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Regulating international debt shifting : a comparison of new Norwegian regulation with traditional thin-capitalization rules

Smith-Nilsen, Christian
Master thesis
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URI
http://hdl.handle.net/11250/219595
Date
2014
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  • NoCet - Master theses [88]
Abstract
Tax planning behavior, where debt is used to minimize the tax payments, has received

considerable attention in Norway recently. To limit such tax planning behavior, several of

Norway’s largest trading partners have implemented rules to prevent thin-capitalization. This

theoretical thesis presents the general design of the new Norwegian earnings-stripping rules

as well as the main features of traditional thin-capitalization rules.

The predictions from the theoretical modeling show that the new earnings-stripping rules

may restrict excessive use of debt. However, the legal and theoretical review also suggests

that the rules contain weaknesses that hamper the effectiveness. The weaknesses are

primarily that companies can make structural changes to avoid that interest expenses will be

denied deductibility. These structural adaptations involve splitting up assets, substitution

between internal and external debt, and creating organizational structure that makes it

possible to have a higher debt ratio. Briefly reviewing empirical papers provides evidence

that the shortcomings found during the theoretical analysis may limit the effectiveness of the

new Norwegian rules.

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