The impact of thin‐capitalization rules on the location of multinational firms’ foreign affiliates

Abstract

This paper examines how restrictions on the tax deductibility of interest cost affect location choices of multinational corporations (MNCs). Many countries have introduced so‐called thin‐capitalization rules (TCRs) to prevent MNCs from shifting their tax base to countries with lower tax rates. As of 2012, in our sample of 172 countries, 61 countries have implemented a TCR. Using information on nearly all new foreign investments of German MNCs, we provide a number of new and interesting insights in how TCRs affect the decision of where to locate foreign entities. In particular, stricter TCRs are found to negatively affect location choices of MNCs. Our results include estimates of own‐ and cross‐elasticities of location choice and also novel results on the relative importance of tax base vs. tax rate effects. We finally provide estimates for different uncoordinated as well as coordinated policy scenarios.

Taxation and the Multinational Firm

“…However, the findings by the same authors point to some adverse effects on the intensive margin of foreign investment as well. Moreover, the findings in Merlo, Riedel, and Wamser (2015) suggest that stricter thincapitalization rules reduce the propensity for a firm to set up its first affiliate in a given country and, hence, such rules adversely affect the extensive margin of foreign investment. The same authors find evidence of spillover effects, whereby lower thin-cap-rule-induced investment propensities in one country mean higher investment propensities in third countries.…”

Multinacionalidade, ativos intangíveis e agressividade fiscal

“…Os dois temas discutidos na literatura contábil internacional são a agressividade tributária e a multinacionalidade das empresas, isso porque há indícios de que a tributação influencia efetivamente nos negócios, principalmente, quando há alteração da localização das empresas que visam a redução dos tributos (Blouin, 2012;Silva & Martinez, 2016;Schanz, Dinkel & Keller, 2017;Lawless, McCoy, Morgenroth & O"Toole, 2018;Ramos & Martinez, 2018;Pieretti & Pulina, 2020;Johannesen, Torslov, & Wier, 2020;Oguttu & Kayis-Kumar, 2020;Choi, Furusawa & Ishikawa, 2020;Goyvaerts & Roggeman, 2020;Mardan & Stimmelmayr, 2020, Merlo, Riedel & Wamser, 2020Nerudova, Solilova, Litzman & Janský, 2020;Akhtar, Akhtar, John & Wong, 2019).…”

“…Nesses estudos, eles analisam empesas de diferentes países que exploram as lacunas existentes na legislação e a ausência de regras claras para regulação do comércio internacional. As empresas exploram tais lacunas com a finalidade de planejamento tributário, sendo que os aumentos são expressivos nos resultados associados à multinacionalidade das empresas (Blouin, 2012;Zucman, 2014;Taylor & Richardson, 2015;Picciotto, 2018;Barrios & D'Andria, 2020;Oguttu & Kayis-Kumar 2020, Goyvaerts & Roggeman, 2020Mardan & Stimmelmayr, 2020;Merlo et al, 2020).…”

“…Ressalta-se a ausência de trabalhos anteriores que investiguem esta temática. No cenário internacional não existem trabalhos que investigam o contexto explorado nesta pesquisa, mas existem estudos que relacionam a multinacionalidade aos preços de transferência (Blouin, 2012;Silva & Martinez, 2016;Schanz et al, 2017, Lawless et al, 2018Ramos & Martinez, 2018;Pieretti &Pulina, 2020;Johannesen et al, 2020;Oguttu & Kayis-Kumar, 2020;Choi et al, 2020;Goyvaerts & Roggeman, 2020;Mardan & Stimmelmayr, 2020;Merlo et al, 2020;Nerudova et al 2020;Akhtar et al, 2019). Além disso, há também estudos que relacionam a multinacionalidade e ativos intangíveis aos preços de transferência (Taylor & Richardson, 2015, Barrios & D'Andria, 2020.…”

Tax treaties worldwide: Estimating elasticities and revenue foregone

“…The first level is known as profit shifting. MNEs can shift their profits—by means of transfer pricing, debt shifting or strategic intellectual property locating—from the country of operation to another country, in some cases a tax haven, to reduce their tax base for corporate income tax (this level is perhaps the one that is most studied by economists and has recently been documented e.g., by Fuest et al., 2011, Dharmapala, 2014, Gresik et al., 2017, Dowd et al., 2017, Laplante & Nesbitt, 2017, and Merlo et al., 2020). On the second level, MNEs can lower the effective corporate income tax rate applicable to profits remaining in the country of operation after any profit shifting, for example, by increasing tax deductibles or reaching an advantageous tax agreement with the tax authority (as in the case of Luxembourg, see ICIJ, 2014 and Huesecken & Overesch, 2015).…”