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Profit Shifting by Debt Financing in Europe

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  • Francesca Barion
  • Raffaele Miniaci
  • Paolo Panteghini
  • Maria Laura Parisi

Abstract

This article aims at analyzing the link between subsidiaries’ capital structure and taxation in Europe. First we introduce a trade-off model, which studies a MNCs’ financial strategy and shows how debt policy allows multinational groups to shift profits from low-tax to high-tax jurisdictions. By letting the MNC choose both leverage and the percentage of profit shifting, we depart from the relevant literature which has mainly focused on the latter. Using the AMADEUS dataset we show that: i) subsidiaries’ leverage increases with the statutory tax rate, levied in the country where it operates; ii) this positive effect is lower, the higher the parent company tax rate is. Furthermore, an increase in the parent company’s tax rate is estimated to raise its subsidiaries’ leverage.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2985.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2985

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Keywords: capital structure; default; multinationals; profit shifting; taxation;

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References

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Cited by:
  1. Jarle Møen & Dirk Schindler & Guttorm Schjelderup & Julia Tropina, 2011. "International Debt Shifting: Do Multinationals Shift Internal or External Debt?," CESifo Working Paper Series 3519, CESifo Group Munich.
  2. 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.
  3. Feld, Lars P. & Heckemeyer, Jost H. & Overesch, Michael, 2011. "Capital structure choice and company taxation: A meta-study," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 11-075, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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