This paper explores the role of internal debt as a vehicle for shifting profi ts to lowtax countries. Using data on German multinationals, it exploits differences in taxes in more than 100 countries over 10 years. The results confi rm that internal debt is used more by multinationals with affi liates in low-tax countries and increases with the spread between the host-country tax rate and the lowest tax rate among all affi liates. However, tax effects are small, suggesting that profi t shifting by means of internal debt is rather unimportant for German fi rms. Further testing indicates that this is partly due to the German controlled foreign corporation (CFC) rule.
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Anti Profit-Shifting Rules and Foreign Direct Investment Abstract This paper explores the effects of tax provisions aimed at restricting multinationals' tax planning on foreign direct investment (FDI). Using a unique dataset which allows us to observe the worldwide activities of a large panel of multinational firms, we test how limitations of interest tax deductibility, so-called thin-capitalization rules, and regulations of transfer pricing by the host country affect investment and employment of foreign subsidiaries. The results indicate that, compared with the unrestricted case, in the presence of a typical thin-capitalization rule, the tax-rate sensitivity of FDI is about twice as large. Moreover, introducing such a rule or making it more tight exerts significant adverse effects on the level of FDI in high-tax countries. Regulations of transfer pricing, however, are not found to exert significant effects on FDI.
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Documents inJEL-Code: H250, F230.
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