Scandinavian Working Papers in Economics
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Department of Business and Management Science, Norwegian School of Economics (NHH) Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)

No 2015/31:
Immobilizing Corporate Income Shifting: Should It Be Safe to Strip in the Harbor?

Thomas A. Gresik (), Dirk Schindler () and Guttorm Schjelderup ()

Abstract: Many subsidiaries can deduct interest payments on internal debt from their taxable income. By issuing internal debt from a tax haven, multinationals can shift income out of host countries through the interest rates they charge and the amount of internal debt they issue. We show that, from a welfare perspective, thin-capitalization rules that restrict the amount of debt for which interest is tax deductible (safe harbor rules) are inferior to rules that limit the ratio of debt interest to pre-tax earnings (earnings stripping rules), even if a safe harbor rule is used in conjunction with an earnings stripping rule.

Keywords: Multinational; Income-shifting; safe harbor; earnings stripping; (follow links to similar papers)

JEL-Codes: H26; H73; K34; (follow links to similar papers)

36 pages, November 18, 2015

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