Tax Arbitrage

What is ‘Tax Arbitrage’

The practice of profiting from differences between the way transactions are treated for tax purposes. The complexity of tax codes often allows for many incentives which drive individuals to restructure their transactions in the most advantageous way in order to pay the least amount of tax. Some forms of tax arbitrage are legal while others are illegal.

Explaining ‘Tax Arbitrage’

Tax arbitrage can, for example, involve recognizing revenues in a low tax region while recognizing expenses in a high tax region. Such a practice would minimize the tax bill by maximizing deductions while minimizing taxes paid on earnings. It is suspected that tax arbitrage is extremely widespread, but by its nature, it is difficult to give precise figures as to what extent tax arbitrage is employed.

Further Reading

  • An equilibrium analysis of debt financing under costly tax arbitrage and agency problems – [PDF]
  • Dividend taxation and intertemporal tax arbitrage – [PDF]
  • How prevalent is tax arbitrage? Evidence from the market for municipal bonds – [PDF]
  • Cross-border investing with tax arbitrage: The case of German dividend tax credits – [PDF]
  • Tax competition: a literature review – [PDF]
  • Taxable and tax-deferred investing: a tax-arbitrage approach – [PDF]
  • Tax Arbitrage, Inflation, and the Taxation of Interest Payments and Receipts – [PDF]
  • Accelerated Capital Recovery, Debt, and Tax Arbitrage – [PDF]
  • Tax arbitrage and labor supply – [PDF]
  • Financial Innovation, tax arbitrage, and retrospective taxation: the problem with passive government lending – [PDF]