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                      along  with the gap of  tax  rate between the    Today,  more  than  70  countries  in  the  world
                      domestic and the country where their related     have mentioned ALP on their tax law. There are
                      party operates.  This is also supported by the   tendencies that transfer pricing regulations in
                      idea of optimal value cost of capital which can   various countries are getting stricter, exposed
                      be measured through weighted average of cost     by the obligation for  multinational  enterprise
                      of  debt  and  cost  of  equity  (weighted  cost  of   to submit  transfer pricing documentation.
                      capital), where cost of debt considers after tax   Before  2001,  only  14  countries  that  have
                      cost of debt.  As a result, firms would prefer   transfer  pricing  documentation  requirement
                      debt in their  capital  structure, particularly in   for affiliated transactions. In 10 years (2011),
                      the context of cross-border financing.           the figures quadruple to 58 countries.  Several
                                                                       countries had also armoured themselves with
                         Comparing  between  those  two,  there        penalty and other re-characterizing clauses.
                      is a general  consensus  that  transfer  price
                      manipulation is the main technique to shifting      Many  countries  today  also  apply  domestic
                      profit.  From  meta-data  analysis  based  on    rules to prevent  intra-group  excessive debt,
                      various  previous  studies  on  profit  shifting,   which  refers  to thin capitalization  measures.
                      transfer  price  manipulation  is  a dominant    The  most common approach to test whether
                      profit  shifting  strategy  accounted  for  72%  of   the  firms  have  reasonable  financial  structure
                      all  cases ,  while  in  developing  countries this   and interest payment is rely on a fixed ratio of
                      figure is higher.                                debt to equity (DER).  Limit of the appropriate
                                                                       debt  to  equity  ratio  is  quite  intriguing.  The
                      3.3. The Cures
                                                                       mark between the ‘appropriate’ and ‘excessive’
                                                                       debt  is hard to measure. From government’s
                         It  should be  emphasized  that  decision  to
                                                                       perspective, efforts to take into account  all
                      have  profit  shifting  strategies  can  be  reduced
                                                                       business  model and economic  sectors  will
                      by creating  anti  avoidance  rules. There is an
                                                                       result  in  numerous ratio,  which indeed  will
                      increasing trend among countries to set specific
                                                                       create more administrative inconveniences,
                      anti  avoidance  rules  (SAAR)  and  general  anti
                                                                       especially when assessing  complex business
                      avoidance  rules  (GAAR).  SAAR  is  meant  to
                                                                       model. Therefore, many countries only set up
                      focus  on  specific  (individual)  tax  avoidance
                                                                       one single debt to equity ratio, mostly around
                      practice, such  as transfer  pricing  rules, thin
                      capitalization rules , and others. With regards
                      to the dominant schemes of profit shifting, this    How about the effectiveness of these rules?
                      article only deals with transfer pricing and thin   Lohse  and  Riedel  estimate  that  transfer  price
                      capitalization rules.                            manipulation channel could be reduced up to
                                                                       50% with stricter transfer pricing legislation.
                         Concerned   with   the   possibility   for
                                                                       Studies on foreign affiliates of US multinationals
                      manipulation  of internal  group  transactions,
                                                                       in 54 countries during 1982 – 2004 also showed
                      there is  a tremendous  growth of  transfer
                                                                       that thin capitalization regimes restrict the ratio
                      pricing rule across countries. The fundamental
                                                                       of an affiliate’s total debt to assets up to 43% of
                      basis for transfer  pricing rule is the arm’s
                                                                       the case.   Moreover,  in  developing  countries
                      length  principle  (ALP),  which  mainly  refers
                                                                       context, application of transfer pricing and thin
                      to  the  Article  9  of  either  OECD  or  UN  Model
                                                                       capitalization rules simultaneously can reduce
                      Tax  Convention  about  associated  enterprise.
                   22. John R. Graham, “Taxes and Corporate Finance:  A Review,”  The
                   Review of Financial Studies, Vol. 16, No. 4 (2003): 1101.
                   23.  Peter H.  Blessing,  “The  Debt-Equity  Conundrum –  A  Prequel,”   28.  UN,  United  Nations  Practical  Manual  on  Transfer  Pricing  for
                   Bulletin for International Taxation, Vol. 66, No. 4/5 (2012): 200.  Developing Countries (New York: UN, 2013), 264.
                   24.  See  Jost  H.  Heckemeyer  and  Michael  Overesch,  “Multinational’s   29. See Theresa Lohse, Nadine Riedel, and Christoph Spengel, “The
                   Profit Response to Tax Differentials: Effect Size and Shifting Channels,”   Increasing Importance of Transfer Pricing Regulations – A Worldwide
                   ZEW Discussion Paper No. 13-045, (2013).         Overview,”  Oxford Centre for Business  Taxation  Working Paper  WP
                                                                    12/27 (2012).
                   25. See B. Bawono Kristiaji, “The  Incentives  and Disincentives  of
                   Profit Shifting Strategies in Developing Countries” (Master Thesis,   30. Please note that thin capitalization rules have many variations, such
                   Tilburg University, 2015). Available online at:  as: fixed interest to EBITDA ratio, targeted rules, worldwide debt, interest
                   cgi?fid=137341.                                  to assets ratio, and others.
                   26.  The  term thin capitalization rules referring to rules which  restrict   31. It is ranging to 6:1 for normal firms. See Jennifer Blouin,  et al.,
                   interest deductions. This rule commonly associated to a debt-to-capital   “Thin Capitalization Rules and Multinational Firm Capital Structure,” IMF
                   ratio,  an interest to-profit ratio (earning stripping), or an application   Working Paper WP/14/12 (2014): 23-24.
                   of arm’s length principle. See Chloe Burnett, “Intra-Group Debt at the   32. Theresa Lohse and Nadine Riedel, “Do Transfer Pricing Laws Limit
                   Crossroads: Stand-Alone versus Worldwide Approach,”  World  Tax   International Income Shifting? Evidence from European Multinationals,”
                   Journal, Vol. 6, No.1 (2014): 43.                CESifo Working Paper, No. 4404 (2013).
                   27. Article 9 (1) of OECD Model Tax Convention consist the concepts   33. Jennifer Blouin, et al., “Thin capitalization Rules and Multinational
                   of associated enterprise and arm’s length principle, while Article 9 (2)   Firm Capital Structure, CEPR Discussion Paper, No. 9830 (2014): 29-
                   concern on corresponding adjustment to avoid economic double taxation.  30.
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