Source: Australian Tax Forum Journal Article
Published Date: 1 Sep 2015
The Organisation for Economic Cooperation and Development (OECD') is currently considering best practice approaches to designing rules to prevent base erosion and profit shifting (BEPS') by multinational enterprises (MNEs'). However, the OECD makes a distinction between combating BEPS and reducing distortions between the tax treatment of various methods of financing 1. Yet, an unequal tax treatment can create distortions, which incentivises tax planning behaviour.
Accordingly, this paper aims to improve the tax design of anti-avoidance rules governing MNEs' crossborder intercompany deductions by introducing the concept of the tax induced crossborder funding bias. To date, the literature has focussed on the debt bias, which arises from the distortion in the tax treatment between debt and equity financing. On the other hand, the funding bias also includes licensing and leasing activities in addition to debt and equity financing. This presents a novel contribution to the literature.
This paper examines the conceptual case for why it might be appropriate and feasible to restrict the tax deductibility of crossborder intercompany interest, dividends, royalties and lease payments given their mobility and fungibility. Specifically, it examines whether it is preferable for MNEs to be subject to economic rent taxation, as is attained through reform proposals such as the Allowance for Corporate Equity (ACE'), in this context. This presents a novel proposal for taxing crossborder intercompany economic rents which aligns with the main aim of corporate tax harmonisation; namely: to reduce, if not remove, distortions relating to the taxation of cross?border intercompany activities.
More by Ann Kayis Kumar
The exploitation of tax professional expenses for tax minimisation: evidence from Australia - Journal 01 Jul 2022
To cap or not to cap? Policy options for dealing with the costs of managing tax affairs deduction in Australia - Journal 01 Jun 2020
International tax planning by multinationals: Simulating a tax-minimising intercompany response to the OECD's recommendation on BEPS Action 4 - Journal 01 Jul 2016
Thin capitalisation rules: A second-best solution to the cross-border debt bias? - Journal 01 Aug 2015
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