Tax, Corporate Behaviour and the Foreign Income Dividend Scheme

Daniella Acker, David J. Ashton and Sue Green

Journal of Business Finance & Accounting, 1997, vol. 24, issue 1, 125-143

Abstract: A model is derived which considers the interactions of corporation tax, advance corporation tax (ACT) and capital gains tax and their impact on UK corporate behaviour. It is shown that the recent changes to the ACT system, in the form of the Foreign Income Dividend (FID) scheme, will increase the gearing ratios of those firms affected by the changes. Debt will become more attractive, since it no longer increases irrecoverable ACT by reducing taxable profits. Furthermore, retention rates will fall, since retentions no longer serve as an ACT shield.

Date: 1997
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