Strategic Line Drawing between Debt and Equity
No 2011-04, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics
Corporate tax systems generally maintain a sharp distinction between debt and equity, however, the advent of hybrid instruments has transformed the universe offinancial instruments into a debt-equity continuum and tax systems therefore need to draw lines that distinguish the set of debt instruments from the set of equity instruments. When countries draw these lines differently, there is a scope for international tax planning: A multinational firm financing a foreign investment with a hybrid instrument categorized as debt in the host country and equity in the home country combines the benfits of tax deductible interest payments in the host country and tax favored dividend payments in the home country. This paper develops a theoretical model of strategic line drawing between debt and equity in the presence of hybrid instruments. In the absence of international cooperation, lines are generally drawn in a globally suboptimal manner. The inefficiency ciency typically derives from the endeavors of policymakers to draw lines in ways that facilitate hybrid financing by domestic multinational firms and impede hybrid financing by foreign multinational firms with a view to eroding foreign taxation of domestic firms and enforcing domestic taxation of foreign firms.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Working Paper: Strategic Line Drawing between Debt and Equity (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:kud:epruwp:11-04
Access Statistics for this paper
More papers in EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark. Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Hoffmann ().