*! version 15.0 11July2024

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Model description
Syntax
Required Variables
Optional Variables
Project specific parameters
Examples
Reference

Description

dietr calculates the cost of capital and the forward-looking average and marginal effective tax rates on a hypothetical investment for specified parameters in a dataset based on Hebous and Mengistu (2024).

Syntax

dietr , id(varname) taxrate(varname) inflation(varname) depreciation(varname) deprtype(varname) delta(varname) [options ]

dietr requires five variables: a unique identifier, statutory tax rate, inflation rate, depreciation rate for tax purposes, depreciation type (straight-line or declining balance), and the economic depreciation rate.
All other variables and parameters have default values, which users can modify as described below.

Required Variables

taxrate(real:real) The tax rate in decimal format (e.g., 0.05 if the tax rate is 5% ).

inflation(real:real) The inflation rate in decimal format (e.g., 0.05 if the inflation rate is 5%).

deprtype(string:string) The depreciation system ('sl' for straight-line and 'db' for declining balance depreciation method).

depreciation(real:real) The depreciation rate for tax purposes in decimal format (e.g., 0.25 if tax depreciation is 25%).

delta(real:real) The economic depreciation rate in decimal format (e.g., 0.25 if economic depreciation is 25%).

The user can assign any name to the tax rate, inflation, deprtype, depreciation, and delta variables in the dataset, provided that the variables in the dataset aer referenced in the correct variable holder in the dietr command.
For example, if the taxrate variable is named xyz in the dataset, it should be included in the dietr command as dietr, taxrate(xyz).

Optional Variables

system(strings:string) The standard corporate income tax ('cit') is the default option. Specify 'cft' for a cashflow tax or 'ace' for the alllowance for equity system.

realint(real:real) The real interest rate in decimal format (e.g., 0.05 if real interest rate is 5%). The default is 5%.

debt(real:real) The proportion of the investment financed with debt, in decimal format (e.g., 0.5 if 50% of the investment is fianced with debt). The default is 0%.

newequity(real:real) The proportion of the investment financed with the issuance of new equity, in decimal format
(e.g., 0.5 if 50% of the investment is fianced with new equity). The default is 0%. The combined share of project financing through debt and new equity can not exceed 100%.

holiday(real:real) The number of years the project benefits from a zero statutory corporate income tax rate (that is, the number of years of the "tax holiday"). The default value is zero.

Personal Income Tax
pitint(real:real) The tax rate on interest income at the individual level, in decimal format (e.g., 0.2 if the tax rate is 20%). The default is 0%.

pitdiv(real:real) The tax rate on dividend income at the individual level, in decimal format (e.g., 0.2 if the tax rate is 20%). The default is 0%.

pitcgain(real:real) The tax rate on capital gains income at the individual, level, in decimal format (e.g., 0.2 if the tax rate is 20%). The default is 0%.

Parameters

p(real:real) The profitability of the investment in decimal format (e.g., 0.1 if profit is 10%). The default is 10%.

sbie(real:real) The amount of the substance based income exclusion (SBIE) as percentage of the book value of capital in decimal format (e.g., 1.5 if sbie is 150% of the book value of capital),
which means 50% reflects payroll and 100% reflects tangible capital. If, for example, sbie is specified to be 80%, this means the mix of tangible capital and payroll is 80% of the book value of total capital.
If the user does not specify a value, the default is 1.5.

qrtc(real:real) The amount of a qualified domestic refundable tax credit, under Pillar Two rules, as a percentage of the book value of capital (e.g., 0.02 if it is 2%). The default is zero.
If this option is specified without the minimumtax(yes) option, then it computes the ETRs with a standard refundable tax credit.

nqrtc(real:real) The amount of non-qualified domestic refundable tax credit, under Pillar Two, as a percentage of the book value of capital (e.g., 0.02 if it is 2%). The default is zero.
If this option is specified without the minimumtax(yes) option, then it computes the ETRs with a standard non-refundable tax credit (that is, reduction in the tax liabilities only in periods when the investment is not making losses).

refund(strings:string) Specify 'no' to generate the ETR under a system without a full loss-offset that allows for loss carry-forward without interest
(without cash refund of the tax value of losses for loss making companies). 'yes' is the default, that is, full loss offset is assumed.

minimumtax(strings:string) Specify 'yes' to generate the ETR with a top-up tax following the Pillar Two minimum tax GLoBE rules. Otherwise, 'no' is the default, assuming no top-up tax.

minrate(real:real) The minimum tax rate following the GLoBE rules in decimal format (e.g., 0.2 if the minimum tax rate is 20%). The default is 15% as it is currently the case in Pillar Two.

Examples

Consider a dataset containing the following variables: 𝑥,𝑧,𝑎,𝑏,𝑐,and 𝑘. Here,
𝑥 uniquely identifies each observation,
𝑧 denotes the statutory tax rate,
𝑎 is the preferred measure of inflation,
𝑏 specifies the type of depreciation system,
𝑐 indicates the depreciation rate for tax purposes, and
𝑘 represents the economic depreciation rate of the asset.

**Example 1: Calculate the METR and AETR of an equity-financed project without a top-up tax, using default parameters:**

. dietr, id(x) taxrate(z) inflation(a) deprtype(b) depreciation(c) delta(k)

**Example 2: Calculate the METR and AETR of an equity-financed project without a top-up tax and with default parameters, assuming tax losses are non-refundable:**

. dietr, id(x) taxrate(z) inflation(a) deprtype(b) depreciation(c) delta(k) refund(no)

**Example 3: Calculate the METR and AETR of a project without a top-up tax and with default parameters, assuming a debt variable called 'loan':**

. dietr, id(x) taxrate(z) inflation(a) deprtype(b) depreciation(c) delta(k) debt(loan)

**Example 4: Calculate the METR and AETR of an equity-financed project without a top-up tax, using user-defined parameters:**

. dietr, id(x) taxrate(z) inflation(a) deprtype(b) depreciation(c) delta(k) p(0.2)

**Example 5: Calculate the METR and AETR of an equity-financed project without a top-up tax, assuming the system is a cash flow tax:**

. dietr, id(x) taxrate(z) inflation(a) deprtype(b) depreciation(c) delta(k) system(cft)

**Example 6: Calculate the METR and AETR of an equity-financed project with a top-up tax:**

. dietr, id(x) taxrate(z) inflation(a) deprtype(b) depreciation(c) delta(k) system(cft) minimumtax(yes)

**Example 7: Calculate the METR and AETR with a top-up tax and a qualified refundable tax credit:**

. dietr, id(x) taxrate(z) inflation(a) deprtype(b) depreciation(c) delta(k) system(cft) minimumtax(yes) qrtc(1)

**Example 8: Calculate the METR and AETR with a top-up tax and a minimum tax rate of 20%:**

. dietr, id(x) taxrate(z) inflation(a) deprtype(b) depreciation(c) delta(k) system(cft) minimumtax(yes) minrate(0.2)

**Example 9: Calculate the METR and AETR of a debt financed project with personal income tax:**

. dietr, id(x) taxrate(z) inflation(a) deprtype(b) depreciation(c) delta(k) debt(loan) pitint(pitint) pitdiv(pitdiv) pitcgain(pitcgain)

Reference

Shafik Hebous and Andualem Mengistu (2024). Efficient Economic Rent Taxation under a Global
Minimum Corporate Tax. Oxford University Centre for Business Taxation Working Paper 2024-10.
https://oxfordtax.sbs.ox.ac.uk/sitefiles/wp2410-hebous-shafik.pdf