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Multinational Capital Structure and Tax Competition

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  • Matthias Wrede

Abstract

This paper analyzes tax competition when welfare maximizing jurisdictions levy source-based corporate taxes and multinational enterprises choose tax-efficient capital-to-debt ratios. Under separate accounting, multinationals shift debt from low-tax to high-tax countries. The Nash equilibrium of the tax competition game is characterized by underprovision of publicly provided goods. Under formula apportionment, the country-specific capital-to-debt ratio of a multinational’s affiliate is independent of the jurisdiction’s tax rate. Public good provision is either too large or too small. If the debt externality is not negative, there is clearly underprovision under formula apportionment.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3041.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3041

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Keywords: multinational enterprises; financial policy; profit shifting; corporate taxation; tax competition;

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  1. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate Tax Systems and Cross Country Profit Shifting," Oxford Economic Papers, Oxford University Press, vol. 52(2), pages 306-25, April.
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  6. Huizinga, Harry & Laeven, Luc & Nicodeme, Gaetan, 2006. "Capital Structure and International Debt Shifting," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5882, C.E.P.R. Discussion Papers.
  7. Alfons Weichenrieder, 2009. "Profit shifting in the EU: evidence from Germany," International Tax and Public Finance, Springer, Springer, vol. 16(3), pages 281-297, June.
  8. Martin Kolmar & Andreas Wagener, 2007. "Tax Competition with Formula Apportionment: The Interaction between Tax Base and Sharing Mechanism," CESifo Working Paper Series 2097, CESifo Group Munich.
  9. Riedel, Nadine & Runkel, Marco, 2007. "Company tax reform with a water's edge," Journal of Public Economics, Elsevier, Elsevier, vol. 91(7-8), pages 1533-1554, August.
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  11. Nielsen, Søren Bo & Raimondos-Møller, Pascalis & Schjelderup, Guttorm, 2010. "Company taxation and tax spillovers: Separate accounting versus formula apportionment," European Economic Review, Elsevier, Elsevier, vol. 54(1), pages 121-132, January.
  12. Rüdiger Pethig & Andreas Wagener, 2007. "Profit tax competition and formula apportionment," International Tax and Public Finance, Springer, Springer, vol. 14(6), pages 631-655, December.
  13. Huizinga, Harry & Laeven, Luc, 2008. "International profit shifting within multinationals: A multi-country perspective," Journal of Public Economics, Elsevier, Elsevier, vol. 92(5-6), pages 1164-1182, June.
  14. 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.
  15. Mihir A. Desai & C. Fritz Foley & James R. Hines, Jr., 2003. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," NBER Working Papers 9715, National Bureau of Economic Research, Inc.
  16. Jack M. Mintz & Michael Smart, 2001. "Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada," International Tax Program Papers, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto 0402, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto, revised Apr 2003.
  17. Dietmar Wellisch, 2004. "Taxation under Formula Apportionment - Tax Competition, Tax Incidence, and the Choice of Apportionment Factors," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 60(1), pages 24-, April.
  18. Chowdhry, Bhagwan & Nanda, Vikram, 1994. "Financing of multinational subsidiaries: Parent debt vs. external debt," Journal of Corporate Finance, Elsevier, Elsevier, vol. 1(2), pages 259-281, August.
  19. Qing Hong & Michael Smart, 2006. "In praise of tax havens: International tax planning and foreign direct investment," Working Papers, University of Toronto, Department of Economics tecipa-265, University of Toronto, Department of Economics.
  20. Dischinger, Matthias, 2007. "Profit Shifting by Multinationals: Indirect Evidence from European Micro Data," Discussion Papers in Economics, University of Munich, Department of Economics 2029, University of Munich, Department of Economics.
  21. Clemens Fuest, 2008. "The European Commission´s Proposal for a Common Consolidated Corporate Tax Base," Working Papers, Oxford University Centre for Business Taxation 0823, Oxford University Centre for Business Taxation.
  22. Pinto, Santiago M., 2007. "Corporate profit tax, capital mobility, and formula apportionment," Journal of Urban Economics, Elsevier, vol. 62(1), pages 76-102, July.
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