TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, March 12, 2014

Dharmapala Presents Interest Deductions in a Multijurisdictional World Today at Toronto

DharmapalaDhammika Dharmapala (Illinois) presents Interest Deductions in a Multijurisdictional World (with Mihir A. Desai (Harvard)) at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series:

The tax treatment of interest expenses in a multijurisdictional setting raises numerous complexities. This paper catalogs these difficulties and highlights the particular problems associated with efforts to achieve ownership neutrality among multinational corporations (MNCs) when debt financing is available. We argue that the differential deductibility of debt entailed by various current tax law provisions leads in general to potential distortions in the patterns of asset ownership across MNCs, and that various proposed solutions have significant limitations. We suggest several alternative regimes to address both the ownership distortions that we highlight, as well as other well-established problems of income-shifting through debt. These alternative regimes are extensions to a multinational setting of two general approaches to the neutral treatment of interest expenses - the CBIT (comprehensive business income tax) and ACC (allowance for corporate capital). These regimes – a worldwide debt cap (WDC) and a net financing deduction (NFD) – provide solutions to income-shifting and ownership distortions. However, they have the potential disadvantage of restricting other policy parameters.

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