Interest Limitation Rules and Business Cycles: Empirical Evidence

Abstract

This paper studies the performance of interest limitation rules during business cycles. It employs register data on Finnish affiliates of multinational enterprises (MNEs) to study both thin-capitalization rules (TCRs) and earnings-stripping rules (ESRs). Both types of rules are found to become tighter in economic downturns: TCRs due to higher debt-to-equity ratios and ESRs due to lower company profits. Among equally tight interest limitation rules, TCRs are found to provide less variation and less pro-cyclical outcomes by increasing the company tax burden less than ESRs in an economic downturn. While ESRs increase the tax burden of Finnish companies by 17.5%-19.3% following the 2008 global financial crisis, for TCRs the increase is less than 10%. Among the ESRs, we find that an EBIT rule induces tighter tax treatment in economic downturns than an EBITDA rule. However, the differences between ESRs remain very small.

Publication info

Research group
Macroeconomy and public finances
Series
ETLA Working Papers 90
Date
13.10.2021
Keywords
Business cycles, Corporate income taxation, Anti-tax avoidance rules, Thin-Capitalization Rules (TCRs), Earnings Stripping Rules (ESRs)
ISSN
2323-2420, 2323-2439 (Pdf)
JEL
H25, H26, F44
Pages
29
Language
English