EU Science Hub

Debt bias in Corporate Taxation

In most countries, interest on debt and the returns to equity capital are treated differently for the purposes of defining tax liabilities. Because interests are deductible from the corporate tax base while returns to equity are not, this introduces a tax advantage for debt financing which distorts financial decisions made by firms and investors. Moreover, it provides multinational groups with an additional channel to shift profits to affiliates in low-tax countries.

Our team studies the intensity of the "debt bias" and its effects on the economy (globally and at the national level) by means of general equilibrium analysis and econometrics. We study the economic consequences of introducing policies that are designed to deal with the "debt bias" (so-called ACE, ACC, CBIT, COCA) using computable models of the European Union calibrated on real macroeconomic data. The team is also involved in the econometric estimation of the size of financial profit shifting and its importance relative to other forms of tax avoidance.