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Consider a case where an MNE has allocated debt funds across countries. I am attempting here to
show with a mathematical model how profit maximization objective is constrained by thin capital-
ization rules across countries. Needless to say, a tax planner would like to allocate debt funds across
tax domains, in a manner that the aggregate interest deduction for tax is maximized. The objective of
this mathematical model is to maximize profit after tax at a group level within the constraints of thin
capitalization rules.
In the equations below, PAT is profit after tax at a consolidated basis, for an MNE operating in n coun-
c
tries, the “I’ in EBIT is total interest while i is tax deductible interest, and t is the effective corporate
tax rate.
CA Ravi Avadhanam
Disclaimer:
This article and/or write ups and/or any of its content shall not be treated as opinion and/or advice in any circumstances of the author(s) and/ or the Chapter. Reader’s to apply their best
judgement in the best interest of their requirement and should seek a formal opinion on any issue.
The Institute of Chartered Accountants of India (Dubai) Chapter NPIO TAX JOURNAL 2020 73
