The interest barrier introduced by Finland slowed down profit-shifting by multinational enterprises

According to the research paper produced by VATT, Finnish multinational enterprises have reduced their interest expenses following the introduction of the interest barrier at the start of 2014.

Profit shifting to low-tax countries by multinational enterprises has been combated in a number of different ways. One of the anti-tax avoidance measures adopted by Finland is the interest barrier, which was introduced at the start of 2014. The main aim is to limit interest-based profit-shifting and  to protect Finland’s tax base.

According to the findings, the reform has produced the desired results. Senior researchers Jarkko Harju, Ilpo Kauppinen and Olli Ropponen found in their study that Finnish multinational enterprises have reacted to the interest barrier by reducing their interest expenses. It was also noted that subsidiaries have reduced their long-term debts after the introduction of the interest barrier.

According to the findings, the interest barrier has not prompted companies to change their behaviour so that they could circumvent the restriction. There was no evidence that companies relying on debt-based profit shifting had started making more use of profit-shifting based on transfer pricing. There have not been any changes in turnover either.

“It seems that the interest barrier is an effective instrument in the efforts to combat profit-shifting. We did not find any evidence that the reform had produced negative impacts,” explains Olli Ropponen.

The three researchers examined the impacts of the interest barrier on the behaviour of Finnish multinational enterprises using similar companies in Sweden and Denmark as a control group. All Finnish, Swedish and Danish multinational enterprises were reviewed in the paper.

Publication:

Responses to an Interest Barrier: Empirical Evidence. VATT Working Papers 90.

Further information:

Olli Ropponen, senior researcher, tel. +358 295 519 443