Cross-Border Hybrid Finance and Tax Planning: Does International Tax Coordination Work?
INTERNATIONAL TAX COORDINATION: AN INTERDISCIPLINARY PERSPECTIVE ON VIRTUES AND PITFALLS, M. Zagler, p. 115, Routledge, 2010
Posted: 7 Jul 2010
Date Written: July 6, 2010
Hybrid financial instruments are neither typical equity nor typical debt and often lead to classification conflicts, especially in cross-border-transactions. The use of hybrid financial instruments for intra-group financing offers the chance of possible double-non taxation. However a parent company that wishes to finance its foreign subsidiary via hybrid instruments faces uncertainties in multiple ways. The chance of double non-taxation is connected to the risk of misclassification and double taxation. The paper analyses the influence of the existence or non-existence of a double tax con-vention on the benefits of using hybrid finance. We therefore have modeled the influence of uncertainty with respect to tax law to these financial decision using probability trees. We find that the existence of a double tax convention does not necessarily reduce the expected total tax burden. In many cases, the expected tax burden is even higher.
Keywords: tax, hybrid finance, double tax conventions
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