Tax avoidance with cross-border hybrid instruments
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Tax avoidance with cross-border hybrid instruments. / Johannesen, Niels.
I: Journal of Public Economics, Bind 112, 2014, s. 40-52.Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › fagfællebedømt
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TY - JOUR
T1 - Tax avoidance with cross-border hybrid instruments
AU - Johannesen, Niels
PY - 2014
Y1 - 2014
N2 - The rules demarcating debt and equity for tax purposes differ between countries, hence the possibility that a hybrid financial instrument is treated as equity in one country and debt in another. This may create a scope for tax avoidance by allowing firms that invest in foreign countries to combine tax deductible interest expenses in the host country and tax favored dividend income in the home country. In this paper, we first develop a formal model of hybrid instruments and show that, for a given pair of countries, firms in at least one country and sometimes in both can avoid taxes on investment in the other country with a cross-border hybrid instrument. We then investigate why countries tend to allow the use of hybrid instruments for tax avoidance and show that even if effective anti-avoidance rules are available, there exists a global policy equilibrium in which no country uses such rules
AB - The rules demarcating debt and equity for tax purposes differ between countries, hence the possibility that a hybrid financial instrument is treated as equity in one country and debt in another. This may create a scope for tax avoidance by allowing firms that invest in foreign countries to combine tax deductible interest expenses in the host country and tax favored dividend income in the home country. In this paper, we first develop a formal model of hybrid instruments and show that, for a given pair of countries, firms in at least one country and sometimes in both can avoid taxes on investment in the other country with a cross-border hybrid instrument. We then investigate why countries tend to allow the use of hybrid instruments for tax avoidance and show that even if effective anti-avoidance rules are available, there exists a global policy equilibrium in which no country uses such rules
KW - Faculty of Social Sciences
KW - Hybrid instruments
KW - Tax planning
KW - Tax avoidance
KW - Corporate taxation
KW - Multinational firms
KW - Foreign investment
U2 - 10.1016/j.jpubeco.2014.01.011
DO - 10.1016/j.jpubeco.2014.01.011
M3 - Journal article
VL - 112
SP - 40
EP - 52
JO - Journal of Public Economics
JF - Journal of Public Economics
SN - 0047-2727
ER -
ID: 101558400