Tax avoidance with cross-border hybrid instruments

Research output: Contribution to journalJournal articlepeer-review

The rules demarcating debt and equity for tax purposes differ between countries, hence the possibility that a hybrid financial instrument is treated as equity in one country and debt in another. This may create a scope for tax avoidance by allowing firms that invest in foreign countries to combine tax deductible interest expenses in the host country and tax favored dividend income in the home country. In this paper, we first develop a formal model of hybrid instruments and show that, for a given pair of countries, firms in at least one country and sometimes in both can avoid taxes on investment in the other country with a cross-border hybrid instrument. We then investigate why countries tend to allow the use of hybrid instruments for tax avoidance and show that even if effective anti-avoidance rules are available, there exists a global policy equilibrium in which no country uses such rules
Original languageEnglish
JournalJournal of Public Economics
Volume112
Pages (from-to)40-52
ISSN0047-2727
DOIs
Publication statusPublished - 2014

    Research areas

  • Faculty of Social Sciences - Hybrid instruments, Tax planning, Tax avoidance, Corporate taxation, Multinational firms, Foreign investment

ID: 101558400