The neutrality of taxation with regard to economic decisions and in particular investment decisions is generally considered to be an important objective when it comes to the design of tax systems. In practice, this often proves to be a difficult objective to achieve, as evidenced by both the immoderate taste of political decision-makers to make taxation an instrument of economic intervention and the accumulation of tax loopholes which very often result  [4]

See the article by Samantha Haulotte and Christian Valenduc….

3This topic takes on particular importance today when considering the tax treatment of the various forms of business financing. Indeed, in terms of corporate taxation, it is most often found that own funds and borrowed funds receive different treatment due to the very fact of the deductibility of loan interest, while the remuneration of own funds does not give rise to to no deduction.

4The bias thus created can induce two kinds of economic distortions. On the one hand, this difference in treatment leads companies to seek a leverage effect, and therefore an excessive debt/equity ratio, which ultimately increases the systemic risk for the financial markets. On the other hand, the favorable treatment of borrowing encourages multinational companies to use interest deductibility or to use hybrid instruments to transfer profits to less taxed places. Thus, the debt of the subsidiaries is located in countries where corporation tax is high, while the interest is paid to the group’s lending companies, located in countries with low taxation, which translates into lower total taxation in the group level.

5These two types of economic distortions have given rise to numerous analytical works and are now well known to economists, especially since the 2008 financial crisis. Fatica, Hemmelgarn and Nicodème (2009) highlight in particular this phenomenon of “ transfer of debts”. These distortions are most often coupled with negative consequences in the form of a cost that reduces well-being on a non-negligible scale, the minimum estimates are

6Both the European institutions and the OECD and the IMF (IMF, 2009) have insisted on the role that the bias introduced by interest deductibility can haveplayed in the development of the financial crisis and on the economic and fiscal policy options to be implemented to reduce or even eliminate this bias. In particular, Table 1 clearly shows the difference created in the effective marginal tax rate by the choice to finance the investment by borrowing compared to financing with equity: for investments financed with equity, if no deduction is provided for the cost of financing, the tax system discourages investment in the sense that an investment which just breaks even before tax becomes a loss after tax: the effective marginal tax rate is positive . On the other hand, for an investment financed by borrowing,

Source: Update from Devereux et al. (2002) , www.ifs.org.uk.

7In the case of Belgium, this has been highlighted previously (Valenduc 1999, 2009) and Chart 1 updates these estimates. Until 1996, a classic tax system, with taxation of reserved profits and distributed profits, created a discrimination between equity financing and debt financing. This discrimination disappeared in 1996, with the effect of a tax credit on new equity, at the level of marginal investment. The average effective rates of investments financed by equity still remained, in many cases, higher than those of investments financed by debt. Neutrality was increased with the introduction of the venture capital deduction in 2006 (Valenduc, 1999, 2009).European Commission (2011). See in particular the chapter:…, highlighted two specific elements useful for enhancing economic efficiency in many Member States: “Member States’ rules on taxation of corporate income and housing debt for the financing of investments. […] The economic cost of this bias in favor of indebtedness may not be negligible. More importantly, excessive debt levels increase the likelihood of default, and the recent financial crisis has proven that adjustment costs can be substantial