Niels Johannesen får optaget forskningsartikel i Journal of Public Economics

The paper studies how multinational firms can use hybrid financial instruments to avoid taxes on foreign investment and explains why governments do not do anything about it. The rules demarcating debt and equity for tax purposes differ between countries, hence the possibility that a hybrid financial instrument is treated as equity in one country and debt in another. This creates a scope for tax avoidance by allowing firms that invest in foreign countries to combine tax deductible interest expenses in the host country and tax favored dividend income in the home country. The paper first develops a formal model of hybrid instruments and shows that, for a given pair of countries, firms in at least one country and sometimes in both can avoid taxes on investment in the other country with a cross-border hybrid instrument. It then investigates why countries tend to allow the use of hybrid instruments for tax avoidance and shows that even if effective anti-avoidance rules are available, there exists a global policy equilibrium in which no country uses such rules.