Interest Deductions in a Multijurisdictional World

35 Pages Posted: 21 May 2015

See all articles by Mihir A. Desai

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Dhammika Dharmapala

University of Chicago Law School

Multiple version iconThere are 2 versions of this paper

Date Written: May 20, 2015

Abstract

This paper proposes and evaluates alternative methods for addressing the tax treatment of interest expenses in a multijurisdictional setting. The differential deductibility of debt entailed by various current tax law provisions leads to potential distortions in the patterns of asset ownership across MNCs and various proposed solutions have significant limitations. We suggest alternative regimes -- a worldwide debt cap (WDC) and a net financing deduction (NFD) -- to address the ownership distortions that we highlight along with other well-established problems of income-shifting through debt. These alternative regimes are extensions to a multinational setting of two general approaches to the neutral treatment of interest expenses -- the CBIT (comprehensive business income tax) and ACC (allowance for corporate capital). While these regimes provide solutions to ownership distortions and to problems of “base erosion and profit shifting,” they have the potential disadvantage of restricting other policy parameters.

Keywords: interest deductions, international taxation, base erosion and profit shifting

JEL Classification: H250, H870, G320

Suggested Citation

Desai, Mihir A. and Dharmapala, Dhammika, Interest Deductions in a Multijurisdictional World (May 20, 2015). CESifo Working Paper Series No. 5350. Available at SSRN: https://ssrn.com/abstract=2608288

Mihir A. Desai

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Dhammika Dharmapala (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

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