Taxing Cross-Border Intercompany Transactions: Are Financing Activities Fungible?

(2015) 30(3) Australian Tax Forum 627-661

36 Pages Posted: 30 Sep 2015 Last revised: 5 Oct 2016

See all articles by Ann Kayis-Kumar

Ann Kayis-Kumar

UNSW Australia Business School, School of Taxation and Business Law; UNSW Sydney

Date Written: July 24, 2015


The Organisation for Economic Cooperation and Development (‘OECD’) is currently considering best practice approaches to designing rules to prevent base erosion and profit shifting (‘BEPS’) by multinational enterprises (‘MNEs’). However, the OECD makes a distinction between combating BEPS and reducing distortions between the tax treatment of various methods of financing. Yet, an unequal tax treatment can create distortions, which incentivises tax planning behaviour.

Accordingly, this paper aims to improve the tax design of anti-avoidance rules governing MNEs’ cross-border intercompany deductions by introducing the concept of the tax-induced cross-border funding bias. To date, the literature has focussed on the debt bias, which arises from the distortion in the tax treatment between debt and equity financing. On the other hand, the funding bias also includes licensing and leasing activities in addition to debt and equity financing. This presents a novel contribution to the literature.

This paper examines the conceptual case for why is might be appropriate and feasible to restrict the tax deductibility of cross-border intercompany interest, dividends, royalties and lease payments given their mobility and fungibility. Specifically, it examines whether it is preferable for MNEs to be subject to economic rent taxation, as is attained through reform proposals such as the Allowance for Corporate Equity (‘ACE’), in this context. This presents a novel proposal for taxing cross-border intercompany economic rents which aligns with the main aim of corporate tax harmonisation; namely: to reduce, if not remove, distortions relating to the taxation of cross-border intercompany activities.

Keywords: OECD, BEPS, Transfer pricing, Multinational, Economic rent taxation

Suggested Citation

Kayis-Kumar, Ann, Taxing Cross-Border Intercompany Transactions: Are Financing Activities Fungible? (July 24, 2015). (2015) 30(3) Australian Tax Forum 627-661, Available at SSRN:

Ann Kayis-Kumar (Contact Author)

UNSW Australia Business School, School of Taxation and Business Law ( email )

Sydney, NSW 2052

UNSW Sydney ( email )

High Street

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