Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

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

Thomas A. Gresik (), Dirk Schindler () and Guttorm Schjelderup ()
Additional contact information
Thomas A. Gresik: Dept. of Economics, University of Notre Dame, Postal: University of Notre Dame, Department of Economics, 434 Flanner Hall, Notre Dame, IN 46556, France
Dirk Schindler: Dept. of Accounting, Auditing and Law, Norwegian School of Economics, Postal: NHH , Department of Accounting, Auditing and Law, Helleveien 30, N-5045 Bergen, Norway
Guttorm Schjelderup: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway

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

JEL-codes: H26; H73; K34

36 pages, November 18, 2015

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