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Cross-border hybrid instruments

Author

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  • Niels Johannesen

    (Department of Economics, University of Copenhagen)

Abstract

The rules demarcating debt and equity for tax purposes differ across countries, hence the possibility that a hybrid instrument is treated as equity in one country and debt in another and that a ?rm with foreign investment can combine tax favored dividend income in the home country and tax deductible interest expenses in the foreign country. This paper characterizes the scope for cross-border hybrid instruments as a function of the properties of demarcation rules. For any given pair of countries, ?rms in at least one country and sometimes in both can ?nance investment in the other country with a cross-border hybrid instrument. When hybrid instruments can be embedded in multi-layered ?nance structures, fi?rms in both countries can always achieve equity treatment in the home country and debt treatment in the host country.

Suggested Citation

  • Niels Johannesen, 2012. "Cross-border hybrid instruments," EPRU Working Paper Series 2012-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:epruwp:12-02
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    File URL: http://web.econ.ku.dk/eprn_epru/Workings_Papers/WP-12-02.pdf
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    References listed on IDEAS

    as
    1. Alan J. Auerbach, 2006. "The Future of Capital Income Taxation," Fiscal Studies, Institute for Fiscal Studies, vol. 27(4), pages 399-420, December.
    2. Niels Johannesen, 2011. "Strategic Line Drawing between Debt and Equity," EPRU Working Paper Series 2011-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    3. Johannesen, Niels, 2012. "Optimal fiscal barriers to international economic integration in the presence of tax havens," Journal of Public Economics, Elsevier, vol. 96(3), pages 400-416.
    4. Desai, Mihir A. & Foley, C. Fritz & Hines, James Jr., 2006. "The demand for tax haven operations," Journal of Public Economics, Elsevier, vol. 90(3), pages 513-531, February.
    5. Rosanne Altshuler & Harry Grubert, 2005. "The Three Parties in the Race to the Bottom: Host Governments, Home Governments and Multinational Companies," CESifo Working Paper Series 1613, CESifo.
    6. Lillian F. Mills & Kaye J. Newberry, 2005. "Firms' Off‐Balance Sheet and Hybrid Debt Financing: Evidence from Their Book‐Tax Reporting Differences," Journal of Accounting Research, Wiley Blackwell, vol. 43(2), pages 251-282, May.
    7. Engel, E & Erickson, M & Maydew, E, 1999. "Debt-equity hybrid securities," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 249-274.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Hsun Chu & Chu-Chuan Cheng & Yu-Bong Lai, 2015. "A political economy of tax havens," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(6), pages 956-976, December.
    2. Hebous, Shafik & Johannesen, Niels, 2021. "At your service! The role of tax havens in international trade with services," European Economic Review, Elsevier, vol. 135(C).
    3. Peter Egger & Michael Stimmelmayr, 2017. "Taxation and the Multinational Firm," CESifo Working Paper Series 6384, CESifo.
    4. Johannesen, Niels, 2014. "Tax avoidance with cross-border hybrid instruments," Journal of Public Economics, Elsevier, vol. 112(C), pages 40-52.

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    More about this item

    Keywords

    Migration; Redistribution; Income Taxation; Government Strategy; Endogenous Type of Competition;
    All these keywords.

    JEL classification:

    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • F2 - International Economics - - International Factor Movements and International Business

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