handbook-tb

Peter A. Barneshome country benefits when companies headquartered inthat country have strong investments outside the country.Having the headquarters of a multinational enterprise(MNE) in a country typically brings with it well-paying jobsfor executives, business opportunities for suppliers, philanthropyand other benefits. But — and this is an importantcaution — such an approach can be viewed as favouringMNEs over companies that operate purely domestically,since the rate of tax paid on the foreign income may belower than the rate incurred by domestic companies thatearn all of their income in the home country;(b) Countries can impose a proxy charge to account for interestexpense that may be attributable to exempt or deferredincome. For instance, some countries exempt certain foreignincome from home country tax but limit the exemption to, say,95 per cent of the income. Local country tax is imposed on5 per cent of the income as a proxy for disallowing expensesattributable to earning that foreign income. This approach isapplied by several countries with respect to dividends paidby non-resident corporations to resident corporations thathold a substantial interest in the foreign corporations;(c) Finally, a country may seek to allocate and apportion interestexpense between home country income (which currentlyis typically subject to full tax) and income that is exempt ordeferred. The interest expense attributable to that exemptor deferred income will, likewise, be denied as a deductionor the deduction will be deferred until the income is takeninto account for tax purposes.There are precedents for each of these options, but no clear consensuson the most appropriate approach. As corporations residentin developing countries increasingly engage in outbound investment,each country will need to determine which rules for interest allocationbest serve its national development goals and its sense of fairness.3.3 Is all interest equal?As discussed previously, debt (and the associated interest expense) mayarise from any of several different business needs:174