Immobilizing Corporate Income Shifting: Should It Be Safe to Strip in the Harbour?
37 Pages Posted: 21 Dec 2015
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: Suggested Citation