The debt bias in company financing decisions - problems and possible solutions

Abstract

Purpose : The purpose of the present article is to compare the relative strengths and weaknesses of thin capitalisation rules and allowances for corporate equity which are the main approaches used in modern tax systems to address the debt bias and have been an integral part of proposals for international coordination of corporate income taxation. Methodology: The theoretical methods applied in the article are review of the existing literature on the topic and comparative analysis of the strengths and weaknesses of the main approaches to the debt bias. Results: Although thin capitalisation rules and allowances for corporate equity contribute to the reduction of the problems associated with the debt bias, both types of methods have their limitations. The two approaches are analysed in the article from the perspective of international reform proposals within the BEPS project and the EU as the effective elimination of the distortions caused by the debt bias can be achieved only in coordinated manner. Originality : The paper adds to the growing body of literature on the topic by summarising the main strengths and weaknesses of the two main methods for resolving the debt bias and analysing them from the perspective of the reforms of international tax rules. Keywords: Corporate income taxation, Debt bias, Thin capitalisation rules, Allowances for corporate equity, International tax coordination https://doi.org/10.58869/EJABM008/SI05