Taxation Papers

7337 Words Sep 18th, 2015 30 Pages
TAXATION PAPERS
WORKING PAPER N.33 - 2012
Serena Fatica
Thomas Hemmelgarn
Gaëtan Nicodème

The Debt-Equity
Tax Bias: consequences and solutions

Taxation and customs union

Taxation Papers are written by the staff of the European Commission's Directorate-General for
Taxation and Customs Union, or by experts working in association with them. Taxation Papers are intended to increase awareness of the work being done by the staff and to seek comments and suggestions for further analyses. The views expressed in the Taxation Papers are solely those of the authors and do not necessarily reflect the views of the European Commission.

Comments and inquiries should be addressed to:
TAXUD TAXATION-PAPERS@ec.europa.eu
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This paper discusses the consequences of this debt bias and the possible remedies.
JEL classification: H25, H32, G21, G32
Keywords: Taxation, Financial sector, Debt, Allowance for Corporate Equity, Comprehensive
Business Income Tax, corporate structure.

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The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They should not be attributed to the European Commission. Any mistake and all interpretations are theirs and theirs only.

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INTRODUCTION.

The tax deductibility of interest payments under most corporate income tax systems while with no such measure is foreseen for equity financing can create a distortion in the financing decision of companies. This tax-induced bias has led to a recommendation for fixing it in the context of the European Semester (European Commission, 2012). The bias results in at least two types of economic distortions. First, the deductibility of interest expenses exacerbates opportunities to shift and decrease reported

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