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International tax planning by multinationals: Simulating a tax-minimising intercompany response to the OECD's recommendation on BEPS Action 4

Author

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  • Kayis-Kumar, Ann
Abstract
In October 2015, the OECD/G20 presented their final report on the Base Erosion and Profit Shifting (BEPS) Project. This article presents a unique analysis of the OECD/G20’s recommendation on Action 4 by utilising tax optimisation modelling to simulate and examine a hypothetical multinational enterprise’s (MNE’s) behavioural response to this recommendation. The literature to date has primarily focused on the “debt bias”, which arises from the distortion in the tax treatment between debt and equity financing. The BEPS Project is no exception, despite acknowledging that the “mobility and fungibility of money makes it possible for multinational groups to achieve favourable tax results”, the focus has remained on the debt bias. Prior work by the author introduced a broader conception of funding biases; specifically, the tax‑induced cross‑border “funding bias”. The funding bias includes intercompany licensing and leasing activities in addition to debt and equity financing. These four forms of fungible intercompany financing are built into the tax optimisation model developed by this article. This model presents a unique contribution to the literature by simulating complex cross‑border intercompany tax planning strategies. This facilitates a formal analysis of one of the most significant challenges presented by the mobility and fungibility of capital, namely, anticipating how an MNE structures its internal affairs in a tax‑minimising manner given the current tax regime — and designing improvements to tax laws accordingly. The model developed by this article shows that the OECD’s fixed ratio rule is more effective than the current regime of thin capitalisation rules at protecting the tax revenue base from the most tax‑aggressive MNEs. However, the model also indicates that it is ultimately more effective to equalise the tax treatment among otherwise fungible intercompany funding activities. This outcome is consistent with the principle of tax neutrality, which suggests that, ceteris paribus, all like income should be treated alike for tax purposes. This shows that rules eliminating the “underlying disease” (the tax incentive for thin capitalisation) are more effective at targeting BEPS than rules which mitigate the “symptom” (such as thin capitalisation rules or the OECD’s fixed ratio rule).

Suggested Citation

  • Kayis-Kumar, Ann, 2016. "International tax planning by multinationals: Simulating a tax-minimising intercompany response to the OECD's recommendation on BEPS Action 4," MPRA Paper 72828, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:72828
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    References listed on IDEAS

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    Cited by:

    1. Kayis-Kumar, Ann, 2018. "Implementing corporate tax cuts at the expense of neutrality? A legal and optimisation analysis of fundamental reform in practice," MPRA Paper 89703, University Library of Munich, Germany.
    2. Kayis-Kumar, Ann, 2016. "What's BEPS got to do with it? Exploring the effectiveness of thin capitalisation rules," MPRA Paper 75741, University Library of Munich, Germany.

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    More about this item

    Keywords

    OECD; BEPS; Thin capitalisation; Interest limitation rules; Optimisation modelling; Mathematical modelling;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • F0 - International Economics - - General
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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