Currency Denomination of Intercompany Debt and Multinational Taxes

Abstract

I analyze the choice between an intercompany loan denominated in the home currency and one denominated in the subsidiary’s functional currency. Using US rules for financial accounting and taxes, I model the impact of the loan’s currency denomination on a multinational’s expected overall tax and variability of overall tax.

The analysis includes scenarios where the foreign currency denomination leads to lower expected overall taxes, and other scenarios where the parent currency denomination leads to lower expected overall taxes. There are also circumstances where the currency denomination has no impact on expected overall taxes. Similar results are shown for the impact of currency denomination on the variability of the multinational’s overall taxes.

Keywords: currency denomination, foreign subsidiary, internal debt, taxes, multinational, foreign exchange

JEL Classification: G3, G32, H25, F23