In 2016 the European Commission issued an Anti-Tax Avoidance Directive containing measures to counteract base erosion and profit shifting. The directive aims to create a minimum level of protection for national corporate tax systems in the European Union to ensure harmonized countermeasures against aggressive tax planning. Due to Denmark being a part of the European Union, it must ensure that its regulations comply with the rules in the directive. This thesis focuses on the rule of limitation of interest deduction. The primary objective of this thesis is to analyse the legal and economic consequences of implementing the new rule on interest deduction in the Anti-Tax Avoidance Directive.
Initially the thesis will address the potential consequences of the new rule on interest deduction on aggressive tax planning and how the lack of tax neutrality between different countries tax systems can affect the implementation of the new rule. This will lead to an analysis of the economic incentives behind tax planning. The analysis explores the difference between financing a company with debt versus equity. One of the main reasons why companies have incentive to engage in aggressive tax planning, is that debt and equity are treated differently in regards to taxation. While equity leaves the taxation at a company level, debt shifts it to an investor level.
When companies finance their investments with debt (as opposed to equity or financial slack), a tax shield is created through the interest deduction that is given at a company level. The economic analysis concludes that from a theoretical perspective companies that have many fixed assets should choose to finance with more debt than companies that have a lower amount of fixed assets. However, the analysis also concludes that although companies can obtain an advantage by exploiting the tax shield they do not always have incentive to do so. This is largely connected to the advantages of having liquidity on their books as well as being able to invest when good investment opportunities arise. It is also derived from empirical studies that there are other risks companies must consider, such as reputational risk, which is an unforeseeable and dangerous risk. The analysis of incentives to engage in aggressive tax planning indicates that the consideration of other risks acts as a natural barrier against aggressive tax planning.
To avoid the exploitation of tax systems that companies are able to utilize through their choice of financing, Denmark has implemented three rules that limit interest deduction. The thesis focuses on the third rule, which is an EBIT-rule. The rule limits the interest deduction of a company’s net financial costs to 80 pct. of the company’s EBIT, Earnings Before Interest and Tax. This rule is analysed in depth to reveal the full extent of the rule. The thesis then analyses the new rule on interest deduction in the Anti-Tax Avoidance Directive. This rule limits the interest deduction of a company’s net financial costs to 30 pct. of EBITDA, Earnings Before Interest, Tax, Depreciation and Amortisation. The thesis then compares the two rules in order to consider if and how the new rule of limitation of interest deduction should be implemented into Danish regulation.
Based on legal policy considerations conducted to ensure that the implementation of the directive is done in an adequate and appropriate way, the thesis concludes that Denmark should implement the directive in its presented form. When doing this the appropriate options from the directive should be chosen and it should be done in a way that ensures the Danish purpose for interest deduction rules is fulfilled as well as the purpose of the directive
|MSc in Commercial Law, (Graduate Programme) Final ThesisMSc in Auditing, (Graduate Programme) Final Thesis
|Number of pages
|Peter Koerver Schmidt & Leif Christensen