Does the tax deductibility of interest affect financial reporting?

Tax Deductibility of Debt Interest is Not a Subsidy

Federal income tax deductions for mortgage interest and property taxes are defensible on grounds of both economic efficiency and the social benefits of homeownership. Homeowners should be treated as landlords renting to themselves; as such, they benefit because they do not pay a tax on the imputed rental income they receive, while rental property owners do. Both receive deductions for mortgage interest and property taxes, and both should. The mortgage interest deduction generates symmetry between debt and equity financing of a home; if interest were not deductible, those whose income derives largely from property would have an advantage over those whose income comes from labor. Because workers would be disadvantaged, repeal is unlikely to generate the revenues Bourassa and Grigsby expect or modify the distribution of the tax burden in the way they favor. Finally, the deductions promote homeownership, which is socially desirable.

In 2019, the Czech Republic implemented some of the provisions under Council Directive (EU) 2016/1164, also called the ATAD (Anti-Tax Avoidance Directive). Since then, professionals in the field have been following the impact of this directive on tax legislation and accounting. However, this paper aims to show that in addition to the tax rates and the profit after tax, the ATAD will also impact financial management, specifically investment decision-making. The paper analyses a model situation based on the implementation of these regulatory measures and focuses on the effects of the new EU legislation on the interest tax shield and the overall borrowing costs. The methodology used in the paper is described in more detail in section 2 (“research commentary”) and is based on comparing the net present value of an investment financed with debt capital before and after the ATAD implementation. The calculations use the accounting data of an existing company including information that is not available to the public. This example is used to demonstrate the point by calculating the net present value with regard to the impact of the interest tax shield based on the method of financing. The calculations in the paper follow the applicable rules used in the Czech Republic before and after the ATAD came into force. The results confirm that the net present value (NPV) of investments have decreased. Due to the default parameters set for the calculation, the results also show a comparable decrease in the NPV when the investment is financed with debt capital. With comparable conditions and initial parameters (i.e. zero down payment and identical borrowing costs), the decrease in the NPV is higher when the investment is financed with a bank loan. The analysis shows that investment planning under the new legislation will be more complex and will have to take into account the financial results of the whole firm and whether the borrowing costs are tax deductible. All in all, this analysis suggests that economic calculations have to focus more on the details and the wider context of the tax deductibility of interest.

THE TAX TREATMENT of homeowners has been and continues to be an emotionally and politically charged issue. This paper analyzes how alternative tax treatments of homeowners affect the incidence of homeownership across income groups and the relationship between rents and housing prices. The paper is divided into five sections. Section II introduces the conceptual framework of our study. Sections III and IV examine the incidence of homeownership across income groups and the relationship between rents and housing prices-first under the present system and then under alternative tax treatments of homeowners. The alternatives examined include: taxing imputed rent, eliminating mortgage interest deductions, limiting the size of the interest deduction allowed on all consumer loans, and substituting a tax credit or subsidy for mortgage interest and property tax deductions. The final section discusses the implications of our study. The conclusions of most previous studies concerning the choice between rental and purchased housing [Aaron, Goode, Laidler, Tinney, White] are either explicitly or implicitly based upon the comparison of the cost of shelter to two individuals in the same marginal tax bracket under two alternative regimes. In the first regime both .own their own homes, while in the second each acts as the landlord for the other. These studies conclude that under the current tax system, the tax-sheltered component of the imputed return on housing exceeds that obtainable from investing in rental units. Hence, each individual would prefer to own his home rather than paying a rent sufficiently high to induce the other individual to invest in rental units. These authors seem to imply that this highly simplified example illustrates that renters have an inequitably high tax burden relative to homeowners and that

Eliminating Housing Tax Preferences: A Distributional Analysis

THIS article reports depreciation and interest tax deductions associated with 83 management buyouts completed during 1982-86 and discusses how both the magnitudes of these deductions and the tax savings to be gained from them are affected by the tax environment and economic circumstances of the buyout. Our discussion of the effects of the tax environment includes estimates of the impact on buyout-related deductions of two major pieces of tax legislation: the Economic Recovery Tax Act (ERTA) of 1981 and the Tax Reform Act (TRA) of 1986. These estimates provide evidence on the sensitivity of buyout-related tax subsidies to specific features of the code. Presumably, these sensitivities will help determine trends in future tax-driven restructurings. One focus of our analysis of the tax environment is the alleged tax incentives ERTA provided for acquisitions. Specifically, a transfer of assets enabled both a step-up in the tax basis of assets (also available prior to 1981) and the application of Accelerated Cost Recovery System (ACRS) depreciation to the new basis. Scholes and Wolfson' document

This article discusses the provisions of the Spanish Ley del Impuesto sobre Sociedades (Corporate Income Tax Law) regarding the tax deductibility of interest and the neutralization of the tax effects of hybrid instruments. In doing so, both domestic rules and the recommendations of the OECD and European Union are considered.

The income bond puzzle

The paper focuses on tax expenditures of individuals, which are one of the fiscal tools of the state. In the Czech Republic they are primarily aimed at housing policy, pension policy, and philanthropy, and the question is the extent to which tax expenditures can influence the preferences of tax payers. The aim of this paper is to evaluate the effect of tax expenditures of individuals in the form of tax deductions for social policy, housing support and retirement savings. We also evaluate whether these tax deductions fulfill the fiscal functions for which they were introduced and the extent to which taxpayers use them. Methodically, the research is based on the analysis of secondary statistical data of the Financial Administration of the Czech Republic and results from aggregated tax returns filed for the period 2005–2015. The effect of tax deductions was decreased by abolition of the progressive rate of personal income taxes and by introduction of a uniform tax rate of 15%. Tax deductions for retirement savings do not have a sufficiently strong motivational impact and do not affect taxpayers in the context of public policy. Deductions for mortgage interest can be regarded as a form of major housing support, but are related to taxpayer income and favor those with higher incomes.

Tax Deductibility, Market Frictions, and Price Discrimination: Evidence from the Mortgage Market.

ABSTRACT: This paper examines how banks impound implicit taxes into loan interest rates. Economic theory predicts that the most flexible party bears the least tax cost. We hypothesize that mortgagors, being geographically fixed, are less flexible than banks and bear greater implicit tax costs, and that this effect diminishes when banks begin to compete across state lines after the 1994 Riegle-Neal Interstate and Branching Efficiency Act. Using data from 1977 to 2004 on banks’ and mortgagors’ state and federal taxes and detailed loan-specific data on mortgage originations, we investigate how interest rates vary separately with banks’ and mortgagors’ taxes. We find that mortgage rates vary positively with both banks’ tax costs and the value of mortgagors’ interest tax deductions. These findings are consistent with banks both passing on their tax costs to borrowers and capturing portions of borrowers’ tax benefits. The estimated annual magnitude of this tax shift is $23 billion, which we find declined after 1993 by approximately 40 percent.

A Revisited Version of the Cost of Capital. The Irrelevance of the Partial Interest Tax Deductibility on Investment and Financing Decisions

Adjusting to Reality: As Proposed, Restricting Corporate Interest Deductibility is Ill-Advised

This note discusses the new Polish thin capitalization rules. The authors critically analyse the tax changes and highlight the practical limitations and possible implications of the new legal regulations on the tax deductibility of interest.

Optimal Capital Structure under the Prevalent and the OECD-Proposed BEPS Corporate Income Tax Regimes