Immobilizing Corporate Income Shifting: Should it be Safe to Strip in the Harbour?
CESifo, Munich, 2015
CESifo Working Paper No. 5609
![](https://cesifo.org/DocImg/cesifo1_wp5609.jpg?c=1689237180)
Many subsidiaries can deduct interest payments on internal debt from their taxable income. By issuing internal debt from a tax haven, multinationals can shift income out of host countries through the interest rates they charge and the amount of internal debt they issue. We show that, from a welfare perspective, thin-capitalization rules that restrict the amount of debt for which interest is tax deductible (safe harbor rules) are inferior to rules that limit the ratio of debt interest to pre-tax earnings (earnings stripping rules), even if a safe harbor rule is used in conjunction with an earnings stripping rule.
Public Finance
Trade Policy