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Interest Deductions in a Multijurisdictional World

Author

Listed:
  • Mihir A. Desai
  • Dhammika Dharmapala

Abstract

This paper proposes and evaluates alternative methods for addressing the tax treatment of interest expenses in a multijurisdictional setting. The differential deductibility of debt entailed by various current tax law provisions leads to potential distortions in the patterns of asset ownership across MNCs and various proposed solutions have significant limitations. We suggest alternative regimes — a worldwide debt cap (WDC) and a net financing deduction (NFD) — to address the ownership distortions that we highlight along with 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). While these regimes provide solutions to ownership distortions and to problems of “base erosion and profit shifting,” they have the potential disadvantage of restricting other policy parameters.

Suggested Citation

  • Mihir A. Desai & Dhammika Dharmapala, 2015. "Interest Deductions in a Multijurisdictional World," National Tax Journal, National Tax Association;National Tax Journal, vol. 68(3), pages 653-680, September.
    • Handle: RePEc:ntj:journl:v:68:y:2015:i:3:p:653-680
    DOI: 10.17310/ntj.2015.3.07
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    Cited by:

    1. Dhammika Dharmapala, 2016. "The Economics of Corporate and Business Tax Reform," CESifo Working Paper Series 5864, CESifo.
    2. De Mooij, Ruud & Hebous, Shafik, 2018. "Curbing corporate debt bias: Do limitations to interest deductibility work?," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 368-378.
    3. Bilicka, Katarzyna & Qi, Yaxuan & Xing, Jing, 2022. "Real responses to anti-tax avoidance: Evidence from the UK Worldwide Debt Cap," Journal of Public Economics, Elsevier, vol. 214(C).
    4. Leszczyłowska, Anna & Meier, Jan-Hendrik, 2021. "Do earnings stripping rules hamper investment? Evidence from CIT reforms in European countries," Economics Letters, Elsevier, vol. 200(C).
    5. Katarzyna Bilicka, 2025. "Labor market consequences of antitax avoidance policies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 32(2), pages 429-465, April.
    6. Dhammika Dharmapala, 2020. "Do Multinational Firms Use Tax Havens to the Detriment of Other Countries?," CESifo Working Paper Series 8275, CESifo.

    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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