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Multinationals, Minority Ownership and Tax-Efficient Financing Structures

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  • Dirk Schindler
  • Guttorm Schjelderup

Abstract

This paper presents a theory model that simultaneously accounts for the financing decisions and ownership structure in affiliates of multinational firms. We find that affiliates of multinationals have higher internal and overall debt ratios and lower rental rates of physical capital than comparable domestic firms. We also show that affiliates with minority owners have less debt than wholly owned affiliates and a less tax-efficient financing structure. The latter is due to an externality whereby minority ownership dampens the incentive to avoid taxes through the use of internal debt.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-04/cesifo1_wp3034.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3034.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3034

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Keywords: multinationals; tax-efficient financing structures; minority ownership;

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References

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  1. Desai, Mihir A. & Foley, C. Fritz & Hines, James Jr., 2004. "The costs of shared ownership: Evidence from international joint ventures," Journal of Financial Economics, Elsevier, vol. 73(2), pages 323-374, August.
  2. Alfons Weichenrieder, 2009. "Profit shifting in the EU: evidence from Germany," International Tax and Public Finance, Springer, vol. 16(3), pages 281-297, June.
  3. Robert E. Lipsey, 2002. "Home and Host Country Effects of FDI," NBER Working Papers 9293, National Bureau of Economic Research, Inc.
  4. Harry Huizinga & Luc Laeven & Gaëtan Nicodème, 2007. "Capital Structure and International Debt Shifting," Working Papers CEB 07-015.RS, ULB -- Universite Libre de Bruxelles.
  5. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2004. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 59(6), pages 2451-2487, December.
  6. Buettner, Thiess & Overesch, Michael & Schreiber, Ulrich & Wamser, Georg, 2009. "Taxation and capital structure choice--Evidence from a panel of German multinationals," Economics Letters, Elsevier, vol. 105(3), pages 309-311, December.
  7. Altshuler, Rosanne & Grubert, Harry, 2003. "Repatriation taxes, repatriation strategies and multinational financial policy," Journal of Public Economics, Elsevier, vol. 87(1), pages 73-107, January.
  8. Gramlich, J.D.Jeffrey D. & Limpaphayom, Piman & Ghon Rhee, S., 2004. "Taxes, keiretsu affiliation, and income shifting," Journal of Accounting and Economics, Elsevier, vol. 37(2), pages 203-228, June.
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  11. Clemens Fuest & Thomas Hemmelgarn, 2003. "Corporate Tax Policy, Foreign Firm Ownership and Thin Capitalization," CESifo Working Paper Series 1096, CESifo Group Munich.
  12. Thiess Buettner & Georg Wamser, 2007. "Intercompany Loans and Profit Shifting – Evidence from Company-Level Data," CESifo Working Paper Series 1959, CESifo Group Munich.
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  16. Büttner, Thiess & Overesch, Michael & Schreiber, Ulrich & Wamser, Georg, 2008. "The impact of thin-capitalization rules on multinationals' financing and investment decisions," Discussion Paper Series 1: Economic Studies 2008,03, Deutsche Bundesbank, Research Centre.
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  18. Jack Mintz & Alfons Weichenrieder, 2005. "Taxation and the Financial Structure of German Outbound FDI," CESifo Working Paper Series 1612, CESifo Group Munich.
  19. Alfons Weichenrieder & Helen Windischbauer, 2008. "Thin-Capitalization Rules and Company Responses Experience from German Legislation," CESifo Working Paper Series 2456, CESifo Group Munich.
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  21. Kant, Chander, 1988. "Endogenous transfer pricing and the effects of uncertain regulation," Journal of International Economics, Elsevier, vol. 24(1-2), pages 147-157, February.
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  23. Kant, Chander, 1990. "Multinational firms and government revenues," Journal of Public Economics, Elsevier, vol. 42(2), pages 135-147, July.
  24. Robert E. Lipsey, 2004. "Home- and Host-Country Effects of Foreign Direct Investment," NBER Chapters, in: Challenges to Globalization: Analyzing the Economics, pages 333-382 National Bureau of Economic Research, Inc.
  25. Chowdhry, Bhagwan & Coval, Joshua D., 1998. "Internal financing of multinational subsidiaries: Debt vs. equity1," Journal of Corporate Finance, Elsevier, vol. 4(1), pages 87-106, March.
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  27. Rita de la Feria & Ana Paula Dourado, 2008. "Thin Capitalization Rules in the Context of the CCCTB," Working Papers 0804, Oxford University Centre for Business Taxation.
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Citations

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Cited by:
  1. Shafik Hebous & Alfons Weichenrieder, 2010. "Debt financing and sharp currency depreciations: wholly versus partially-owned multinational affiliates," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 146(2), pages 281-302, June.
  2. Stefan Lutz, 2013. "Effects of taxation on European multi-nationals’ financing and profits," Documentos de Trabajo del ICAE 2013-04, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  3. Scheuering, Uwe, 2014. "M&A and the tax benefits of debt-financing," ZEW Discussion Papers 14-019, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Matthias Wrede, 2010. "Multinational Capital Structure and Tax Competition," CESifo Working Paper Series 3041, CESifo Group Munich.
  5. Haufler, Andreas & Runkel, Marco, 2012. "Firms' financial choices and thin capitalization rules under corporate tax competition," European Economic Review, Elsevier, vol. 56(6), pages 1087-1103.
  6. Robert Krämer & Vilen Lipatov, 2013. "The Effect of Corporate Taxation and Ownership on Raising Shareholder Capital," CESifo Working Paper Series 4436, CESifo Group Munich.
  7. Shafik Hebous & Alfons Weichenrieder, 2009. "Debt Financing and Sharp Currency Depreciations: Wholly vs. Partially Owned Multinational Affiliates," CESifo Working Paper Series 2892, CESifo Group Munich.

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