The Debt-Equity Tax Bias: Consequences and Solutions

Fatica, Serena; Hemmelgarn, Thomas; Nicodème, Gaëtan

doi:10.3917/rpve.521.0005

Cited by 24 publications

(28 citation statements)

References 44 publications

(26 reference statements)

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…In our stylized setting, we do not discuss the alternative modalities of establishing tax neutrality between debt and equity. For a critical discussion, see for example Fatica, Hemmelgarn, and Nicodème (2013). shifting effect in the econometric model, we can parse the different implications of these channels on systemic risk. Specifically, we do so by assuming three hypothetical reform scenarios.…”

Section: A the Impact Of Eliminating The Tax Bias Towards Debt Financementioning

confidence: 99%

See 1 more Smart Citation

Banks, Debt and Risk: Assessing the Spillovers of Corporate Taxes

2019

Self Cite

View full text Add to dashboard Cite

We find evidence of tax‐driven strategic allocation of debt and asset risk across group entities of European banks. We evaluate the effects that establishing tax neutrality between debt and equity finance has on systemic risk, and show that the degree of coordination in implementing the hypothetical tax reform matters. In particular, a coordinated elimination of the tax advantage of debt would significantly reduce systemic losses in the event of a severe banking crisis. By contrast, uncoordinated tax reforms are not equally beneficial precisely because national tax policies generate spillovers through cross‐border bank activities. (JEL G21, G28, H25)

show abstract

Section: A the Impact Of Eliminating The Tax Bias Towards Debt Financementioning

confidence: 99%

mentioning

confidence: 99%

Banks, Debt and Risk: Assessing the Spillovers of Corporate Taxes

2019

Self Cite

View full text Add to dashboard Cite

show abstract

Section: _________________________mentioning

confidence: 99%

“…Although PS disassociates reported profits from value creation, a certain level of real economic activity in the territories where profits are reported is necessary to justify such reported profits. _________________________ 2 Dividends (which constitute equity remuneration), as opposed to interest, cannot be deducted (Fatica et al, 2012).Recently, some leading international institutions and governments have expressed concern about PS and the reduced taxes paid by some MNEs. Since the financial crisis and the loss of economic resources, the taxation scandals of MNEs have become front page news.…”

mentioning

confidence: 99%

Are Spanish companies involved in profit shifting? Consequences in terms of tax revenues

Murciego

Laborda

2017

Economics

View full text Add to dashboard Cite

In this paper the authors analyze the existence of profit shifting between Spain and other OECD and EU countries. Using a sample of 1,169 Spanish subsidiaries owned by foreign OECD and EU parent companies and a sample of 317 EU subsidiaries owned by Spanish parent companies, taken from the AMADEUS Database for the period 2005 to 2014, and a simple tax rate difference as a measure of the tax incentive, the authors obtain a negative effect of corporate income taxes on reported profits. When the tax rate differences between Spain and the foreign countries vary by one percentage point, reported profits vary by approximately 2.7 to 3%. This is consistent with profit shifting activity by corporations and matches the empirical results in the literature. Furthermore, the authors calculate the impact of this activity on Spain's tax revenues from the sample of Spanish subsidiary companies. They obtain that the tax revenues vary from year to year, depending on the level of taxation of the main investor countries in Spain in comparison to the Spanish tax rate. IntroductionAmong multinational enterprises (MNEs), profit shifting (PS) is a tax planning strategy within a group consisting of artificially shifting taxable income from entities located in high tax paying countries (basically, countries with high corporate income tax, CIT) to entities located in countries with lower tax rates. The PS phenomenon, like other tax avoidance and evasion devices, causes what is known as Double Non-Taxation, which refers to the minimisation and sometimes zero taxation of certain taxable income (or more generally, taxable object). Where there is PS activity, worldwide CIT revenues become lower because profits are taxed at low tax rates.Nowadays these tax minimizing activities are encouraged by the discrepancy between the features of today's economy and the international taxation standards (based on the Separate Accounting Method) created a century ago, when international exchanges of goods and services were limited and business models were simpler. While the world economy is becoming ever more globalized, current international taxation standards require MNEs to report profits separately in the different jurisdictions in which they operate. This creates an opportunity for MNEs to develop strategies to reduce their tax burden, most of which are legally acceptable, because it is difficult to determine where profits are created. 1 The digitalization of the economy, the complexity of business models and the diversity of tax rules in different jurisdictions (which creates tax loopholes) also make it easier for companies to develop these strategies.Two of the most popular PS mechanisms among MNEs are transfer pricing and thin capitalisation. Transfer prices are the prices that entities set when they exchange services and/or goods within the multinational group, i.e. the prices applicable to related-party transactions, which have to be determined as if the transactions were between independent enterprises, i.e., according to the arm's len...

show abstract

“…The possibility to locate debt in higher-tax rate countries lowers the marginal cost of debt for MNE groups, which could lead them to increase their overall leverage. This would intensify the "debt bias" present in most corporate tax systems (de Mooij, 2012;Fatica et al, 2012…”

mentioning

confidence: 99%

Debt and tax planning by multinationals

Sorbe

Johansson

Skeie

2017

OECD Economics Department Working Papers

View full text Add to dashboard Cite

JT03407324 Complete document available on OLIS in its original format This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. ECO/WKP(2016)81 Unclassified English-Or. English ECO/WKP(2016)81 2 OECD Working Papers should not be reported as representing the official views of the OECD or of its member countries. The opinions expressed and arguments employed are those of the author(s). Working Papers describe preliminary results or research in progress by the author(s) and are published to stimulate discussion on a broad range of issues on which the OECD works.

show abstract

The Debt-Equity Tax Bias: Consequences and Solutions

Cited by 24 publications

References 44 publications

Banks, Debt and Risk: Assessing the Spillovers of Corporate Taxes

Banks, Debt and Risk: Assessing the Spillovers of Corporate Taxes

Are Spanish companies involved in profit shifting? Consequences in terms of tax revenues

Debt and tax planning by multinationals

Contact Info

Product

Resources

About