sweden or Switzerland, for example," explains the Director of EcoAustria, Monika Köppl-Turyna.
"We must motivate business operators to build up higher levels of equity in order to become more independent and crisis-resistant. Here, tax law is an important lever and provides us with the tools we need. At present, tax can be deducted in relation to interest paid on debt capital. Analogous provisions should also apply to the accumulation and preservation of equity," explains Blümel. The model for this is known as notional interest on equity, whereby a notional interest rate is assumed which is then deducted when calculating business taxes. As a result, the same would apply as already applies to debt capital, so that equity and debt capital would at least be given equal tax treatment.
EcoAustria's Director is optimistic about this initiative in the light of the present study and international experience: "The total equity of all Austrian businesses would grow by up to EUR 25 billion."
Depending on the model implemented, the measure would cost EUR 0.5 – 1.0 billion. However, the positive incentive thereby generated would also cause GDP to rise by up to 0.4 %. For instance, as a result of healthier, more competitive businesses, over the long term up to 50,000 additional jobs would be created. Moreover, the measure would be 50 % self-financing due to the additional growth arising and higher tax revenues, and this would considerably mitigate the actual budgetary costs.
"With notional interest on equity, we have developed a meaningful measure for the Austrian economy which will also protect us in future crises and which we should implement on a timely basis," concludes Blümel.