Interest Deduction Research Articles

Tax Planning Measures of Salaried Individuals

Tax planning is a crucial financial strategy for salaried individuals, aimed at minimizing tax liabilities while ensuring compliance with applicable tax laws. The objectives of tax planning for the salaried class include maximizing exemptions, deductions, and rebates to enhance post-tax income and secure long-term financial stability. Common tax planning measures adopted by salaried individuals involve investing in tax-saving instruments like Public Provident Fund (PPF), Employee Provident Fund (EPF), National Savings Certificates (NSC), and making the most of deductions under Section 80C, such as those for insurance premiums and home loan repayments. Additionally, individuals utilize allowances like House Rent Allowance (HRA), medical reimbursements, and interest deductions on home loans to further reduce their taxable income. This study aims to explore the satisfaction levels of salaried individuals with the tax planning measures they adopt, identifying the effectiveness of these strategies in achieving their financial goals. Furthermore, the research examines the challenges and obstacles faced by salaried individuals in effectively implementing tax planning measures, such as limited knowledge, complex regulations, or insufficient access to financial tools. By understanding these factors, the study seeks to provide insights into improving tax planning practices and policies for the salaried class.

Article: DEBRA: When Unstoppable Aspirations for Debt-Equity Parity Meet Immovable Tax Systems

p class="MsoNormal"Achieving debt-equity parity in corporate taxation has long been a sought-after holy grail in the quest for capital structure neutrality; however, the latter does not always align with the former. The United States devoted significant thought on how to reach both, especially in the 1990s, but eventually did not achieve either with its tax reforms at the dawn of the twenty-first century. o:p/o:pp class="MsoNormal"Now, it is Europe’s turn to try. This is what the European Commission aims to accomplish with its Directive Proposal for a Debt Equity Bias Reduction Allowance (DEBRA). It would introduce a notional interest deduction on increases in a firm’s equity and a dual-limiting rule that would cap deductible interest at 85% of exceeding borrowing costs (interest paid minus interest received) in addition to interest deductibility already being restricted to 30% of a firm’s earnings before interest, taxes, depreciation, and amortization (EBITDA). o:p/o:pp class="MsoNormal"This article shows that DEBRA fails to achieve capital structure neutrality and does not ensure debt-equity parity. It skews the tax treatment of debt without promoting greater diversification in the portfolio choice of financing sources for corporate Europe as European companies remain heavily reliant on bank lending compared to their American counterparts.o:p/o:p p class="MsoNormal" Last, the article suggests that the risk of debt-financing outsourcing as a potential consequence of DEBRA could inadvertently impact direct investments between Europe and some of its main trading partners, including the United States and the United Kingdom. This process is already underway in America with more anti-abuse provisions emerging in its tax treaties and federal tax regulations for the cross-border payment of interest and dividendso:p/o:p

Limits of Interest Deduction Restrictions Deriving from the Prohibition of Abuse of EU Law: Lessons from X BV (C-585/22) for the Netherlands and Other Member States – Part 2

In this article, the authors comment on the recent ECJ decision in X BV (C-585/22) from both an EU and domestic law perspective. Part 1, published in the January 2025 issue of European Taxation, provided an analysis of the decision and its impact on the interpretation of the Dutch legal framework on interest deduction restrictions. Part 2 explores the EU principle of prohibition of abuse of law in the context of the EU jurisprudence on interest deduction restrictions, highlighting the developments introduced by X BV. Further, the authors analyse the impact of the decision on other EU Member States that use the arm’s length principle as a standard for abuse.

Economic impacts of federal reserve policies on taxation and corporate finance

Federal Reserve policies play a pivotal role in shaping the U.S. economy, influencing not only macroeconomic stability but also the financial strategies and tax implications for corporations. Broadly, the Federal Reserve's use of monetary tools—such as interest rate adjustments, Quantitative Easing (QE), and inflation targeting—affects the economic environment within which businesses operate, impacting costs of capital, investment incentives, and overall corporate behaviour. Through mechanisms like lowering interest rates, the Federal Reserve reduces borrowing costs, which encourages companies to adjust their capital structures and debt levels, with significant implications for tax planning due to interest deductibility. QE, on the other hand, drives asset prices higher, promoting increased investment activity, stock buybacks, and changes in dividend policies that indirectly influence corporate taxation. This article examines the nuanced relationships between Federal Reserve decisions and corporate finance, analysing how shifts in policy impact tax revenue and how governments adapt tax policies to manage economic conditions such as inflation. By presenting case studies from the 2008 financial crisis and the COVID-19 pandemic, this analysis illustrates the practical effects of the Federal Reserve's actions on corporate financial decisions and the broader tax landscape. The article concludes by addressing the future of Federal Reserve policies in light of technological advances in finance and the adaptive strategies that corporate and regulatory bodies may adopt to navigate an increasingly dynamic economic environment.

La deducción de gastos en el impuesto a las ganancias. La aplicación del principio de universalidad del pasivo versus el principio de afectación patrimonial

Deduction of expenses for income tax purposes for corporate entities, considering the application of the principle of universality of liabilities in relation to the principle of patrimonial involvement. Analysis of the decision of the Supreme Court of Justice in “INC SA” regarding the deduction of interest and exchange differences originated by the purchase of stock packages. Deduction of interest generated by the issuance of negotiable debt securities by law 23.576.

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? Not a bad idea after all

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.