Withholding taxes and international bank credit terms

This report shows empirically that international differences in withholding tax rates are indeed largely reflected in bank credit terms. Using a sample of 510 loans to 14 debtor nations originated between 1971 and 1981, the author finds that the developing countries have been able to reduce their interest expense by an estimated 56 cents for every dollar of tax withheld at the source. He concludes that tax treatment in the creditor country of interest income from foreign sources probably still has an important effect on credit terms. In particular, limits on tax credits for foreign-interest withholding taxes, as effectively introduced by the 1986 U.S. tax reform, will probably lead to less favorable credit terms.