Author Description

This study provides a general insight into the effect of different profit shifting strategies on effective tax rates for cross-border investments between the 28 EU member states and the US. Specifically, this report presents the cost of capital (CoC) and the effective average tax rates (EATR) for cross-border investments between the 28 EU member states and the US distinguishing between scenarios that involve seven different tax planning strategies. The calculations are based on tax law data for the year 2015. The tax planning strategies considered use different forms of profit shifting via interest and royalty payments. To put the effectiveness of these tax-driven indirect investment strategies into perspective, this study compares the resulting CoC and EATR to corresponding results for the most tax-efficient way of directly financing the cross-border investment. The study considers the following seven tax planning strategies: (1) Tax planning strategy 1 assumes that the subsidiary, which conducts the investment, is owned and financed by an intermediate company resident in a tax-exempt country. This company grants a loan to the subsidiary and the subsidiary pays interest on that loan. (2) The second tax planning strategy replicates tax planning strategy 1 but assumes that the intermediate company is resident in a fictitious average EU country which has a corporate income tax rate of 23%. (3) Tax planning strategy 3 replicates tax planning strategy 1 but assumes that the loan granted to the subsidiary has a hybrid element resulting in its classification as equity capital in the country of residence of the intermediate company. (4) Tax planning strategy 4 replicates tax planning strategy 2 considering a hybrid loan. (5) Tax planning strategy 5 assumes that the subsidiary invests in a bundle of assets (buildings, machinery, inventory, and a financial asset) whereas the intangible asset used in the production process is owned by a separate intellectual property (IP) hol