U.S. Interest Allocation Rules: Effects and Policy

48 Pages Posted: 11 Jun 2000 Last revised: 2 Aug 2008

See all articles by Rosanne Altshuler

Rosanne Altshuler

Rutgers, The State University of New Jersey - Department of Economics

Jack Mintz

University of Calgary - The School of Public Policy; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: April 1994

Abstract

One of the important changes of the 1986 tax reform for U.S. multinationals is related to the allocation of interest expense. Prior to 1986, U.S. companies allocated domestic interest expense to the income of foreign affiliates on a non-consolidated basis according to the distribution of gross income or assets. After 1986, a U.S. multinational is required to allocate domestic interest expense on a consolidated basis according to the distribution of U.S. and foreign assets. We analyze the impact of the new interest allocation rules on the financial and investment decisions of U.S. multinationals using data from a survey of multinationals assembled by Price Waterhouse. We find that the allocation of interest expense increases the marginal cost of U.S. debt by about 38 percent for firms with excess foreign tax credits. Our empirical tests suggest that firms have altered the location of their borrowings in response to the new rules. We also find that the requirement to allocate interest expense has a significant impact on the effective tax rate faced by U.S. multinationals. For U.S. domestic investments, the interest allocation rules increase the U.S. effective rate from 17.6 percent to 21.9 percent. The rules also increase the effective tax rates on foreign investments made by U.S. firms.

Suggested Citation

Altshuler, Rosanne and Mintz, Jack, U.S. Interest Allocation Rules: Effects and Policy (April 1994). NBER Working Paper No. w4712. Available at SSRN: https://ssrn.com/abstract=227003

Rosanne Altshuler

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Jersey Hall
New Brunswick, NJ 08901
United States

Jack Mintz (Contact Author)

University of Calgary - The School of Public Policy ( email )

Calgary, Alberta
Canada
403-220-7661 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
32
Abstract Views
1,055
PlumX Metrics