Tax Deductibility of Interest under the ATAD in Investment Decisions

Abstract

In 2019, the Czech Republic implemented some of the provisions under Council Directive (EU) 2016/1164, also called the ATAD (Anti-Tax Avoidance Directive). Since then, professionals in the field have been following the impact of this directive on tax legislation and accounting. However, this paper aims to show that in addition to the tax rates and the profit after tax, the ATAD will also impact financial management, specifically investment decision-making. The paper analyses a model situation based on the implementation of these regulatory measures and focuses on the effects of the new EU legislation on the interest tax shield and the overall borrowing costs. The methodology used in the paper is described in more detail in section 2 (“research commentary”) and is based on comparing the net present value of an investment financed with debt capital before and after the ATAD implementation. The calculations use the accounting data of an existing company including information that is not available to the public. This example is used to demonstrate the point by calculating the net present value with regard to the impact of the interest tax shield based on the method of financing. The calculations in the paper follow the applicable rules used in the Czech Republic before and after the ATAD came into force. The results confirm that the net present value (NPV) of investments have decreased. Due to the default parameters set for the calculation, the results also show a comparable decrease in the NPV when the investment is financed with debt capital. With comparable conditions and initial parameters (i.e. zero down payment and identical borrowing costs), the decrease in the NPV is higher when the investment is financed with a bank loan. The analysis shows that investment planning under the new legislation will be more complex and will have to take into account the financial results of the whole firm and whether the borrowing costs are tax deductible. All in all, this analysis suggests that economic calculations have to focus more on the details and the wider context of the tax deductibility of interest.