Interest Deduction Research Articles

The Geography of Housing Subsidies

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 at the county level featuring an endogenous itemization of housing subsidies. We find that repealing the MID decreases homeownership rates more strongly in central areas because owner-occupiers migrate to the countryside. Welfare increases because positive externalities arising from less congested housing markets and undistorted tenure decisions outweigh productivity losses. A MID repeal is preferred to an increase of standard tax deductions as implemented in 2018 by the Tax Cuts and Jobs Act.

Housing market responses to the mortgage interest deduction

After a decade under federal control, the Belgian regions became responsible for the mortgage interest and capital deduction (MICD) in 2015. One region drastically reduced the average subsidy while another left it unaffected. Exploiting this variation in a difference in differences design, we estimate the impact on prices, construction and sales. The tax subsidy largely capitalizes in the price of houses and developable land. The response in prices together with a lack of effect on buildings permits suggest the supply of land is inelastic. Finally, a small but insignificant positive effect indicates the reduction did not depress house sales.

Real Responses to Anti-Tax Avoidance: Evidence from the UK Worldwide Debt Cap

We analyze how multinational firms reallocate real operations and debt across their affiliates in response to anti-tax avoidance policies. The UK introduced a worldwide debt cap in 2010, generating a quasi-natural experiment that limited interest deductibility for a group of multinational firms. We find that multinationals affected by the reform reduced the amount of debt held in the UK and increased debt held abroad. Affected multinationals reallocated a share of their real operations away from the UK. Our findings provide causal evidence for tax-motivated debt and real activity reallocation within multinationals and show how multinationals can circumvent tax avoidance regulations.

Os métodos de prova nos Primeiros Analíticos de Aristóteles e sua natureza normativa

Este artigo se divide em duas etapas. A primeira etapa tem o objetivo de apresentar, dos tópicos 1 ao 5, três métodos de prova e um de contraprova presentes nos Primeiros Analíticos de Aristóteles. Fornecendo uma notação de fácil acesso, compreensão e relativamente neutra à interpretações com o objetivo de demonstrar que a silogística preserva interessantes ferramentas de dedução e questões intuitivamente férteis para investigação filosófica, em especial, àqueles que desejam compreender leituras filosóficas à lógica de Aristóteles, como as presentes em Łucasievicz (1957) e Corcoran (2009). A segunda etapa consiste em oferecer uma interpretação inferencialista ao estilo de Robert Brandom (1999) para a silogística aristotélica. Para realizar esta tarefa, iniciaremos com a apresentação do contexto e dos elementos formais de desenvolvimento do método aristotélico de prova de argumentos chamado silogística. Em seguida, apresentarei o método direto de prova que envolve converter sentenças em silogismos imperfeitos e permutar a posição sujeito-predicado delas, de modo a obter um silogismo perfeito. Depois, apresentarei o método chamado reductio ad impossibile que se vale das regras do método direto, das relações semânticas entre sentenças categóricas e de hipóteses para provar a validade do silogismo. Por fim, apresento o método de prova chamado ekthesis, que envolve a introdução de categorias intermediárias e suas manipulações entre esquemas dedutivos a fim de provar a validade do silogismo. A segunda etapa, dos tópicos 6 ao 8, consiste na discussão da silogística como um sistema baseado em regras, inspirado nos trabalhos de Żłarnecka–Biały (1993) e Corcoran (2018). A partir do qual exploro a possibilidade de interpretar a silogística de uma perspectiva inferencialista, como uma estratégia lógica de explicitação do “jogo de dar e pedir razões” que marcou a filosofia por cerca de dois milênios.

Role of National Taxes and Fees in the System of Mandatory Payments

The provisions of the Tax Code of Ukraine, which determine the national taxes and fees within the system of mandatory payments, have been studied. It has been determined that the main purpose of national taxes and fees is the formation and saturation of the State budget’s revenues. The influence of national taxes and fees on the regulation of production and consumption has been clarified. It has been stated that national taxes and fees have a general impact on each person, obliging him or her to pay taxes established by the Tax Code. It has been determined that the studied taxes and fees are a lever for regulating and preventing negative tendencies in the economy and are the part of the mechanism that ensures the relationship between national interests and the interests of local business entities. The role of national taxes and fees within the system of mandatory payments as a source of revenues of the State budget (given their stability) also determines the policy of formation of all other types of revenues. The role of national taxes and fees in the formation of local budgets in Ukraine has been analyzed, namely such instruments of budget regulation as interest deductions from national taxes and revenues, budget transfers (budget subsidies, subsidies and subventions, withdrawals to the State Budget of Ukraine, intergovernmental settlements) and budget loans.
 It has been offered that the share of national taxes, which should be fixed in local budgets, is defined in proportion to the amount of the relevant national tax collected in a particular community. An important criterion for the VAT distribution between centeral and regional budgets should be the population of the region. It has been noted that national taxes are distributed between different levels of the budget system in accordance with the norms of deductions.

Does Removing Interest Tax Shield Decrease Corporate Debt? Evidence From The 2017 US Tax Reform

Tax advantage of debt has been the cornerstone of corporate finance since the beginning. Nonetheless, providing empirical evidence for the relation between tax incentives and corporate debt has been challenging because of a variety of endogeneity issues. This paper uses a unique feature of the 2017 US tax reform to study this relation. The reform reduces the tax advantage of debt for all but a group of exempted firms. Firms that lose interest deductions significantly reduce corporate debt in the year following the tax reform.

European Tax Law and the Freedom of Choice Regarding Cross-Border Financing within Multinational Groups

Member States often try to restrict cross-border debt financing within multinational groups. The pending Swedish case, Lexel AB (Case C-484/19), is a prime example. This article analyses the Swedish rules on interest limitation in affiliated groups in the context of EU law and finance theory. Beyond the Lexel AB case, the higher-level question is how national interest deduction limitation rules should be legally formulated in relation to intra-group financing such that they do not conflict with EU law.

Taxes Depress Corporate Borrowing: Evidence from Private Firms

We re-examine the relation between taxes and corporate leverage, using variation in state corporate income tax rates. In contrast with prior research, we document that corporate leverage increases following tax cuts for both privately held and publicly listed firms. We use an estimated dynamic equilibrium model to show that tax cuts result in lower default spreads and more distant default thresholds. These effects outweigh the loss of benefits from the interest tax deduction and lead to higher leverage, especially for privately held firms. Overall, debt tax shields appear to be a secondary capital structure consideration.

Costly reversals of bad policies: The case of the mortgage interest deduction

This paper measures the welfare effects of removing the mortgage interest deduction under a variety of implementation scenarios. To this end, we build a life-cycle model with heterogeneous households calibrated to the U.S. economy, which features long-term mortgages and costly refinancing. In line with previous research, we find that most households would prefer to be born into an economy without the deductibility. However, when we incorporate transitional dynamics, less than forty percent of households are in favor of a reform and the average welfare effect is negative. This result holds under a number of removal designs.

Finance Theory Meets Tax Law: How a Risk-Based Rule Can Rationalize the Debt Versus Equity Distinction

The debt-equity distinction in the corporate tax presents one of the most controversial and intractable puzzles in the tax law. The distinction is fundamental to the corporate tax as interest payments on debt are generally deductible by corporations, while dividend payouts on equity are not. But the consensus among tax experts is that the legal distinction between debt and equity lacks a basis in economics or a policy rationale: the distinction requires the IRS and judges to arbitrarily draw a dividing line among financial instruments that exist on a continuous spectrum of economic profiles. The result is that the law on the debt-equity distinction is infamous for its indeterminacy, which carries substantial costs for both taxpayers and the government. The tax reform in 2017 enacted a business interest deduction limitation which could have mitigated the distinction, but critics quickly observed a loophole in the provision that would likely render the limitation ineffective. A first-best solution to the debt-equity conundrum would require a fundamental change in the corporate tax; the best approaches would introduce an entirely new form of business taxation, one that removes the debt-equity distinction. But these reforms are costly and controversial, and unlikely to be adopted soon. Instead, I offer a novel, second-best solution to improve the administrability and certainty of the debt-equity distinction. Drawing on modern finance literature, I propose to use beta, a measure of systematic risk, to craft a general rule that would solve the line-drawing problem for an important subset of corporate financing transactions. Systematic risk is the type of risk that pervades the entire market rather than a particular stock or company, and finance theory posits that systematic risk drives investor behavior in the financial marketplace. Therefore, classifying a transaction as debt or equity based on its systematic risk minimizes inefficient behavioral distortions. Moreover, crafting an objective rule in lieu of a nebulous multi-factor standard reduces administrative costs associated with debt-equity planning and litigation. The innovative approach would estimate betas of a firm’s prototypical debt and equity, and classify a hybrid instrument according to the proximity of the instrument’s beta to the firm’s debt or equity benchmark. This paper demonstrates real world applications of the proposed beta rule using empirical data on two recent kinds of hybrid instruments.

Taxes and Borrower Behavior: Evidence from the Mortgage Interest Deductibility Limit

This paper estimates the behavioral response to mortgage interest tax deductibility by studying the discrete change in the net-of-tax marginal interest rate that occurs at $1 million in mortgage debt. Using data on 2004-2016 mortgage originations, I estimate excess bunching in the loan distribution based on a counterfactual that accounts for bunching at salient loan amounts. Findings suggest excess of about 54,000 loans at the deductibility limit, or 4.5% of the sample. The level of bunching implies an average reduction in borrowing around the $1 million limit of 9.4 percent, and mortgage demand elasticities between − 0.132 to − 0.115 for home purchase loans. Estimated elasticities imply that from 2004-2016 the MID induced $49.52 billion in deadweight loss in the mortgage market.

Pouring oil on fire: interest deductibility and corporate debt

This paper investigates the role of tax incentives towards debt finance in the buildup of leverage in the nonfinancial corporate (NFC) sector, using a large firm-level dataset. We find that so-called debt bias is a significant driver of leverage, for both small and medium-sized enterprises and larger firms, with its effect accounting for up to a quarter of total leverage. These findings support the tradeoff theory of capital structure. We furthermore explore what firm traits affect these results, documenting how the strength of this effect differs with firm size, the availability of collateral, income and income volatility, cash flow, and capital intensity. We conclude that leveling the playing field between debt and equity finance through tax policy reform would decrease NFC leverage.

The interaction of bank regulation and taxation

The tax benefit of interest deductibility encourages debt financing, but regulatory constraints create dependency between bank leverage and asset risk. Using a large international sample of banks this paper shows that banks located in high-tax countries have higher leverage and lower average asset risk-weights. This trade-off is stronger when regulation is more stringent and for banks with less capital. Non-financial firms' leverage and asset risk are positively related to tax rates, as further evidence of the regulatorily induced adjustment of portfolio risk. A difference-in-difference analysis provides support for a causal interpretation of these results. Overall, higher tax rates are positively correlated with systemic risk, suggesting that the lower asset risk does not offset the risk-inducing effect of tax rates on bank leverage.

Double Taxation Resulting from the ATAD: Is There Relief?

Pursuant to the preamble of the Anti-Tax Avoidance Directive (ATAD), its primary purpose is to combat abusive practices in the EU and ensure that tax is paid where profits are generated without undermining the functioning of the internal market through double taxation (ATAD, recitals 1 and 5). Regardless of the aim of avoiding the creation of a double tax burden on taxpayers, the ATAD does not obligate Member States to effectively eliminate the aforesaid burden. It is, therefore, a taxpayer’s responsibility to identify the correct source of law for providing relief from double taxation. This article focuses on the double taxation that is caused by the implementation of the ATAD and identifies the correct source of law, if possible, to provide relief for such double taxation. As the potential sources of law, the OECD MC (OECD Model Tax Convention on Income and on Capital 2017 (Full Version) (OECD Publishing 2019)), and European Union legislation have been analysed. The scope of this article is limited to the rule on interest deduction limitation and controlled foreign company (CFC) rules as provided in the ATAD. ATAD, anti-tax avoidance directive, interest deduction limitation rule, CFC rules, double taxation, European Union, OECD, economic double taxation, juridical double taxation

The Impact of the Transposition of the ATAD on the Greek Tax System

In response to the Anti-Tax Avoidance Directive (ATAD), Greece has recently amended its legislation with L. 4607/2019 regarding interest deduction limitation rules, controlled foreign company (CFC) rules, and the General Anti-Abuse Rule (GAAR). In this article, the impact of the transposition of the ATAD in the aforementioned three rules will be analysed. In addition, a comparative survey between them and the respective provisions of the ATAD will occur in which it will be examined to what extent the aforesaid anti-tax avoidance rules have been changed by the transposition of the ATAD. Lastly, a critical analysis of each of them will take place concerning the issues that may arise and on their compatibility with ECJ case law. Transposition, Anti Tax-Avoidance Directive (ATAD), Interest Deduction Limitation Rules, General Anti-Abuse Rule (GAAR), Controlled Foreign Company Rules (CFC rules), EBITDA, Main Purpose Test, non-Genuine Arrangement, ECJ case law, Greece

Tax Deductibility of Interest under the ATAD in Investment Decisions

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.

Analysis of Interest Deduction Rules Under Ethiopian Corporate Tax System

The use of third party and related party interest is one of the profit-shifting techniques available in international tax planning. The fluidity and fungibility of money make it a relatively simple exercise to adjust the mix of debt and equity in a controlled company. When the level of debt capital is much greater than the equity capital of the company thin capitalization occurs. Nowadays, thin capitalization is one of the major challenges to the corporate tax system of Ethiopia. Thin capitalization reduces government income from tax by increasing deductible interest paid or payable on the debt. To address this problem, Ethiopia has implemented tax rules restricting the deductibility of interest payments. This article aims to qualitatively examine the interest deduction rules under the Ethiopian income tax regimes through a qualitative analysis of existing literatures and laws. To this end, the analysis start unfolding the conceptual framework of interest deduction and its rules followed by an examination of interest deduction rules of Ethiopia. As the finding has revealed, the newly enacted federal income law has taken a big step in tightening the interest deduction rules through the adoption of debt-to-equity ratio and arm’s length approach to determine the maximum debt on which interest deductible. In doing so, the income tax rules of Ethiopia incorporated the indirect interest deduction rule which indirectly limits the amount interest on which is deduction is allowable. In addition to this, the withholding tax imposed on interest paid to non-resident and limit on maximum deductible interest rates are adopted as an interest deduction approach to supplement arm’s length and debt-to-equity ratio to protect tax base erosion. Despite these positive developments, the Ethiopian tax law has failed to recognize direct interest deduction rules which directly limit the maximum interest on which deduction is allowed. Nowadays, interest stripping rule is widely appreciated as the modern and most effective approach that directly restricts interest deduction. So, the failure to introduce a direct interest deduction rule is one of the major defect interest deduction rules in Ethiopia. Besides, the income tax law has failed to limit the special debt-equity ratio that applies to financial institutions. Furthermore, the tax law has failed to set a maximum deductible rate that applies to financial institutions licensed to lend in Ethiopia. To fill these gaps and ensure efficient protection of the tax base against erosion by deduction of interest payment, the researcher called for a direct interest deduction rule. Besides, the researcher called for the introduction of the debt-equity ratio that applies to a financial institution and the maximum deductible interest rate concerning the interest payment to legitimate financial institutions.

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

Now is not the time to consider capping interest deductions for business taxes, says a new report from the C.D. Howe Institute. In “Adjusting to Reality: As Proposed, Restricting Corporate Interest Deductibility is Ill-Advised,” authors Jack Mintz and V. Balaji Venkatachalam note that the proposal, the implementation of which is currently under serious consideration in Ottawa, would have added $1.45B to Canada’s 2019 corporate tax bill.

Lowering the cost of funds for exploration: the case for tax-based equity financing incentives

Exploring for, and discovering, new oil and gas resources is essential to an oil and gas company’s ability to replenish and enhance its reserves base. With rising future demand for clean, sustainable and affordable energy sources and the important role and contribution of the Australian petroleum industry in the evolving global energy mix, continual investment in exploration activity will be the key to unlocking the prospectivity of undeveloped acreage, particularly in frontier areas. However, exploration is inherently risky and costly. Companies constantly compete for scarce capital to provide the necessary funding to undertake exploration activities. Financial capacity underwrites the ability to bid for exploration acreage by offering commensurate work program commitments. For junior explorers in the early exploration stage, liquidity constraints can mean that the covenants, collateral security requirements and periodic servicing obligations associated with raising debt financing are prohibitive. Equity investors, on the other hand, typically demand a higher return on capital. A fresh policy approach to encouraging petroleum exploration in Australia should be considered by government to incentivise the providers of equity capital to risk money for exploration ventures. This paper considers three models that are used internationally: (1) flow-through shares, (2) worthless stock deductions and (3) notional interest deductions for equity financing. This paper provides a comparative in-principle analysis of each model and offers some suggestions on how these models may be adapted to an Australian context and embedded into the existing taxation system.

La limitación a la deducibilidad de los gastos financieros en el Impuesto sobre Sociedades: Evolución y análisis comparativo

El presente trabajo tiene por objeto dar una visión de la evolución en el tratamiento legal de la limitación a la deducibilidad de los gastos financieros como medio para evitar la elusión fiscal, tanto a nivel supranacional, como nacional y, más concretamente, foral, así como analizar las cuestiones más problemáticas que surgen de la aplicación de esta limitación. En la actualidad, es patente la preocupación de los países de la OCDE y de otros organismos supranacionales por el fraude fiscal y la elusión de impuestos, fenómenos que se han generado como productos derivados de la globalización y que utilizan los gastos financieros como una de sus herramientas más habituales por la facilidad con la que permite el traslado de bases imponibles a territorios de menor o nula tributación.Recibido: 21.10.2019 Aceptado: 18.11.2019 Publicación en línea: 31.12.2019