Updated: Jun 16
By José Rubens Scharlack Reprinted from Tax Notes Interna!onal, December 16, 2019, p. 1005
Situated in a federal income tax system conveniently protected by the high-tax exception of subpart F, Brazilian subsidiaries of U.S. multinationals have historically had little incentive to avoid income taxation. The Tax Cuts and Jobs Act dramatically changed that. The combination of the new 21 percent corporate rate with new rules for global intangible low-taxed income, foreign-derived intangible income, and the foreign dividends received deduction (DRD) produces an almost irresistible incentive for U.S. parents to press their Brazilian subsidiaries to strip income and reduce their effective corporate income tax rates to less than Brazil’s nominal 34 percent on net profits.
I say almost irresistible, because the Brazilian Federal Revenue (Receita Federal do Brasil, or RFB), which fiercely protects its taxable base, limits taxpayers’ use of the more commonly known income-stripping strategies and will likely oppose efforts that lack a bona fide business purpose.
Should the RFB’s resistance prevail, U.S. parents are likely to employ alternative strategies to close the gap between U.S. and Brazilian income taxation, including:
checking the box on Brazilian subsidiaries and treating them as branches of the U.S. parent, thus opting out of controlled foreign corporation treatment altogether;
converting non-subpart F income into subpart F income to benefit from the hightax exception; or
implementing or strengthening a CFC’s tangible manufacturing structure in Brazil to increase that CFC’s qualified business asset investment.
Notably, the third alternative is precisely the result the TCJA was created to prevent.
This article is divided into four sections. Section I describes the major modifications that the TCJA made to the U.S. outbound tax system (putting aside the base erosion and antiabuse tax) and explains why these modifications put pressure on U.S. parents to strip income from CFCs in high-tax countries like Brazil. Section II presents the weapons that the RFB can use to fight multinationals’ most common income-stripping strategies. Section III suggests alternative ways to reduce the impact of the GILTI regime if the RFB’s resistance successfully limits the use of the more common income-stripping initiatives. In Section IV, I offer my conclusions.
I. The TCJA and Its Pressure Points
A. The New Corporate Rate
The TCJA modified IRC section 11(b) to reduce the corporate income tax rate from 35 percent to 21 percent. Brazil, on the other hand, does not have a specific income tax for corporations. Instead, Brazil has two income taxes for legal entities in general:
the legal entity income tax (Imposto de Renda Pessoa Jurídica, or IRPJ), which is generally levied at a 25 percent rate — that is, 15 percent plus 10 percent additional for monthly income higher than BRL 20,000 (approximately $5,000); and
the social contribution on net profits (Contribuição Social sobre o Lucro Líquido, or CSLL), which is typically levied at 9 percent (although different rates apply to some economic sectors).
Both taxes can be calculated using two different tax systems, both of which apply to entities with non-Brazilian shareholders:
the Lucro Real system, under which taxable profit is the entity’s accounting profit with modifications (additions and exclusions) in accordance with the tax law; and
the Lucro Presumido system, under which a percentage of the entity’s gross income is legally presumed to be its net profit and taxed accordingly.
Therefore, Brazilian CFCs generally pay a total 34 percent in income taxes, which was fine when the U.S. corporate rate was 35 percent because, at least under the Lucro Real system,1 any subpart F inclusion would generate no income inclusion to the U.S. shareholder because of the high-tax exception in IRC section 954(b)(4). This rule provides that income otherwise taxable under subpart F may be excluded if the taxpayer establishes that such income was “subject to an effective rate of income tax imposed by a foreign country greater than 90 percent” of the U.S. tax rate. Now that the U.S. corporate rate is 21 percent, 34 percent suddenly seems too high — especially because the TCJA also repealed section 902, which had granted the U.S. parent an indirect foreign tax credit for the foreign income taxes previously paid by a CFC whenever it remitted dividends (which are exempt from tax in Brazil).
There are talks in Brazil about reducing the entity income taxes and resuscitating dividend taxation to align both to international standards.2 Still, even if entity income taxation drops — for example, to 20 percent — the U.S. shareholder pressure for CFC income stripping will remain, now that the paradigm is 21 percent and not 35 percent and as a result of other changes made by the TCJA.
B. GILTI: A Minimum Tax and a Paradigm Shift
New section 951A gives birth to the GILTI tax. The TCJA inserted it into subpart F as an addition to the CFC rules that works in parallel with that regime and the U.S. transfer pricing rules. The GILTI tax reaches a CFC’s foreign income that is not:
effectively connected to a U.S. trade or business;
subpart F income; • excluded from foreign base company income (FBCI) or from insurance income because of the high-tax exception;
a dividend received from a related person;
foreign oil and gas extraction income.
The GILTI regime taxes income currently (that is, without deferral) to the extent that the relevant income minus deductions properly allocable to it (the tested income) and minus tested losses3 (thus, the net tested income) exceeds a 10 percent notional return (the CFC’s net deemed tangible return) on the CFC’s aggregate adjusted basis in depreciable tangible property used in the production of the tested income (QBAI) minus specified interest expenses.
Basically, section 951A taxes, on a current basis, all of a CFC’s foreign active income that escapes subpart F (unless it qualifies for the hightax exception4 ) to the extent that the income exceeds 10 percent of the value of the CFC’s tangible, depreciable, and productive assets. If a CFC’s income would not originally be FBCI or insurance income then it cannot escape the GILTI tax because it faces a high tax in the other country. For example, a Brazilian CFC that imports products from a controlling U.S. parent and sells them to unrelated customers in Brazil does not perceive foreign base company sales income and thus cannot use Brazil’s 34 percent net profits taxation to claim the high-tax exception to the GILTI tax.
The broad formula for the GILTI regime encompasses more than just low-taxed intangible income. For example, it reaches a typically commercial CFC that keeps inventory in a space leased from third parties. That CFC would have virtually no QBAI and, therefore, would generate full 951A inclusions to its U.S. shareholders every year, despite generating income from active, tangible operations in the foreign country and even if it is taxed by a high-tax foreign jurisdiction.
The GILTI tax is a global tax that goes where subpart F and section 482 (transfer pricing’s arm’s length standard) cannot go. It is built on different principles and thus represents a paradigmatic shift in international tax law. Much remains to be said and argued about the GILTI tax and only time will tell whether it will subsist, but for now it is very important for — and can make a great difference to — a U.S. multinational’s tax planning strategy. To start, GILTI inclusions represent ordinary income for a U.S. shareholder. For unincorporated U.S. shareholders, this means the ultimate individual owner is subject to ordinary taxation, which may reach as high as 37 percent. U.S. corporate shareholders, however, not only benefit from the newly reduced 21 percent rate, but also receive a 50 percent deduction, resulting in an effective income tax rate of 10.5 percent for GILTI inclusions. Moreover, section 960(d) gives U.S. corporate shareholders with GILTI inclusions a deemed FTC equal to 80 percent of the foreign income taxes paid or accrued on the amount included. FTCs for the U.S. shareholders’ GILTI are calculated separately from FTCs on other income.
While the high-tax exception of section 954(b)(4) partly immunizes a Brazilian CFC against subpart F inclusions, it does not protect it against GILTI inclusions. It is true that GILTI’s tested income does not include income that is subpart F nor income that, but for the high-tax exception, would be subpart F. However, that is all that section 951A and reg. section 1.951A2(c)(iii) say about section 954(b)(4).5 A CFC’s income that would not be subpart F regardless of the high-tax exception is sure to be included in GILTI’s net tested income calculation, if it does not qualify for the other exceptions in section 951A.
Therefore, profitable Brazilian CFCs with active, non-subpart F income are likely to generate GILTI inclusions for their U.S. shareholders. If the GILTI inclusion was subject to income taxation in Brazil under the Lucro Real system, then 80 percent of that tax is generally creditable as an FTC under section 960(d) and can be offset against the GILTI tax, which is as low as 10.5 percent for U.S. corporate shareholders. Therefore, potential GILTI inclusions will likely lead to U.S. parents pressuring their Brazilian CFCs to lower their effective, creditable income tax rates to as low as 13.125 percent (80 percent of which is 10.5 percent).
C. Foreign Dividends Exemption
What happens to a CFC’s income that generated either a GILTI or a subpart F inclusion and is later distributed to the U.S. shareholder? The prior inclusion is now previously taxed income, and it escapes a second round of U.S. taxation in accordance with section 959.
More broadly, however, all dividend distributions from a CFC to its corporate U.S. shareholders are now free from additional taxation under the foreign DRD in new section 245A. This new code section strongly reduces the historic economic incentive for deferral. Aside from subpart F and GILTI inclusions, the only case in which a U.S. shareholder would owe U.S. tax is if shares of the CFC are disposed of in a taxable sale and the proceeds do not qualify as dividends. 6
U.S. multinationals know that, whether or not taxed by subpart F or GILTI, their subsidiaries’ profits may flow upstream with no additional U.S. federal income tax. Dividend distributions are also exempt in Brazil. However, tax reform may occur during the current Brazilian presidency.7 If it does, experts expect that dividend distribution will be no longer exempt. The underlying idea is that taxation of dividends would help the government recover some of the revenue lost from a decrease in corporate income tax rates. Dividend taxation in Brazil would increase the pressure on U.S. multinationals to strip income from Brazilian CFCs.
D. FDII: A Direct Incentive
1. The FDII Deduction
Thus far, we have examined indirect incentives to strip income from Brazilian CFCs that arise from the decrease in the U.S. parent company’s effective corporate income tax rate, which in turn tempts the U.S. parent to avoid “wasting” resources on foreign taxes that cannot be used as FTCs in the United States.
The TCJA also created a direct incentive to strip income in the FDII deduction (new section 250(a)(1)(A)). FDII explicitly allows a U.S. corporation to deduct 37.5 percent of its gross income that is not attributable to a CFC, a foreign branch, financial services, or domestic oil and gas extraction, but that is related to the sale of property (including licenses and leases) to foreign persons for use outside the United States or to the performance of services for foreign persons or with respect to property outside the United States. The eligible gross income is reduced by related deductions (including taxes) and by a 10 percent notional return on the U.S. corporation’s QBAI (the deemed tangible income return). In a GILTIlike calculation, FDII grants the U.S. corporation a 37.5 percent deduction on the excess of its net income from exports of goods and services over a 10 percent return on its QBAI, thus resulting in an effective federal income tax rate of only 13.125 percent (instead of 21 percent) for that excess income.
FDII also applies in foreign related-party transactions, but only if the property sold or leased, the service rendered, or the license granted is either resold to an unrelated party or used by the related party in connection with sales, leases, licenses, or services provided to unrelated parties for use outside the United States. This is essentially what a foreign subsidiary that imports products or uses the parent’s equipment, patent, trademark, or services does. Therefore, section 250(b)(5)(C) directly incentivizes a U.S. parent to strip income from its foreign subsidiaries by selling or leasing products, licensing intangibles, or rendering services to the CFC at a lower income tax rate, thanks to the FDII deduction. As counterintuitive as it may be, the deduction adds pressure toward stripping income in Brazil.
There is some controversy around the FDII deduction. J. Clifton Fleming Jr. and others have suggested that FDII may violate WTO law; likewise, part of the reason that Daniel Shaviro suggests that a true intellectual property box would be preferable to FDII is that the WTO has never repealed those regimes.8 Another potentially controversial issue is that, because it is based on the excess of the U.S. corporation’s income over its QBAI, the FDII deduction not only encourages the beneficiary to increase its intangible income, but also to decrease its QBAI. One way a multinational could do this would be to transfer tangible assets to CFCs that generate GILTI, thus increase the CFCs’ QBAI, while decreasing that of the U.S. parent. In this sense, both GILTI and FDII fall short on their promise to encourage multinationals to bring back factories to the United States.
2. An Example
To demonstrate how the TCJA encourages stripping Brazilian income,9 consider a corporate U.S. parent (USP) with a commercial Brazilian CFC (BRSub). USP exports products to BRSub, which resells them locally. BRSub houses its local team in a leased office and holds its inventory through a third-party logistics provider; thus, BRSub holds no relevant tangible or depreciable assets. BRSub’s net income of $100 from inventory sales to local consumers is subject to Brazilian income tax at a combined 34 percent rate under the Lucro Real system. That income is not FBCI and therefore escapes subpart F. All after-tax dividends from BRSub (here, $66) are distributed to USP free from tax in Brazil.
Before the TCJA, USP took an indirect FTC of the $34 for taxes paid on BRSub’s profits and paid an additional 1 percent (here, $1) to the U.S. Treasury. Now, while the additional $1 of U.S. tax disappears because of the rate reduction and the section 245 exemption on foreign dividends, BRSub’s inventory resale net income is subject to an immediate 10.5 percent GILTI tax (assume that BRSub’s net income for Brazilian tax purposes equals its net tested income for GILTI purposes). Even with no QBAI to reduce its taxable basis, the GILTI tax owed is still zero because the $10.50 GILTI tax is completely offset by the $27.20 FTC (80 percent of the Brazilian corporate income tax). This leaves not only an excess credit of $16.70 — which, if not cross-credited against GILTI inclusions from other countries in the same tax year, will be forever lost — but also $6.80 of Brazilian taxes that can no longer be used as FTCs because of the combined effect of the GILTI FTC limitation to 80 percent and the section 902 revocation (referred to hereinafter as Brazilian non-FTC taxes). These become a relevant cost of doing business in Brazil, not because they produce a lower after-tax income (in fact, post TCJA, USP gains $1), but because they are left on the table. Table 1 illustrates the example.
Table 1. Comparing Taxes and Income Pre- and Post-TCJA
The U.S. parent’s incentive to strip income10 from the Brazilian CFC will thus derive from the desire to reduce the amount of potentially unused GILTI excess credits and non-FTC Brazilian taxes.
In our example, to reduce BRSub’s income, USP may decide to charge BRSub $20 for a license to exploit USP’s intangibles embedded on the imported products, which would — assuming, for now, that no Brazilian taxes are levied on the royalty payment (which would clearly change the numbers, as we will see in Section II.F) — reduce the Brazilian taxes to $27.20 (that is 34 percent of the new net income of $80, a $6.80 saving), reduce the GILTI excess credit to $13.36 (a $3.34 saving), and reduce the Brazilian non-FTC taxes to $5.44 (a $1.36 saving). It would also trigger a $2.62 U.S. FDII tax (assuming USP has no QBAI and applying the reduced U.S. tax rate of 13.125 percent), thus generating net tax savings of $8.88. This leaves $18.80 (that is, $13.36 GILTI excess credit plus $5.44 Brazil non-FTC taxes) on the table.
E. New Source Rule for Inventory Sales
The TCJA made a small but significant modification to the flush language of section 863(b) that changes the source rule for sales of inventory property manufactured in one jurisdiction and sold in another.
Before the TCJA, the income from these sales was sourced 50 percent to the country where the inventory was produced and 50 percent to the country where title to the property changed hands. If title to U.S.-manufactured inventory passed from seller to buyer within the United States, 100 percent of the income from that sale would be sourced in the United States. If, however, title to the same U.S.-manufactured inventory passed outside the United States, 50 percent of the income would be U.S.-source, and the other 50 percent would be foreign-source. This particularity made the taxation of income from U.S.-manufactured inventory sales subject to contractual manipulation.
Post-TCJA, section 863(b) flush language provides that the sole basis for sourcing the income from the sale of inventory property produced in one jurisdiction and sold in another is “the production activities with respect to the property” — that is, 100 percent of inventory sales income will be sourced to the jurisdiction of production regardless of where title passes.
By providing a clear, tangible standard, amended section 863(b) has closed the door on entities contractually altering the source of international inventory sales. However, as will be discussed in Section III.C, it may have left a window open for U.S. groups that are willing to move their factories abroad.
F. Incentives for U.S. Shareholders to Incorporate
The lower 21 percent rate, the 50 percent GILTI deduction, the foreign DRD, and the FDII deduction are corporate privileges. They are not available to unincorporated U.S. entities that have subsidiaries abroad, and there are no similar benefits available to unincorporated taxpayers doing business abroad.
Indeed, the new section 199A — which provides a 20 percent deduction for partnerships and other noncorporate businesses (other than those engaged in excluded types of business) — does not apply to trades or businesses carried on outside the United States and thus cannot be used in the international subsidiary context. Section 199A(c)(3)(A)(i) specifically limits the definition of qualified business income for purposes of the deduction to items of income, gain, deduction, and loss effectively connected with the conduct of a trade or business within the United States.
Taking our previous example, suppose USP is a noncorporate entity. Post-TCJA, USP (or, more accurately, its partners or members) will be immediately taxed on the GILTI from BRSub’s net sales income at a rate of 21 percent rather than 10.5 percent because the 50 percent deduction does not apply. In the example, there would still be zero GILTI tax because the $21 tentative GILTI tax would be completely offset by the $27.20 FTC. USP will also be taxed at the applicable noncorporate rate on non-PTI dividends flowing from BRSub because the foreign DRD does not apply. In the example, this would also lead to a zero tax, because the entire GILTI inclusion and the distributed amount coincide. USP will not be able to use the discounted 13.125 percent rate for income from licensed U.S. intangibles because the FDII deduction does not apply. In the example, there would be no alternative to leaving $13 of unusable Brazilian taxes on the table.
Individual U.S. shareholders can still make a section 962(b) election and get corporate treatment for purposes of applying the 21 percent corporate rate on their income inclusions under section 962(a)(1) and qualifying for section 960’s deemed FTC in accordance with section 962(a)(2). It is not yet clear, however, whether a section 962(b) election would enable an individual U.S. shareholder to benefit from the FDII and GILTI11 deductions under section 250, or from the DRD in section 245A.
Moreover, section 962(d) taxes prior section 951(a) inclusions (that is, section 951(a) PTI) upon actual distribution of earnings and profits to the opting individual U.S. shareholder, except to the extent the amount of E&P distributed equals the amount of U.S. income tax the opting U.S. individual previously paid. Were it not for the section 962 election, actual distribution of E&P pertaining to PTI would be nontaxable under section 959(a)(1). This harsh rule — which largely annihilates the advantage of a section 962 election — was recently upheld by the Tax Court in Smith v. Commissioner, 151 T.C. No. 5 (Sept. 18, 2018). Although Congress’s clear intent in issuing section 962 was to prevent an individual U.S. shareholder from suffering hardship and guarantee he incurred no heavier taxation than he would have suffered if he invested in a U.S. corporation doing business abroad, the Tax Court found that this intent related solely to undistributed earnings.
Therefore, in addition to encouraging CFCs to strip income, the post-TCJA international tax framework strongly incentivizes U.S. shareholders to incorporate, which is a far cry from, and in no way facilitates, attracting jobs or investments back into the United States.
II. The RFB’s Response to Income Stripping
A. Brazil’s Federal Income Taxes
Brazil’s federal income taxes not only include the previously mentioned IRPJ and CSLL, which are levied at a combined rate of 34 percent on an entity’s net profits under the Lucro Real system, but also two social contributions — Programa de Integração Social (PIS) and Contribuição para Financiamento da Seguridade Social (COFINS) — that are levied on the entity’s gross income. While the PIS and COFINS rates vary according to the economic activity of the taxpayer, the general rate is 9.25 percent (1.65 percent for PIS and 7.6 percent for COFINS) under the Lucro Real and 3.65 percent (0.65 percent for PIS and 3 percent for COFINS) under the Lucro Presumido.
Only the IRPJ and CSLL under the Lucro Real are creditable taxes in the United States under sections 901 and 960. The PIS and COFINS taxes, either under the Lucro Real or under the Lucro Presumido, are costs to the taxpayer.
B. General Antiavoidance Rule
Article 116, sole paragraph, of Brazil’s National Tax Code (Código Tributário Nacional, or CTN)12 contains a general anti-tax-avoidance provision, as follows:
The administrative authority may disregard legal acts or transactions performed with the purpose of dissimulating the occurrence of the taxable fact or the nature of the elements of the tax obligation, according to procedures to be established by law.
This provision thus empowers the tax authority to investigate and disregard arrangements that lack a bona fide business purpose or that the taxpayer entered into solely to avoid or reduce taxes. Therefore, to be on the safe side, an income-stripping strategy needs to be something beyond an income-stripping strategy. It needs an autonomous, valid business purpose, regarded independently of tax reasons. If it lacks such purpose, the RFB will likely disallow the respective deduction at the Brazilian entity level.
The “business purpose” condition has been hotly debated by Brazilian scholars and practitioners since Supplementary Law 104/2001 inserted the paragraph into the CTN. In the absence of statutory guidance on its implementation, the definition has been progressively shaped by the Administrative Council of Tax Appeals (CARF). According to Plinio J. Marafon,13 CARF has interpreted the business purpose condition as a surrogate for simulation. That surrogate argument has a valid basis in the text of the sole paragraph of article 116 of the CTN, but CARF has historically imposed, more often than not, the business purpose condition as a requirement to validate tax planning.14
C. Product Imports
Regardless of the underlying legal transaction or where title passes, anything that physically enters the Brazilian territory is subject to a bundle of taxes at varying rates depending on the product: import tax (Imposto sobre a Importação, or II), excise tax (Imposto sobre Produtos Industrializados, or IPI), sales tax (Imposto sobre Operações Relativas à Circulação de Mercadorias e Serviços de Transporte Interestadual e Intermunicipal e de Comunicações, or ICMS), PIS, and COFINS. Rates vary according to each product’s tax code under the Mercosur (a customs union and free trade bloc in which Argentina, Brazil, Paraguay, and Uruguay are full members).
Although some of these taxes may be creditable by the importer, these taxes are generally levied on top of each other and its total economic burden may create a disincentive, especially if the importer cannot use the entirety of its import tax credits. Specifically, while the import tax is never credited to the importer, the IPI and the ICMS generally are and can be offset with later levies of the same taxes, and the PIS and COFINS are creditable if the importer opted for the Lucro Real system. An example of the importer being unable to use all of its credits would occur if an 18 percent ICMS import levy was followed by an interstate sale of the imported product, taxed at 4 percent. Moreover, deductibility of the respective product cost is subject to transfer pricing controls under one of the applicable, non-OECD, Brazilian methods of Law 9.430/1996.15
Therefore, Brazil is not a country that companies tend to use to triangulate imports or structure round-trip transactions. Usually, multinational groups ship products to Brazil only when they actually intend to sell them there, and it may be even cheaper to manufacture those products in Brazil.
D. Dividend Distributions
Dividends are neither deductible nor taxable in Brazil. They cannot be deducted because they are an after-tax payment. Further, they have been exempt from income taxation at both the source and beneficiary levels since 1996.16 As noted, a future tax reform (possibly focused on matching the new U.S. corporate rate) may change this.
Notably, however, if the Brazilian entity pays dividends to a shareholder in a tax haven,17 then the exemption does not apply and the dividends are fully taxable by a 25 percent income withholding tax.18
Therefore, dividend distribution does not amount to an income-stripping strategy in Brazil.
E. Interest Payments
When paying interest to its U.S. parent, a Brazilian subsidiary has to withhold a 15 percent income tax, creditable to the U.S. parent under section 901. The U.S. parent may use the income withholding tax credit regardless of the tax regime selected by the Brazilian subsidiary, because it is a tax withheld from (and thus suffered by) the U.S. parent. This can be a good deal, once the corresponding deduction at the Brazilian entity level reaches 34 percent to Lucro Real taxpayers. Lucro Presumido taxpayers cannot take any deductions because they are taxed on gross revenue at a much lower combined rate. Because of that, only income taxes paid under Lucro Real may be credited (when appropriate) in the United States, while income taxes paid under Lucro Presumido may not.
The RFB usually allows the deduction of interest payments from a Brazilian CFC to its U.S. parent19 as long as:
they are necessary and ordinary expenses in the course of the Brazilian entity’s trade or business;20
the applicable interest rate is among those established by legislation and regulations, plus a spread determined by the Ministry of Finance;21
the total amount of debt does not exceed twice the amount of equity of the Brazilian entity;22 and
the total amount of debt owed to entities established in tax havens does not exceed 30 percent of the Brazilian entity’s equity.23
Returning to our example, assume that USP decides to strip income from BRSub via interest on a previously made intercompany loan that fulfills the requirements above, and the amount of interest paid in a given year is $20. All other amounts are the same as those in the original example that led to Table 1. The $20 interest payment will reduce BRSub’s income taxes to $27.20 (80 * 34 percent), generate an FTC of $21.76 (27.20 * 80 percent) and, consequently, a GILTI excess credit of $13.36 and non-FTC Brazilian tax of $5.44. USP will fully credit itself for the $3 that Brazil withholds as income tax on the interest payment (15 percent of $20) against its tentative $2.63 U.S. tax on the interest income (that is, assuming the interest income is eligible for the FDII deduction under section 250(b), the $20 royalty minus the $7.50 FDII deduction taxed at 21 percent),24 generating a $0.38 non-GILTI excess credit. USP’s after-tax income will rise from $66 to $72.80.
Table 2 compares a pure dividend distribution with an interest payment strategy.
Table 2. The Interest Payment Strategy