Immobilizing Corporate Income Shifting: Should It Be Safe to Strip in the Harbour?

37 Pages Posted: 21 Dec 2015

See all articles by Thomas A. Gresik

Thomas A. Gresik

University of Notre Dame - Department of Economics

Dirk Schindler

Erasmus School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Guttorm Schjelderup

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: November 2015

Abstract

Many subsidiaries can deduct interest payments on internal debt from their taxable income. By issuing internal debt from a tax haven, multinationals can shift income out of host countries through the interest rates they charge and the amount of internal debt they issue. We show that, from a welfare perspective, thin-capitalization rules that restrict the amount of debt for which interest is tax deductible (safe harbor rules) are inferior to rules that limit the ratio of debt interest to pre-tax earnings (earnings stripping rules), even if a safe harbor rule is used in conjunction with an earnings stripping rule.

Keywords: multinational, income-shifting, safe harbor, earnings stripping

JEL Classification: H730, H260, K340

Suggested Citation

Gresik, Thomas A. and Schindler, Dirk and Schjelderup, Guttorm, Immobilizing Corporate Income Shifting: Should It Be Safe to Strip in the Harbour? (November 2015). CESifo Working Paper Series No. 5609, Available at SSRN: https://ssrn.com/abstract=2706419 or http://dx.doi.org/10.2139/ssrn.2706419

Thomas A. Gresik

University of Notre Dame - Department of Economics ( email )

3060 Jenkins Nanovic Halls
University of Notre Dame
Notre Dame, IN 46556
United States

Dirk Schindler (Contact Author)

Erasmus School of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Guttorm Schjelderup

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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