Interest Deduction Research Articles

KHO 2024:58: Items Covered by the ATAD Interest Deduction Limitation

KHO 2024:58: Items Covered by the ATAD Interest Deduction Limitation

More Tax, Less Refi? The Mortgage Interest Deduction and Monetary Policy Pass-Through

We study how the mortgage interest deduction (MID) affects refinancing. Households who deduct mortgage interest from their taxes face a lower post-tax mortgage rate, reducing the interest savings from refinancing net of taxes. We estimate the effect of the MID on refinancing using the Tax Cuts and Jobs Act (TCJA) of 2017 as a natural experiment. The TCJA doubled the standard deduction, reducing MID uptake and value. We show that, following the TCJA, the refinancing rate amongst households who lose the MID increased by 25%. Our results suggest that reducing the MID may improve the pass-through of monetary policy when rates fall.

The Impact of Transfer Pricing, Capital Intensity, Thin Capitalization on Tax Avoidance with Sales Growth as Moderating Variabel in Pharmaceutical and Health Companies Listed on Indonesia Stock Exchange 2017-2022

In Indonesia, current tax regulations aim to address these practices through rules like transfer pricing, restrictions on interest deductions on loans from affiliated companies (thin capitalization rules), and asset depreciation rules. However, companies often seek loopholes or new strategies to reduce their tax obligations. This study aims to evaluate the impact of transfer pricing, capital intensity, and thin capitalization on tax avoidance practices in the health and pharmaceutical sector in Indonesia. This is particularly relevant as health sector companies listed on the Indonesia Stock Exchange saw an average revenue increase of 6% during the overall economic downturn caused by the Covid-19 pandemic, reflecting the growing public awareness of health importance and efforts to maintain health during the pandemic. The data for this study is obtained from the financial statements of health and pharmaceutical sector companies listed on the Indonesia Stock Exchange from 2017 to 2022, selected through purposive sampling, with a total of 132 observations sourced from www.idx.co.id. The analysis method used was panel data regression analysis, with Gross Profit Margin (TA_GM) used as a proxy. The results show that transfer pricing, capital intensity, and thin capitalization have a positive impact on tax avoidance. However, sales growth does not enhance the influence of these independent variables on tax avoidance. These findings are expected to assist the Tax and Financial Services Authority in enhancing regulations related to tax avoidance in Indonesia, aligning with the reduction of tax avoidance practices in the health and pharmaceutical sector, and increasing state tax revenues.

The Skewed Playing Field between Private Equity and Family Ownership Hemmed in by Intra- and Inter-Country Tax Non-Neutralities

This article investigates the ownership and management dynamics of private equity investments and family-controlled holdings in the United Kingdom and Italy, and reveals a tax imbalance in their pursuit of corporate control over publicly listed firms. By employing an interdisciplinary approach and a quantitative case study analysis applied to corporate and tax planning, this article illustrates that whereas UK taxation favours private equity, Italy leans towards controlling families, highlighting its implications for the private equity industry’s competitiveness and family inter generational succession, both domestically and across borders. Hence, with no ex ante preference for a specific form of ownership model (family or private equity), the article sheds light on the impact of tax considerations on corporate control decisions, and therefore advocates for tax neutrality to level the playing field between family and private equity control. Last, the article observes a greater reliance on leverage in private equity corporate governance models compared to controlling families, suggesting that it is not the legal availability of a tax shelter (interest deductions) per se that prompts its use, but rather the controlling investor's profile that weighs on borrowing preferences.

Commission

This overview highlights the Commission’s (i) adoption of a communication with respect to unanimity limitations in the context of EU enlargement and (ii) referral of Luxembourg to the ECJ for failing to correctly transpose the ATAD interest deduction limitation rules.

Distribution and use of tax support for housing in the Czech Republic

AbstractThis article focuses on mortgage interest deduction (MID) as an indirect tax support for acquiring one's housing. This form of support is the most widely used in the Czech Republic compared to other tax reliefs and causes the highest losses for the government budget. This paper provides quantitative evidence on how the MID was distributed among taxpayers in the Czech Republic in the period 2008–2019 in relation to taxable income and revenue losses for the government budget. Furthermore, it assesses the effectiveness of these tax measures in reducing socioeconomic inequalities among taxpayers. Research based on the application of the MID in tax returns has shown the effective distribution of the MID until 2017. Tax support for housing was used mainly by taxpayers with low taxable income, which is also the largest group. The essence of vertical equity has been fulfilled, which contributed to reducing the level of social inequality. This positive distributional effect has diminished over time. As of 2019, the highest share of public expenditure was redistributed to taxpayers with higher taxable income, indicating the existence of inequalities in the tax system. The different developments over time have shown that the use of the mortgage interest deduction cannot be assessed statically, as it evolves dynamically over time.

The Tax Attractiveness of EU Locations for Corporate Investments: A Stocktaking of Past Developments and Recent Reforms

Abstract In this paper, we illustrate the tax attractiveness of EU countries as investment locations over time in terms of effective average tax rates and evaluate potential tax reform options. Our quantitative assessment of recent tax policies suggests that corporate tax rate cuts, notional interest deductions and R&D incentives significantly reduce the effective average tax rate. When government budgets are constrained, however, tax incentives with a direct link to investment activities, such as accelerated depreciation and R&D incentives, are most suitable to stimulate private investment. Even after the introduction of the global minimum tax, these measures remain a viable tool to stimulate investments.

Impact of globalization on the tax system of countries

Globalization of the economy and the departure from the principle of taxation at the source, as well as the improper definition of the concept of “resident” create prerequisites for the profits shifting and require the conclusion of agreements on the avoidance of double taxation between countries. To solve artificially created taxation problems, the OECD has developed a plan to avoid erosion of the tax base and profit shifting (BEPS plan), which includes 15 Actions. The purpose of this work is to investigate the causes and methods of profit shifting and to determine adequate measures to prevent abuse. Two methods of profit shifting are studied: thin capitalization and transfer pricing. The right to deduct interest on loans generates four problems – profit shifting, creation of fictitious companies, costs imitation of control of thin capitalization and corrupt redistribution of income. All problems of thin capitalization are solved simply – by canceling the deduction of interest from the taxable base. No deductions – no problems. Deduction interest from profit pre-tax is possible, but at the rates at which banks of the borrower’s country provide loans to their residents. The deduction rate may be limited to 5% maximum. In this case, double taxation agreements are not required. The best alternative to transfer pricing is to determine the results of the enterprise’s activity by the amount created added value, which can be calculated by the amount of taxes paid from the wage fund and profit and VAT. This approach ensures payment of the appropriate amount of taxes, give you permission to accurately determine the consolidated profit of the MNC. The distribution of consolidated profit is proposed to be carried out according to a formula that includes a single criterion. The fair share of the consolidated profit, which corresponds to the contribution of each member of the MNC to the final result, is determined by the ratio of the wage fund to the profit.

Fiscal policy as credit policy: Homeownership subsidization and the household debt boom

This paper revisits the policy drivers of the substantial household credit boom experienced in recent decades. While existing work has typically pointed to the retreat of the state, deregulating and substituting public safety nets by private credit, this paper brings the focus to the active use by governments of ‘fiscal policy as credit policy’ through homeownership subsidization. In this context, the paper introduces a new unique dataset of 550 homeownership subsidies adjustments in 51 advanced and emerging countries since 1990, which brings two important contributions. First, I show that these fiscal subsidies have been increasingly used since the 1990s and significantly contributed to the easy credit stance up to the global financial crisis in both advanced and emerging countries. Second, using panel fixed effects regressions, I find that these subsidies, and notably mortgage interest deductibility, are indeed significantly associated with household/mortgage credit expansion, with crucial distributional and financial stability implications.

Penerapan BEPS Action Plan 4 sebagai Penangkal Penghindaran Pajak melalui Pembebanan Biaya Pinjaman

Since 2015, the government has enacted an interest limitation rule to prevent excessive interest deduction and tax avoidance. However, this regulation is not aligned with the BEPS Action Plan 4 released by the OECD. Previous research had been conducted quantitatively to measure the effectiveness of the current interest limitation rule in Indonesia. However, the result still inconclusive. Some research concluded that the current interest limitation rule is effectively impacted the tax avoidance, while other research concluded otherwise. Furthermore, previous research suggested the importance of future research concerning the BEPS Action Plan 4 implementation in Indonesia. In order to fill the gap, this study aims to evaluate the effectiveness of the current regulation in Indonesia and provide ideal recommendations for implementing the BEPS Action Plan 4 to prevent tax avoidance. The research uses qualitative methods, including case studies and data acquisition techniques like interviews and document analysis. The study found that the current interest limitation rule in Indonesia is not effective in preventing tax avoidance. The OECD's BEPS Action Plan 4 recommendations are considered more effective as an anti-tax avoidance model. The ideal approach for implementation in Indonesia is the mandatory fixed ratio rule method based on EBITDA, with a de minimis threshold. The recommended ratio aligns with the OECD's recommendations, but should be periodically updated according to economic conditions. This approach should apply to both single entities and taxpayers who are group members.

Influence of a Mortgage Interest Deduction on Homeownership Attainment of European Households

This article provides new European evidence about the relation between the much discussed mortgage interest deduction (MID) and homeownership. We also examine which household-group, based on income or marital status, is (mainly) encouraged via this fiscal relief to own a home. To do so, we estimate multilevel mixed-effects logistic regressions by using Eurostat EU-statistics on income and living conditions data in twelve countries over 2003-2018. Our quantitative study shows that an MID generally fails to advance its purpose of promoting homeownership, likely due to price capitalization. However, our results underscore that there is (substantial) variation across household groups. From the odds ratios, we conclude that the intended positive effect of an MID on homeownership probability occurs only for the highest-income households; those who need the most help with good-quality affordable housing are the most discouraged via this relief to become a homeowner. Since the continuation of an MID remains one of the contested issues in many national debates, our empirical findings provide useful insights for governments around the world that wish to promote homeownership through tax incentives.

Mortgage interest deductions? Not a bad idea after all

Mortgage interest deductions and other homeownership subsidies are widely believed to be harmful because they redistribute resources from lower-income renters to higher-income homeowners. We argue that renters actually benefit from these policies in general equilibrium for two reasons. First, the rental supply curve is relatively inelastic, which means that rents fall when these policies reduce rental demand. Second, many renters spend most of their income on housing, and these renters gain substantially from rent decreases. We calibrate a quantitative model to match empirical evidence on these factors and show they are strong enough that subsidizing homeownership actually increases welfare.

Regspraak: The trade and production of income requirements for the deductibility of interest

Ten einde ’n rente uitgawe wat voortspruit uit ’n skuldinstrument te kan aftrek, moet ’n belastingbetaler aan beide die vereistes van “in beoefening van ’n bedryf” en “die voortbrenging van inkomste” voldoen. Die beoefening van ’n bedryf-vereiste behels dat die belastingbetaler moet aantoon dat hulle ’n positiewe stap geneem het, nie bloot ’n passiewe rol vertolk nie. Ten einde aan die voortbrenging van inkomste-vereiste te voldoen, moet die belastingbetaler aantoon dat die uitgawe nou verwant is aan die voortbrenging van inkomste soveel so dat dit as deel daarvan geag kan word. Alhoewel die algemene aftrekkingsformule vereis dat die belastingbetaler ’n bedryf moet uitoefen en die uitgawe vir doeleindes daarvan aangegaan moes wees, vereis die spesiale reëls betreffende die aangaan en toevalling van rente, sowel as die insluiting en aftrekbaarheid van rente, soos vervat in artikel 24J van die Inkomstebelastingwet 58 van 1962, nie so ’n skakel nie. Die belastingbetaler in Unitrans Holdings Ltd v CSARS ((A3094/2022) 2024 ZAGPJHC 3 (9 Jan 2024)) het probeer om meer as wat nodig was aan te toon om ’n aftrekking te eis, naamlik dat dit ’n bedryf as ’n geldskieter beoefen het, terwyl dit voldoende sou wees om aan te dui dat dit ’n bedryf, enige bedryf, beoefen het. Hierdeur het die belastingbetaler ’n risiko geloop om die geskil op die vraag van die beoefening van ’n bedryf te verloor, maar het eintlik die saak verloor omdat daar nie bewys is dat die rente-uitgawes aangegaan was in die voortbrenging van inkomste nie. Alhoewel die bedoeling om ’n wins te maak nie ’n vereiste vir die beoefening van ’n bedryf is nie, ontken die gebrek daaraan die doel van die voortbrenging van inkomste. ’n Direkte skakel tussen die uitgawe en die voortbrenging van inkomste word steeds vereis. Indien daardie skakel nie bestaan nie, of gebreek is, is die uitgawe nie aftrekbaar nie. Dit is ook die geval waar die uitgawe, soos in casu, bedoel is om belastingvrye inkomste voort te bring. Die Suid Afrikaanse Inkomste Diens se voorneme om die praktyk te staak om rente-aftrekkings toe te laat op geleende geld wat teen ’n hoër of laer rentekoers herleen word, beklemtoon die belang van artikel 24J van die wet en die nakoming van die reëls daarvan.

Revisiting the Interaction of the Interest Expense Deduction and the Foreign Tax Credit

This Article demonstrates that the most appropriate proxy for allocating and apportioning U.S. interest expense is one that first identifies the incremental U.S. deduction benefit attributable to the inclusion of foreign income. Now that the positive section 163(j) limitation enhancement attributable to the inclusion of foreign income into the section 163(j) computation can be readily determined, the allocation and apportionment regime should allocate that amount of U.S. interest expense (and only that amount) because that methodology actually matches the amount of the allocation and apportionment of U.S. interest expense to the actual interest deduction benefit derived from the inclusion of foreign income. The Article sets forth the manner in which this reform proposal would harmonize the section 163(j) disallowance regime with the allocation and apportioinment regime of section 861 and also discusses the advantages that the Article’s reform proposal has over competing paradigms.

The 2023 Tax Reform Package

In this article, the authors provide an overview of key measures of the Tax Reform Act 2023, including, inter alia: interest deduction limitations, such as the interest-barrier rule and the interest rate limitation; new depreciation rules; amendments to the tax loss utilization rules; an amendment regarding the taxation of retained earnings; the new corporate tax option for partnerships; measures to promote investment in renewable energies and the new investment premium for climate protection.

The Influence of Interest-to-EBITDA on Interest Deductibility Limitation as a Measure to Prevent Tax Avoidance (Empirical Study on Companies Listed on the IDX Quality 30 Index of the Indonesia Stock Exchange)

This study aims to determine the effect of interest-to-EBITDA ratio on interest expense restrictions. This type of research is quantitative research using secondary data, namely financial statements obtained from the official website of the Indonesia Stock Exchange (IDX). The population in this study is the IDX Quality Index 30 and there are 20 companies as research samples. The sampling technique uses nonprobability sampling technique with Purposive Sampling method. The data analysis method in this study uses simple linear analysis using Excel and SPSS 20 applications. The results of this study show that the interest-to-EBITDA ratio has no effect on tax avoidance.

The geography of mortgage interest deductions

We investigate the heterogeneous impact of the US federal mortgage interest deduction (MID) on households’ location and tenure decisions. We develop a spatial general-equilibrium model featuring non-homothetic preferences in which households can choose whether to claim the MID or a standard tax deduction. Repealing the MID decreases homeownership rates more strongly in central areas because owner-occupiers migrate to the countryside. Welfare increases slightly because positive externalities from less congested housing markets and undistorted tenure decisions outweigh productivity losses in central locations. An increase in standard tax deductions, as implemented in 2018 by the Tax Cuts and Jobs Act, leads to a similar welfare increase.

Методический подход к обоснованию ставки роялти в проектах нефтегазовых компаний

Intellectual property (IP) is the result of the creative work of inventors. The implementation of intellectual property and non-property rights is regulated by Russian law. One of the important components of intellectual property (IP) management is its commercialization. It is possible to assess the value of IP through an objective analysis of projects and their parameters, including financial components. Commercialization of IP is carried out through the mechanisms of alienation and disposal by companies of their intellectual assets in order to obtain commercial benefits. One of the ways to dispose of rights is to conclude license agreements on granting the right to use protected intellectual property. The validity of a license agreement depends on the presence in the compensated license agreement of a condition on the amount and procedure for paying remuneration. Payment of remuneration may be provided in the form of one-time payments (lump payment), periodic interest deductions (royalties) or in another form. Payments in the form of royalties are most in the interests of the right holder. The calculation of the royalty rate is methodologically not regulated at the legislative level and is the most controversial issue when concluding license agreements. The development of methodological approaches to determining the royalty rate makes it possible to increase the justification of the costs of project implementation. The article describes the existing methodological approaches to the calculation of a fair royalty rate, analytical tools for determining standard royalty rates, and the values of recommended royalty rates in the oil and gas industry.

Dynamiek van naoorlogse private schuldgroei in Nederland

The level of private debt in the Netherlands is exceptional in both historical and comparative terms. High debt ratios inhibit economic growth, induce financial fragility and lead to deeper and more tenacious recessions. Facilitated by fiat money creation, private debt in the modern economy mainly consists of bank credit. Internationally shared causes of the rise in bank money are the decline in cash payments, tax deductions and a narrowed focus in monetary policy. In the Dutch case, liberalized mortgages, the side effects of the funded pension system and the strong concentration of the banking system add to these. It is the confluence of these factors that has made Dutch debt growth since the 1970s exceptional. Some of these, notably the deduction of interest on mortgages and financial deregulation, have dominated the debate on this subject and hence are part of public perception. However, this does not apply to other mechanisms mentioned, such as the role of bank money and that of bank concentration. As a result, policy analysis of the debt problem thus far has been selective. The lessons of Dutch financial development are of importance to the realization of the European banking union and to monetary policy and taxation in the euro area. Our analysis demonstrates the usefulness of applied history.

Debt and Taxes? The Effect of Tax Cuts & Jobs Act of 2017 Interest Limitations on Capital Structure

ABSTRACT The Tax Cuts & Jobs Act of 2017 (TCJA) limited interest deductibility. Using a difference-in-differences design, we show that following the enactment of the new limitations, affected firms significantly decrease their leverage. Specifically, we find that relative to unaffected U.S. firms, affected firms decrease leverage by 7.6 percent of assets, corresponding to $330 million per firm and $84.8 billion for the treatment sample. These results are driven by decreases in long-term domestic debt and by declines in new issuances rather than debt repayment. Additional tests indicate other tax reform elements do not explain the results. We also find that firms not currently subject to limitations on interest but subject to future limitations decrease leverage by about half as much as firms currently subject to the limits. Overall, our findings document an economically significant effect of recent tax reform on firm behavior and advance understanding of how taxes affect capital structure. JEL Classifications: H26; H71; H72.