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Firms’ Financial Choices and Thin Capitalization Rules under Corporate Tax Competition

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  • Andreas Haufler
  • Marco Runkel

Abstract

Thin capitalization rules have become an important element in the corporate tax systems of developed countries. This paper sets up a model where national and multinational firms choose tax-efficient financial structures and countries compete for multinational firms through statutory tax rates and thin capitalization rules that limit the tax-deductibility of internal debt flows. In a symmetric tax competition equilibrium each country chooses inefficiently low tax rates and inefficiently lax thin capitalization rules. We show that a coordinated tightening of thin capitalization rules benefits both countries, even though it intensifies competition via tax rates. When countries differ in size, the smaller country not only chooses the lower tax rate but also the more lenient thin capitalization rule.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2429.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2429

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Keywords: thin capitalization; capital structure; tax competition;

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References

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Citations

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Cited by:
  1. Dreßler, Daniel & Scheuering, Uwe, 2012. "Empirical evaluation of interest barrier effects," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 12-046, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Matthias Wrede, 2009. "Multinational Capital Structure and Tax Competition," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 200934, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  3. Alfons Weichenrieder & Helen Windischbauer, 2008. "Thin-Capitalization Rules and Company Responses Experience from German Legislation," CESifo Working Paper Series 2456, CESifo Group Munich.
  4. Jennifer Blouin & Harry Huizinga & Luc Laeven & Gaëtan Nicodème, 2013. "Thin capitalization rules and multinational firm capital structure," Working Papers, Oxford University Centre for Business Taxation 1323, Oxford University Centre for Business Taxation.
  5. Schindler, Dirk & Schjelderup, Guttorm, 2008. "Multinationals, Minority Ownership and Tax-Efficient Financing Structures," Discussion Papers, Department of Business and Management Science, Norwegian School of Economics 2008/19, Department of Business and Management Science, Norwegian School of Economics.
  6. Chu, Hsun & Lai, Ching-Chong & Cheng, Chu-Chuan, 2013. "Tax Havens, Growth, and Welfare," MPRA Paper 52878, University Library of Munich, Germany, revised Sep 2013.
  7. Dirk Schindler & Guttorm Schjelderup, 2011. "Debt Shifting and Ownership Structure," Working Paper Series of the Department of Economics, University of Konstanz, Department of Economics, University of Konstanz 2011-35, Department of Economics, University of Konstanz.
  8. Chu, Hsun, 2013. "Tax Enforcement Policy and the Provision of Public Goods with the Presence of Tax Havens," MPRA Paper 53021, University Library of Munich, Germany, revised Nov 2013.
  9. Hermann Buslei & Martin Simmler, 2012. "The Impact of Introducing an Interest Barrier: Evidence from the German Corporation Tax Reform 2008," Discussion Papers of DIW Berlin 1215, DIW Berlin, German Institute for Economic Research.
  10. Thiess Buettner & Michael Overesch & Georg Wamser, 2014. "Anti Profit-Shifting Rules and Foreign Direct Investment," CESifo Working Paper Series 4710, CESifo Group Munich.

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