Tax Policy Assessment Challenges: The Case of the Slovenian Interest Tax Shield

Abstract

Globalization affects national government fiscal policy; therefore, the recent policy debates focus on international fiscal competition. The national tax policies pay special attention to multinational companies, which are highly mobile and able to avoid taxes. The trend of tax rate cutting and tax base broadening (“the race to the bottom”) means that tax completion is one of the most important topics in the professional public. There are two main instruments to avoid the multinational companies' profit shifting; decreasing the corporate tax rates or the implementation of anti-avoidance rules. While tax policy implementation affects multiple stakeholders, a thorough, empirically tested and publicly aligned impact assessment procedure should be carried out. The main idea of this article is to analyze the procedure of impact assessment for tax policy in Slovenia, focusing mainly on the example of the interest tax shield, verifying the impact of the tax policy (thin capitalization rule) implemented in 2005 and offering recommendations for future tax policy. The results revealed that the Slovenian procedure for impact assessment concerning tax policy is used to fulfill formal compliance requirements. Such a declaratory and theoretical level of usage cannot contribute to effective results for tax policy. This turned out to be proved by the data from the financial reports of foreign companies operating in Slovenia for the tax policy instrument (thin capitalization). Contrary to expectations, the amount of debt to parent companies has on average increased, causing a capital to debt (to parent company) ratio considerably lower than the tax rules have restricted. The recommendations therefore are concentrated on a thorough quantitative and qualitative analysis of specific policy challenge. The globalization trend has affected tax policies all over the world, causing tax competition among countries. Multinational companies (MNCs) are very mobile and able to avoid taxes, so the tax code is one of the important factors in investment decisions. In this manner, the national tax policy can either decrease the corporate tax rates or implement anti-avoidance rules. The main article objectives are focused on a review of the existing procedure for tax policy evaluation, including the analysis of the impact of the thin capitalization rule on MNCs operating in Slovenia. The article finally provides recommendations for the tax instrument implementation of thin capitalization in general. The research methodology in based on a systematic literature review concerning the procedure for tax policy evaluation, while the second part employs statistical analysis including the Friedman test to evaluate the effectiveness of the thin capitalization rule and its impacts on foreign direct investment (FDI) in Slovenia. The research findings reveal a rather loose procedure considering the evaluation of the future impacts of tax policies, whereas the tax policy evaluation is addressed on the regulatory and declaratory level, while in practice it is often based on inertia, intuition, and incomplete recommendations from international organizations and supranational bodies. © 2017 Wiley Periodicals, Inc.