Evaluating the effects of ACE systems on multinational debt financing and investment

Abstract

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. Evaluating the Effects of ACE Systems on Multinational Debt Financing and Investment Abstract Theory recommends aligning the tax treatment of debt and equity. A few countries, notably Belgium, have introduced an allowance for corporate equity (ACE) to achieve tax neutrality. We study the effects of adopting an ACE on debt financing, passive investment, and active investment of multinational firms, using high-quality administrative data on virtually all German-based multinationals. We use two main identification strategies, based on: (1) synthetic control methods, and (2) variations across affiliates within the multinational group. Our results suggest that an ACE reduces the corporate debt ratio of multinational affiliates. Additionally, an ACE increases intra-group lending and other forms of passive investment but has no effects on production investment of multinational affiliates. The findings indicate that a unilateral implementation of an ACE system generates a tax planning opportunity using a structure combining the benefits from the ACE with interest deductions. JEL-Code: H250, F230. Terms of use: Documents in

Changes in the Cost of Bank Equity and the Supply of Bank Credit

“…First, an ACE neutralizes the debt-bias. Evidence suggests significant reductions in debt ratios as result of ACE, consistent with theoretical predictions (Princen, 2012;Hebous and Ruf, 2017;Panier et al, 2013). Second, an ACE renders the corporate income tax neutral with respect to marginal investment decisions.…”

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“…Unilateral tax reforms, while beneficial for the reforming country, create negative spillovers for the countries where the favorable treatment of debt is still in place. In this respect, our results concur with the conclusions by Hebous and Ruf (), who find that the Belgian ACE, by increasing intragroup lending and other types of passive investments, opened up tax planning opportunities for German multinationals. We show that the lack of coordination entails a similar risk also from a financial stability standpoint.…”

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“…The Belgian case suggests that the reduction in leverage coincided with increased intra-group lending within multinationals with no effects on investment (Hebous and Ruf, 2017). The implementation of an allowance for corporate equity requires a careful design to avoid any incentive to cross-border tax planning.…”