handbook-tb

Limiting interest deductionsas dividends from foreign corporations. But at least a few concernsneed to be noted.The issue is not limited to developed countries. It affects developingcountries as well:‣ ¾ For instance, many developing countries tax their multinationalcorporations on worldwide income. But, income earned outsidethe home country may be deferred for a period of time, beforehome country tax is imposed. If a resident company incursinterest expense within its home country, should some portionof that expense be allocated to the investments and incomeearned from those investments outside the home country? And,if so, should a portion of the current interest expense be disallowed(or deferred) until the foreign income is taxable in thehome country? If the answer is yes, how should the allocableexpense be determined?‣ ¾ In countries with a territorial tax system, where active earningsoutside the home country of a taxpayer are not subject to homecountry tax, a similar issue arises. Should some portion of thehome country interest expense be allocable to this exemptincome and disallowed permanently?The concern for developing countries will increase as moremultinational corporations grow within developing countries andoutbound investment from developing countries increases. In the nearfuture, existing multinationals resident in developing countries willbe joined by a dramatically increasing number of home country peers.In determining how to allocate interest expense to outboundinvestment, countries have struggled to balance appropriate tax ruleswith a public policy desire to encourage and support home countrychampions as they invest abroad. As a result, there is no singleapproach that has garnered consensus support.There are several options:(a) Countries can impose no (or very modest) limits on thededuction for interest expense on debt incurred to supportoutbound investment. This approach is not “pure,”but garners support on the well-grounded theory that a173