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International Debt Shifting: Do Multinationals Shift Internal or External Debt?

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  • Jarle Møen
  • Dirk Schindler
  • Guttorm Schjelderup
  • Julia Tropina

Abstract

Multinational companies can exploit the tax advantage of debt more aggressively than national companies by shifting debt from affiliates in low tax countries to affiliates in high tax countries. Previous papers have either omitted internal debt or external debt from the analysis. We are the first to model the companies’ choice between internal and external debt shifting and show that it is optimal for them to use both types of debt to save taxes. Using a large panel of German multinationals, we find strong empirical support for our model. The estimated coefficients suggest that internal and external debt shifting are of about equal relevance. Since the tax variables that determine the incentive to shift internal and external debt are correlated both with each other and with the host country tax rate, previous estimates of the tax sensitivity of debt suffer from omitted variable bias.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3519.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3519

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Keywords: corporate taxation; multinationals; capital structure; international debt-shifting; tax avoidance;

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References

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Cited by:
  1. Lars P. Feld & Jost Henrich Heckemeyer & Michael Overesch, 2011. "Capital Structure Choice and Company Taxation: A Meta-Study," CESifo Working Paper Series 3400, CESifo Group Munich.
  2. 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.
  3. Schindler, Dirk & Schjelderup, Guttorm, 2014. "Transfer Pricing and Debt Shifting in Multinationals," Discussion Papers 2014/22, Department of Business and Management Science, Norwegian School of Economics.

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