How do countries curb their debt or profit shifting: a systematic literature review

Alfandia, Nurlita Sukma Article How do countries curb their debt or profit shifting: a systematic literature review Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Alfandia, Nurlita Sukma (2024) : How do countries curb their debt or profit shifting: a systematic literature review, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 11, Iss. 1, pp. 1-17, https://doi.org/10.1080/23311975.2024.2344032 This Version is available at: https://hdl.handle.net/10419/326248 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Business & Management ISSN: 2331-1975 (Online) Journal homepage: www.tandfonline.com/journals/oabm20 How do countries curb their debt or profit shifting: a systematic literature review Nurlita Sukma Alfandia To cite this article: Nurlita Sukma Alfandia (2024) How do countries curb their debt or profit shifting: a systematic literature review, Cogent Business & Management, 11:1, 2344032, DOI: 10.1080/23311975.2024.2344032 To link to this article: https://doi.org/10.1080/23311975.2024.2344032 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 22 Apr 2024. Submit your article to this journal Article views: 2005 View related articles View Crossmark data Citing articles: 2 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oabm20 ACCOUNTING, CORPORATE GOVERNANCE & BUSINESS ETHICS | REVIEw ARTIClE Cogent Business & ManageMent 2024, VoL. 11, no. 1, 2344032 How do countries curb their debt or profit shifting: a systematic literature review Nurlita Sukma Alfandia taxation study Program, Faculty of administrative science, university Brawijaya ABSTRACT Companies often favor debt financing over equity financing due to its tax benefits, allowing multinational companies to exploit internal debt to transfer profits to jurisdictions with lower tax rates. Although the BEPS Action Plan provides governments with guidelines to curb interest deductions and combat profit shifting linked to financing arrangements, its implementation varies across nations. Moreover, multinational corporations leverage internal debt for tax planning and profit-shifting purposes. This research conducts a Systematic literature Review on the tax treatment of financial transactions, focusing on debt. Through an examination of papers available on the OECD website, particularly those analyzing thin capitalization rules and transfer pricing practices worldwide, we collected 43 empirical publications from three journal system publishers: ScienceDirect, Springerlink, and Proquest. The study scrutinizes tax planning tactics adopted by multinational firms, particularly profit shifting, debt manipulation, and transfer pricing, to reduce tax liabilities and boost profits. It investigates the effects of thin capitalization regulations, highlighting discrepancies between countries. Although these practices comply with legal frameworks, tax authorities often perceive them as ethically questionable, prompting countermeasures. Tax regulations profoundly influence the strategic distribution of multinational corporations’ profits. Relaxed enforcement leads to heightened income shifting, particularly within privately owned multinational corporations (MNCs), necessitating legislative adjustments to promote fairer financing practices. Group ratios and anti-avoidance regulations are implemented to mitigate profit shifting, affecting tax revenue, investment dynamics, and economic stability. 1. Introduction The company’s capital structure is derived from both equity and debt financing. The capital structure refers to the combination of long-term financing methods employed by the company. Companies exhibit a preference for debt financing over equity financing (Desai & Dharmapala, 2015). Multinational corporations can employ internal debt to divert profits from countries with high tax rates. Two approaches can be employed to accomplish this objective: tactically assessing the amount of domestic debt and establishing interest rates (Gresik et al., 2017). The decisions regarding a company’s capital structure are typically greatly influenced by tax considerations (Faccio & Xu, 2015). The interplay between capital structure and taxes can impact the cost of capital, cash flow, and the overall financial performance of a company. enterprises situated in nations with low effective tax rates exhibit less leverage compared to enterprises operating in nations with high effective tax rates (Faulkender & Smith, 2016). The company’s desire to reduce tax liabilities, thereby increasing after-tax income for corporate taxpayers, influences companies to increase their debt financing because interest expenses reduce information asymmetry and reduce the level of tax burden (Sani et al., 2024). when a firm grants a loan, it © 2024 the author(s). Published by informa uK Limited, trading as taylor & Francis group CONTACT nurlita sukma alfandia [email protected].id taxation study Program, Faculty of administrative science, university Brawijaya https://doi.org/10.1080/23311975.2024.2344032 this is an open access article distributed under the terms of the Creative Commons attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. the terms on which this article has been published allow the posting of the accepted Manuscript in a repository by the author(s) or with their consent. ARTICLE HISTORY Received 1 December 2023 Revised 7 April 2024 Accepted 13 April 2024 KEYWORDS Debt shifting; profit shifting; interest limitation; welfare; aggresive tax planning REVIEWING EDITOR Collins Ntim, University of Southampton, United Kingdom of Great Britain and Northern Ireland SUBJECTS Business, Management and Accounting; Finance; Economics 2 N.S. AlFANDIA will incur interest payments. Interest payments can be deducted as an expense based on corporate income tax. As the deductible interest expenditure increases, the taxable income or the company’s profit decreases. Concurrently, financing through shares will produce dividends that are liable to be taxed as income. Consequently, corporations have a preference for utilizing debt financing options over stocks. leverage, in financial terms, refers to the utilization of borrowed cash (debt) to finance a company’s operations or investments. A low leverage ratio signifies that the company possesses a comparatively small amount of debt in relation to its equity or assets (Hussan, 2016). The company exhibits less reliance on borrowed capital, resulting in a diminished debt burden and lower leverage. Consequently, the organization exhibits greater financial stability and adaptability. Reducing leverage can lead to decreased interest expenses and financial vulnerability as the company has a smaller amount of debt to repay. Companies have a preference for other funding methods rather than loans, such as raising share capital or selling fixed assets or inventories. Multinational companies has the ability to secure funding through debt within the framework of the international tax system. The system also enables Multinational companies to transfer their profits to jurisdictions with lower tax rates in foreign countries. The OECD has established an all-encompassing system of guidelines and suggestions aimed at tackling the use of aggressive tax planning tactics employed by MNC (Ouelhadj & Bouchetara, 2021). The term used to refer to this framework is the BEPS Project. The objective of the BEPS Project is to mitigate tax evasion by multinational corporations by the rectification of existing loopholes in international tax legislation (Kobetsky, 2020). The OECD released the Action Plan on Base Erosion and Profit Shifting (BEPS) in 2013. It has exerted a substantial influence on global tax policies, shaping tax systems worldwide. Several nations have implemented or adjusted their national legislation to conform with OECD guidelines, enhancing openness and collaboration among tax authorities in order to address profit shifting and guarantee equitable taxes (Crivelli et al., 2016). The implementation and execution of these measures may differ across different countries. Continued endeavors are being made to tackle obstacles and evaluate the efficacy of the BEPS Action Plan in mitigating profit-shifting tactics. The Action Plan on BEPS has 15 action items that tackle different facets of international tax planning and profit transfer. The key action points pertaining to profit transfer are Action 2, Action 3, Action 4, and Actions 7 to 10. According to BEPS Action 4, it is recommended to create regulations that would prevent the reduction of taxable income through interest payments and the avoidance of taxation from both foreign and domestic perspectives (Cencerrado et al., 2015). Effective execution of Action 4 necessitates the synchronization and collaboration among nations to guarantee uniform implementation and avoid transfers of the tax foundation across different jurisdictions. The BEPS Action Plan provides guidelines for governments to establish legislation that effectively restrict interest deductions and reduce the chances of profit shifting related to financing arrangements. It is important to acknowledge that the implementation of Action 4 and other BEPS Actions might differ across nations, with specific rules and practices varying based on individual jurisdictions. Each nation is accountable for adopting and executing measures that align with the OECD BEPS principles, while considering the specific legislative and administrative structure of their own country. The correlation between debt and taxes is a complex and multifaceted financial issue. Multiple studies have examined this correlation and offered valuable insights into the impact of taxes on corporate decisions about debt financing. Multinational company have the ability to utilize internal debt as a means to shift their profits away from jurisdictions with high tax rates (Gresik etal., 2017). By creating numerous operational and non-operational businesses, holdings, and sub-holdings in different jurisdictions, including tax havens, MNCs can also participate in tax optimization schemes. Due to the complexity of their structures, multinational company can capitalize on differences in national taxation policies and rates (Merle et al., 2019). They may choose to assign debt to jurisdictions with high tax rates due to the fact that loan interest can be deducted (Goldbach et al., 2021). This enables them to reduce their taxable revenue in regions with high tax rates while transferring profits to regions with lower tax rates. This possibility stimulated the emergence of a shift in earnings by leveraging lending programs. Internal debt is utilized by MNCs as a strategy for tax planning and profit shifting. This involves the provision of loans from firms situated in low-tax jurisdictions to subsidiaries in high-tax jurisdictions (Buettner et al., 2016). COGENT BUSINESS & MANAGEMENT 3 The allocation of income and expenses within multinational corporations, often aims to reduce taxable income, leading to base erosion and profit shifting (Sebele-Mpofu et al., 2021). Research on how the tax code treats financial transactions like debt has surfaced recently. As technology advances, global corporations employ many ways to reroute their potential tax liabilities. Prior studies have looked at how multinational corporations manage their capital structure. Prior studies have only looked at aggressive tax planning techniques. Aside from that, no prior study has examined how the BEPS Action Plan is being implemented, mainly how interest is limited and what laws are in effect in each nation. SlR was not used in earlier studies either. The Systematic literature Review (SlR) methodology is used in this study as part of a review research approach. This study tries to synthesize and evaluate the evolution of techniques used by multinational corporations using SlR. This study attempts to compile, using the BEPS Action Plan 4 recommendations from the OECD, the strategies or policies employed to reduce tax base erosion using debt schemes. This research investigates multinational corporations’ (MNCs’) tax planning practices, focusing on profit shifting, debt manipulation, and transfer pricing to minimize tax liabilities and increase profits. This research also aims to analyze the impact of implementing regulations regarding thin capitalization, including safe harbor rules (SHR) and earnings stripping rules (ESR), as well as how these regulations vary in various countries. 2. Research methodology This study utilizes a qualitative research methodology. The research selection technique was described in compliance with the recommended reporting items in Systematic Reviews and Meta-Analyses (PRISMA) standards (Moher et al., 2010). The articles were carefully chosen and finalized. To extract the relevant data from the chosen publications, a number of technologies were used. The data needed for this research was collected using manual extraction methods, Microsoft Excel, and content analysis. Figure 1 shows each step carried out based on the PRISMA standard. Table 1 is an exhaustive compilation of the journals employed in the conducted research. This research adopts research methodology (lu et al., 2022). The SlR subject is defined as the tax treatment of financial transactions, particularly debt, by reading articles on the OECD website that discuss the most commonly referenced thin capitalization laws and transfer pricing profiles of nations worldwide. we obtained specific papers from three publishers of journal platforms – ScienceDirect, Springerlink, and Proquest. Journal publisher platforms frequently offer direct access to journals and Figure 1. Flow of information through the different phases of systematic review. source: Researcher, 2023. 4 N.S. AlFANDIA Table 1. the list of journal. no Year author title Publisher 1 2013 Matthias Wrede Multinational financial structure and tax competition springer Link 2 2013 Philip g. Cohen testing thin capitalization under section 163(j): a flawed safe harbor Proquest 3 2013 ulrich scheiber international business taxation and the business cash flow tax springer Link 4 2014 Jim Fuller, David Forst us inbound: inbound debt limitations Proquest 5 2014 Matthias Dischinger, Bodo Knoll, nadine Riedel the role of headquarters in multinational profit shifting strategies springer Link 6 2014 Michael overesch, georg Wamser Bilateral internal debt financing and tax planning of multinational firms springer Link 7 2014 thomas Hemmelgarn, Daniel teichmann tax reforms and the capital structure of banks springer Link 8 2015 Borisas seminogovas taxation hybrid instruments scienceDirect 9 2015 Christof Beuselink, Marc Deloof, ann Vanstraelen Cross-jurisdictional income shifting and tax enforcement: evidence from public versus private multinationals springer Link 10 2015 grace Weishi gu, Ruud de Mooij, tigran Poghosyan taxation and leverage in international banking springer Link 11 2015 Kay Blaufus, Marocs Kreinacke, Britta Mantei interest deductibility restrictions and organizational form Proquest 12 2015 Mihir a. Desai, Dhammika Dharmapala interest deduction in multijurisdictional world Proquest 13 2015 Molly J. saunders-scott substitution across methods of profit shifting Proquest 14 2016 ann Kayis-Kumar What’s BePs got to do with it? exploring the effectiveness of thin capitalization rules Proquest 15 2016 David Forst, Jim Fuller us inbound: us proposes new debt-equity regulations regarding interest in a corporation Proquest 16 2016 Frank M. Fossen, Martin simmer Personal taxation of capital income and the financial leverage of firms springer Link 17 2016 thiess Buettner, Michaeloveresch, georg Wamser Restricted interest deductibility and multinationals’ use of internal debt finance springer Link 18 2017 Mohammed Mardan Why countries differ in thin capitalization rules: the Rule of financial development scienceDirect 19 2017 Peter Birch sorensen taxation and the optimal constraint on corporate debt finance: why a comprehensive business income tax is suboptimal springer Link 20 2017 thomas a. gresik, Dirk schindler, guttorm schjelderup immobilizing corporate income shifting: should it safe to strip in the harbor? scienceDirect 21 2018 andreas Haufler, Mohammed Mardan, Dirk schindler Double tax discrimination to attract FDi and fight profit shifting: the Role of CFC Rule scienceDirect 22 2018 Dirk Kiesewetter, tobias steigenberger, Mattias stier Can formula apportionment really prevent multinational entrprises from profit shifting? the role of asset valuation, intragroup debt, and leases springer Link 23 2018 Jose a. Clemente-almendros, Fransisco sogorb-Mira Costs of debt, tax benefits and a new measure of non-debt tax shields: examining debt conservatism in spanish listed firms scienceDirect 24 2018 Martin thomsen, Christoph Wartin tax avoidance over time: a comparison of european and us Firms scienceDirect 25 2018 Pieter Van Der Zwan, Daniel P. schutte, Waldo Krugell an evaluation of interest deduction limitations to counter base erosion in south africa Proquest 26 2018 thiess Buettner, Michaeloveresch, georg Wamser anti-profit shifting rules and foreign direct investment springer Link 27 2019 irena stejskalova, Petra Kozakova, Jana Pevna tax Deductibility of interest under the ataD in investment decisions Proquest 28 2020 Costas savva, Demis ioannou, taxatelier oeCD Ft Report: a potential solution to excessive debt financing Proquest 29 2020 Dave goyvaerts, annelies Roggeman the impact of thin capitalization rules on subsidiary financing: evidence from Belgium springer Link 30 2020 Katharina schulte sasse, Christoph Watrin, Falko Weib the alignment between reported profits and real activity in times of the BePs action Plan scienceDirect 31 2020 Pietro Dallari, nicolas end, Fedor Miryugin Pouring oil on fire: interest deductibility and corporate debt springer Link 32 2020 sabine schenkelberg the Cadbury schweppes judgment and its implication on profit shifting activities within europe springer Link 33 2020 Xuerui (estelle) Li and alfred tran an empirical study on cross-border profit shifting in australia Proquest 34 2020 Zarko Y. Kalamov safe haven or earnings stripping rules: a prisioner’s dilemma Proquest 35 2021 anna Leszylowska, Jan-Hendrik Meier Do earning stripping rules hamper investment? evidence from Cit reforms in european Countries scienceDirect 36 2021 Franz Reiter, Dominika Langenmayr, svea Holtman avoiding taxes: bank’s use of internal debt Proquest 37 2021 Jeff gordon Coherent capital structure policy: between bailouts and the interest deduction Proquest 38 2022 aleksi eerola, arjen H. L. slangen a review of international management research on corporate taxation springer Link (Continued) COGENT BUSINESS & MANAGEMENT 5 their published papers, ensuring superior content quality and greater relevance to a specific subject. Journal databases, on the other hand, compile information from several publications, which can be advantageous for conducting comprehensive searches but may require more precise criteria. (Koley etal., 2022; laakso et al., 2011). we gather data using a set of keyword strings. The initial search utilized the following keywords: ‘debt shifting’, ‘profit shifting’, ‘interest limitation method’, ‘thin capitalization rules’, and ‘earnings stripping rules’. These keywords were compared to the most commonly used ones in TCR-related articles and the three publishers’ platforms. In addition, these keyword strings were searched along with their synonyms and singular and plural versions to prevent prejudice. Articles were included based on selection criteria. A total of 564 articles were published with the specified keywords on three platforms between 2013 and 2023, according to the initial search. After manually eliminating papers that were not available, duplicates, and articles with missing information, a total of 508 studies were left in the relevant fields. In addition, we employed many inclusion criteria based on the guidelines provided by Alhossini etal. (2021) to evaluate the article’s quality. Every journal article is composed in English and contains the complete text—262 items completed this process. Examine titles, abstracts, and keywords manually to generate more comprehensive word frequency lists that exclude articles that contain inaccurate keywords. Subsequently, the article undergoes a thorough evaluation, considering the title, keywords, and abstract, to determine its relevance to the study theme. The featured articles solely focus on debt shifting, profit shifting, and the limitations of interest deduction schemes. For example, we will remove the article about earnings management that does not directly address aggressive tax avoidance from the list. Furthermore, we excluded any research that did not meet the criteria of a scientific paper from the list. The ultimate compilation comprised 43 empirical publications. Figure 2 shows data visualization using VOSviewer with the analysis type "co-occurrence: and the unit of analysis ‘keyword’. Research on debt shifting and thin capitalization rules has been conducted since 2013. As seen in the visualization results above, the color of the keyword’s thin capitalization rule and debt shifting is darker than the other keywords. Previous research linking thin capitalization rules with different topics, such as earnings stripping rules, profit shifting, and corporate taxation, emerged in 2017–2018. This topic still needs to be discussed in academic research in Indonesia, especially profit shifting, which began to be widely researched in 2018–2019. It can be caused by many multinational companies trying to shift profit due to various gaps in tax regulations in each country. 3. Analysis and discussion The topics of debt and profit erosion have been the focus of both quantitative and qualitative research. Identifying effective strategies to halt this transition remains a tough task in research. The OECD has additionally presented recommendations for the BEPS Action Plan. This section provides a concise overview of several previous studies conducted between 2013 and 2023 that examined the strategies employed by multinational corporations to manipulate their debt and profits. Moreover, the presence of a BEPS action plan will unquestionably impact a country’s approach to mitigating debt and preventing no Year author title Publisher 39 2022 ama a. ahene-Codjoe, angela a. alu, Rahul Mehrotra abnormal pricing in international commodity trading: evidence from ghana scienceDirect 40 2022 egidijus Kundelis, Renata Legenzova, Julijonas Kartanas Debt or profit shifting? assessment of corporate tax avoidance practices across Lithuanian companies Proquest 41 2022 goerdt gideon, Wolfgang eggert substitution across profit shifting methods and the impact on thin capitalization rules Proquest 42 2023 aria ardalan, sebastian g. Kessing, salmai Qari, Malte Zoubek Does capital bear the burden of local corporates taxes? evidence from germany scienceDirect 43 2023 Harald J. amberger, saskia Kohlhase international taxation and the organizational form of foreign direct investment springer Link source: Researcher, 2023. Table 1. Continued. 6 N.S. AlFANDIA the manipulation of profits in the realm of global taxation. we will endeavor to organize everything in accordance with the pertinent empirical methodology. The aggressive tax planning strategies of multinational corporations Debt and equity get disparate treatment in the context of corporate income tax. In most countries, interest is subject to taxation or can be deducted from taxes. Contrarily, dividends are disbursed from earnings that have already been subjected to taxation and do not reduce the taxable income of a company. Multinational corporations commonly utilize strategic tax planning strategies that take advantage of the tax implications of interest expenses. Companies endeavor to delay payments for various reasons. Multinational corporations have the ability to distribute their profits among the several countries where their subsidiaries are based through the utilization of transfer pricing, external and/or intra-company debt, and other strategic methods. Corporate tax avoidance encompasses several tactics employed by multinational corporations such as profit or debt manipulation to achieve a tax rate that is lower than the officially mandated tax rate (Kundelis et al., 2022). In Indonesia, aggressive tax planning refers to the deliberate actions taken by corporations or individuals to minimize their tax obligations legally. However, tax authorities typically view this activity as unethical despite its legality. One of the primary tactics employed in this practice is known as transfer pricing, which involves firms manipulating the prices at which they sell goods or services amongst their subsidiary companies in order to shift profits to jurisdictions with lower tax rates. In addition, firms can exploit tax incentives or loopholes provided by Indonesian tax legislation, such as tax discounts for specific investments. Additional strategies include the utilization of intricate business formations, incorporating entities located abroad or in regions with reduced tax rates, and using debt to create interest that can be subtracted from taxable revenue. Profit shifting refers to the act of moving profits to a different jurisdiction with the aim of minimizing tax liabilities (Dowd et al., 2017). To minimize their tax obligations and enhance their earnings, multinational corporations can exploit profit-shifting strategies (Buettner et al., 2016; Schindler & Schjelderup, 2016). Even with a consistent interest rate, multinational corporations have the opportunity to decrease their tax obligations by shifting debt to affiliates in countries with higher tax rates. Countries with high tax rates benefit from reduced interest rates, leading to tax savings that exceed the tax liabilities of the parent company. This incentive suggests that affiliates in countries with high tax rates are required to maintain higher levels of debt in relation to their assets and claim disproportionate deductions for interest expenses, as compared to affiliates in other countries (Schjelderup, 2016). Figure 2. network visualization keyword co-occurrence in thin capitalization. source: extraction from Vosviewer, 2024. COGENT BUSINESS & MANAGEMENT 7 Multinational corporations employ debt shifting as a strategy for tax planning, whereby they transfer debt or financing arrangements across linked enterprises situated in different countries (Dallari et al., 2020). Shifting operations occur not solely from the main firm to the subsidiary. The tax-related corporate acts can be classified into four categories: income shifting, overseas relocations of headquarters, internalization of operational activities, and tax evasion (Eerola & Slangen, 2022). Shifts can also transpire in the opposite direction, whereby they move from subsidiaries to parent businesses. when the parent business is located in a country with a lower tax rate, the profits will be moved to the parent firm (Dischinger et al., 2014). Multinational corporations that operate in multiple jurisdictions have the ability to establish debt arrangements or intercompany loans among their subsidiaries. These loans can be structured to reduce taxable income in jurisdictions with low tax rates and increase interest deductions in areas with high tax rates (Goldbach et al., 2021). Most countries commonly provide tax deductions for debt interest (Schjelderup, 2016). Businesses are inclined to choose debt financing over equity due to the tax advantages associated with debt interest. The term ‘debt bias’ is used to describe this organizational practice. This bias could potentially affect the financial framework of a company, leading to a rise in indebtedness (Dallari etal., 2020). Companies can minimize their taxable income and tax liabilities in jurisdictions with high tax rates by optimizing interest expense deductions through the expansion of intra-group debt or the reorganization of current debt. while both concepts relate to the utilization of debt in a company’s financial framework, debt bias and debt shifting are fundamentally different notions. Multinational corporations may alter their organizational structure in response to tax-driven strategies aimed at shifting income. Multinational corporations have the autonomy to choose from many organizational frameworks for their overseas subsidiaries, including options like subsidiaries or flow-through organizations. These organizational forms have diverse tax implications. Subsidiaries are obligated to pay corporate income tax due to their separate legal status as different corporations. Multinational corporations can reduce their total tax liability by channeling their earnings to subsidiaries located in jurisdictions with lower tax rates. The organizational structure employed by the MNC can potentially affect the distribution of wealth. A multinational corporation may incur higher tax liabilities if it opts for subsidiaries located in countries with elevated tax rates. Alternatively, the multinational corporation can reduce its tax obligations by shifting income to flow-through entities situated in jurisdictions with lower tax rates. The selection of organizational structure by multinational corporations can lead to a redistribution of income, since it allows them to allocate profits to entities situated in many jurisdictions with lower tax rates, hence reducing their overall tax liability (Amberger & Kohlhase, 2023). A parent firm domiciled in a jurisdiction with high tax rates establishes a subsidiary known as a controlled foreign company in a different country that offers a lower tax rate. The subsidiary firm is subject to the control of its shareholders. If dividends are allocated to shareholders, specifically the parent business in this instance, the subsidiary company’s revenue may be subject to taxation. If the parent company decides to delay the distribution of income (dividends), the dividends will not be taxed in the country where the subsidiary is located. CFCs can serve as a substitute for multinational corporations to transfer their profits or revenue. Multiple subsidiary firms possess the capability to exclude interest payments on internal debt from their taxable income. Multinational corporations possess the capacity to shift their earnings away from the host country by employing tax havens to create domestic debt. They have authority over the amount of debt they issue, and the interest rates they charge (Gresik etal., 2017). Conduit entities or special purpose vehicles are alternative organizational forms employed by multinational corporations, in addition to CFCs. Conduit entities have a substantial impact on the practice of debt shifting. These are subordinate companies that function as middlemen, transferring debt from one affiliate to another inside a global corporation. This enables the transfer of profits from areas with high tax rates to areas with low tax rates, without increasing the overall debt of the group. Conduit entities have the ability to fulfill several functions, including the coordination of capital distribution, the consolidation of debt from various subsidiaries, and the obfuscation of the source of internal loans. Conduit businesses enable multinationals to enhance the opacity of their tax avoidance strategies and decrease the probability of thorough scrutiny by tax authorities. Conversely, the utilization of conduit entities might complicate the determination of how internal debt fluctuates in relation to tax rates, as it artificially inflates the levels of internal debt in these businesses (Reiter et al., 2021). 14 N.S. AlFANDIA stripping rule. The ESR is advantageous as it efficiently restricts the exploitation of debt financing and transfer pricing methods. The SHR specifically affects the debt-shifting strategy utilized by multinational companies. The ESR outperforms the SHR, indicating that nations shouldn’t favor hybrid laws as their preferred course of action (Gresik et al., 2017). The comparative efficacy of one legislation in relation to another depends on the extent to which multinational companies can employ different strategies for profit shifting, in addition to practices involving debt shifting (Mardan, 2017). Given the presence of other profit-shifting tactics, multinational companies have two options when faced with hybrid legislation. Hybrid regulations can increase the overall cost of capital, leading multinational businesses to reduce their capital holdings. The second option is implementing stricter hybrid rules, which would require multinational companies to increase their capital in order to address the emerging limitations. Countries with a net inflow of foreign direct investment have a vested interest in safeguarding tax payments from multinational companies through the implementation of supplementary safe harbor legislation. In contrast, countries with a low ratio of incoming foreign direct investment relative to outgoing investment prioritize their domestic tax and wage income. Extra-safe harbor restrictions are exclusively implemented when multinational companies increase their capital holdings. Many countries observe a disparity between the conduct of MNCs and their claimed beneficial characteristics. Therefore, it is imperative for these countries to adopt policies that prevent the erosion of revenue as a direct and effective response. welfare research indicates that hybrid instruments possess the capacity to enhance the overall welfare of a nation. However, it is not obligatory for all countries to implement hybrid regulations. It is important to customize these policies to address important concerns related to a country’s desired welfare objectives, such as investment (Goerdt & Eggert, 2022). The interest limitation approach can affect a country, affecting state tax revenues, investment levels, economic growth, corporate capital structure, global competitiveness, and financial market stability. Stringent interest limitation regulations can enhance state tax revenues by curbing corporations’ capacity to minimize tax obligations through interest expenses. However, these policies can impede economic expansion by restricting enterprises’ ability to secure funding through debt. Companies will modify their capital structures in response to interest rate cap regulations, explore more affordable financing options, and adjust their debt-to-equity ratios to optimize tax advantages. However, they will also consider the stability of financial markets and the country’s global competitiveness. Conclusion This research investigates multinational corporations’ (MNCs’) tax planning practices, focusing on profit shifting, debt manipulation, and transfer pricing to minimize tax liabilities and increase profits. This research also aims to analyze the impact of implementing regulations regarding thin capitalization, including safe harbor rules and earnings stripping rules, as well as how these regulations vary in various countries. In conclusion, Multinational firms utilize many tax planning techniques, including debt shifting, profit shifting, transfer pricing, and the implementation of organizational structures, to minimize their tax liabilities and optimize their earnings. These techniques entail capitalizing on the variances in tax rates and regulations among countries. Nevertheless, although these tactics are legal, tax authorities perceive them as morally wrong and are implementing strategies to counteract aggressive tax planning. The implementation of tax regulations has a pivotal role in shaping the actions of multinational corporations (MNCs) as they strategically relocate their earnings to nations with more favorable tax rates. The study emphasizes that lenient tax enforcement results in heightened income shifting by multinational corporations (MNCs), mainly privately owned ones. It underscores the necessity for policymakers to rectify disparities in the taxation of debt and equity to reduce tax benefits and promote a more equitable approach to financing. Ultimately, discrepancies in interest-limiting measures among countries are shaped by disparities in tax regulations, economic circumstances, and policy goals. Strategies to prevent profit shifting and loss of tax revenue include the implementation of group ratios, safe harbor rules, hybrid tactics, fixed ratio regulations, and anti-avoidance laws. The impact of thin capitalization laws, earnings stripping restrictions, and hybrid regulations on multinational firms’ profit shifting and debt financing strategies vary, affecting tax collections, investment levels, economic growth, and financial market stability. COGENT BUSINESS & MANAGEMENT 15 There are several implications from this research. This study is extremely pertinent to international economic policy that demonstrates the necessity for nations to have comprehensive and well-coordinated policies to deal with profit-shifting and debt issues. The study result emphasizes how crucial it is for nations to work together and develop equitable policies to stop profit-shifting behaviors and reduce the danger of taking on too much debt. In order to prevent tax manipulation and successfully restructure debt, the government must take into account measures requiring stringent rules, financial openness, and cross-border collaboration. This research offers crucial information that policymakers may use to develop sensible debt management plans and stop profit-shifting tactics that harm the nation’s economy. It is important to acknowledge the limitations of the study. First, this study focusing on profit shifting, debt manipulation, and transfer pricing to minimize tax liabilities and increase profits. Second, this research only explains strategic choices that limit the importance of having a direct impact on the level of welfare of a nation. Further investigation is recommended to examine the efficacy of different policy tools that nations employ to deal with fluctuations in debt and profit. Analyzing case studies from diverse nations with varying economic characteristics can help research reach a wider audience. The scope could also be expanded to consider the real-world effects of international tax laws and fiscal policy on debt and profit transfers and how they affect investment, economic expansion, and income inequality. Information technology’s function and current advancements in monitoring and enforcing tax laws could also be examined in future research. Therefore, greater research in this area can offer a more comprehensive and contextualized understanding of the best approaches to deal with issues about profit and debt shifts on a national and global scale. Author statements All authors of this manuscript have met all four criteria for authorship in the ICMJE Recommendations. Author contributions The author actively participates in the conceptualization and design, analysis and interpretation of data, the drafting of the paper, the critical revision of its intellectual content, and the final approval of the version to be published. The author accepts responsibility for all parts of the work. Disclosure statement The author declares that there is no financial, professional, or personal competition interest with other parties. About the author Nurlita Sukma Alfandia, Master of Accounting at Brawijaya University. Her research interests are accounting, international tax, education, and finance. Funding The author reports that the results of this research are mandatory outputs from non-competitive research activities organized by the Research and Community Service Agency, Faculty of Administrative Sciences, Brawijaya University. ORCID Nurlita Sukma Alfandia http://orcid.org/0000-0003-2878-6298 Data availability statement All data underlying the results are available as part of the article and no additional source data required. 16 N.S. AlFANDIA References Ahene-Codjoe, A. A., Alu, A. A., & Mehrotra, R. (2022). Abnormal pricing in international commodity trading: Evidence from Ghana. 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