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Competition for Migrants in a Federation: Tax or Transfer Competition?

Marko Koethenbuerger

No 2012-01, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: 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.

Keywords: Migration; Redistribution; Income Taxation; Government Strategy; Endogenous Type of Competition (search for similar items in EconPapers)
JEL-codes: H7 J2 F2 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2012-01
New Economics Papers: this item is included in nep-mig, nep-pbe and nep-pub
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Related works:
Journal Article: Competition for migrants in a federation: Tax or transfer competition? (2014) Downloads
Working Paper: Competition for Migrants in a Federation: Tax or Transfer Competition? (2012) Downloads
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