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Limitations of deductions of interest payments

Highlights

  • ICC notes that differences in the tax treatment of equity and debt financing have a potentially significant impact on investment decisions This may have been a contributory factor to overleveraging in some economies.

  • In order to remove this distortion, ICC recommends that Governments consider introducing Allowance for Corporate Equity - an approach which has already been adopted by a small number of countries.

  • An alternative theoretical approach is to eliminate tax deductions for interest expense. Given the preponderance of countries that allow a level of deduction for interest expense this would be a radical move and would be unlikely in practice to stimulate growth and international development.

  • In making any changes Governments should be careful not to artificially restrict the deductibility of debt interest. This is especially important given the potential impact on existing business models and long-term investments.

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