James Hausman Tax Law & Policy Workshop Series
presents
Dhammika Dharmapala
University of Illinois at Urbana-Champaign
Interest Deductions in a Multijurisdictional World
Wednesday, March 12, 2014
12:30 - 2:00
Solarium - Falconer Hall
84 Queen's Park
The tax treatment of interest expenses in a multijurisdictional setting raises numerous complexities. This paper catalogs these difficulties and highlights the particular problems associated with efforts to achieve ownership neutrality among multinational corporations (MNCs) when debt financing is available. We first show that the differential deductibility of debt entailed by various current tax law provisions leads in general to potential distortions in the patterns of asset ownership across MNCs. We also show that a multilateral formula apportionment system would not eliminate these ownership distortions, unless all MNCs’ assets are distributed across countries in the same proportions. Moreover, we also show that MNCs’ ability to establish “multiple-dip” financing structures (in which the same third-party debt is deducted in multiple countries) generally exacerbates these distortions. We suggest several alternative regimes to address both the ownership distortions that we highlight, as well as other well-established issues of income-shifting through debt. These alternative regimes are extensions to a multinational setting of two general approaches to the neutral treatment of interest expenses - the CBIT (comprehensive business income tax) and ACC (allowance for corporate capital). These regimes – a worldwide debt cap and a net financing deduction – provide solutions to income-shifting and ownership distortions. However, they have the potential disadvantage of restricting other policy parameters.
Dhammika Dharmapala is a Professor at the University of Illinois College of Law and a Professor of Finance (by courtesy) at the College of Business at the University of Illinois at Urbana-Champaign. He will serve as a Visiting Professor of Law at Northwestern University in the Fall semester of 2013 and at the University of Chicago in the Winter and Spring quarters of 2014. He is also an International Research Fellow of the Oxford University Centre for Business Taxation and a Fellow of the CESifo Research Network (based in Munich). He serves on the Board of Directors of the American Law and Economics Association, and formerly served on the Board of Directors of the National Tax Association. Until recently, he was Editor-in-Chief of the peer-reviewed journal International Tax and Public Finance. He has previously held postdoctoral or visiting positions at Harvard, Michigan, Georgetown, and the Australian National University. He holds a PhD in Economics from the University of California at Berkeley and an undergraduate degree (with First-Class Honours) from the University of Western Australia. His PhD thesis was awarded the National Tax Association’s Outstanding Doctoral Dissertation Award. His scholarship, which spans the fields of taxation, the economic analysis of law, and corporate finance and governance, has been published in leading scholarly journals in law, economics and finance. It has also been cited in various media outlets, including the New York Times, the Washington Post, Bloomberg Businessweek, and The Economist.
A light lunch will be served.
For more workshop information, please contact Nadia Gulezko at n.gulezko@utoronto.ca
