handbook-tb

Peter A. Barnescurrency for one party or the other. Depending on the currency inwhich the debt is denominated, on whether that debt can be properlyhedged and on other factors, the use of debt to partially capitalize Betamay result in the recognition of substantial periodic gain or loss forpurposes of financial reporting. This non-tax consideration may driveAcme to capitalize Beta with equity.1.3.3 SummaryThe above example, and the considerations that influence the way inwhich Acme chooses to capitalize its new investment in Beta, sets aframework for the issues discussed below. Although the analysis forany specific investment can be complex, two general observations arewidely applicable:‣ ¾ There is no simple rule that dictates whether the use of allequityor some combination of debt and equity to capitalize aninvestment will yield the most favourable tax result, taking intoconsideration both home and host country tax considerations;‣ ¾ Taxpayers have flexibility in their decision-making on this issue,and will generally seek to maximize the benefits from the investment,taking into account both tax and non-tax considerations.Whether the benefits are, indeed, maximized often depends onfuture business consequences that are not entirely knowable atthe time of the investment.1.4 Branch operationsThe above discussion of debt and equity assumes that a corporation inone country (for example, Acme in Country X) will establish a separatelegal entity in the other country (for example, Beta in Country Y).In many cases, however, there is no separate legal entity; rather, Acmemay establish a branch in the other country. Typically, Acme would betaxable in Country Y on the profits of its branch there. If a tax treatyexists between Country X and Country Y, then the relevant enquirywould be whether Acme has a permanent establishment in Country Y.Concerns regarding the deductibility of interest — and the possibleerosion of tax base — arise in connection with branches, just as162