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Interest Limitation Rules and Business Cycles: Empirical Evidence

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  • Ropponen, Olli

Abstract

This paper studies the performance of interest limitation rules during business cycles. It employs register data on Finnish affiliates of multinational enterprises (MNEs) to study both thin-capitalization rules (TCRs) and earnings-stripping rules (ESRs). Both types of rules are found to become tighter in economic downturns: TCRs due to higher debt-to-equity ratios and ESRs due to lower company profits. Among equally tight interest limitation rules, TCRs are found to provide less variation and less pro-cyclical outcomes by increasing the company tax burden less than ESRs in an economic downturn. While ESRs increase the tax burden of Finnish companies by 17.5%-19.3% following the 2008 global financial crisis, for TCRs the increase is less than 10%. Among the ESRs, we find that an EBIT rule induces tighter tax treatment in economic downturns than an EBITDA rule. However, the differences between ESRs remain very small.

Suggested Citation

  • Ropponen, Olli, 2021. "Interest Limitation Rules and Business Cycles: Empirical Evidence," ETLA Working Papers 90, The Research Institute of the Finnish Economy.
    • Handle: RePEc:rif:wpaper:90
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    More about this item

    Keywords

    Business cycles; Corporate income taxation; Anti-tax avoidance rules; Thin-Capitalization Rules (TCRs); Earnings Stripping Rules (ESRs);
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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