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German Inbound Investment, Corporate Tax Planning, and Thin-Capitalization Rules - A Difference-in-Differences Approach

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  • Michael Overesch
  • Georg Wamser

Abstract

This paper investigates tax planning behavior by means of inter-company finance and the effectiveness of fighting back via thin-capitalization rules. A simple theoretical model, which considers the financing decision of a multinational company, is used to obtain empirical implications. The empirical analysis, based on German inbound investment data from 1996 until 2004, supports a significant impact of tax rate differences on the use of intra-company debt. The effectiveness of the German thin-capitalization rule is tested by using legal amendments as natural experiments. The results suggest that the German thin-capitalization rule induces significantly lower intra-firm debt-levels of inbound investments. Hence, tax planning via intra-firm finance is effectively limited.

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Bibliographic Info

Paper provided by Ifo Institute for Economic Research at the University of Munich in its series Ifo Working Paper Series with number Ifo Working Papers No. 37.

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Date of creation: 2006
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Handle: RePEc:ces:ifowps:_37

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Keywords: Corporate income tax; multinationals; thin-capitalization rule; difference-indifferences; firm-level data;

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  1. Huizinga, Harry & Laeven, Luc & Nicodeme, Gaetan, 2008. "Capital structure and international debt shifting," Journal of Financial Economics, Elsevier, Elsevier, vol. 88(1), pages 80-118, April.
  2. Meyer, Bruce D, 1995. "Natural and Quasi-experiments in Economics," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 13(2), pages 151-61, April.
  3. Paolo Panteghini, 2009. "The capital structure of multinational companies under tax competition," International Tax and Public Finance, Springer, Springer, vol. 16(1), pages 59-81, February.
  4. Thiess Büttner & Michael Overesch & Ulrich Schreiber & Georg Wamser, 2006. "The Impact of Thin-Capitalization Rules on Multinationals’ Financing and Investment Decisions," CESifo Working Paper Series 1817, CESifo Group Munich.
  5. Mintz, Jack & Smart, Michael, 2004. "Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada," Journal of Public Economics, Elsevier, Elsevier, vol. 88(6), pages 1149-1168, June.
  6. Büttner, Thiess & Overesch, Michael & Schreiber, Ulrich & Wamser, Georg, 2006. "Taxation and capital structure choice: evidence from a panel of German multinationals," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 06-67, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  7. Fred Ramb & Alfons J. Weichenrieder, 2005. "Taxes and the Financial Structure of German Inward FDI," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 141(4), pages 670-692, December.
  8. Jeffrey MacKie-Mason, 1988. "Do Taxes Affect Corporate Financing Decisions?," NBER Working Papers 2632, National Bureau of Economic Research, Inc.
  9. Clemens Fuest & Thomas Hemmelgarn, 2003. "Corporate Tax Policy, Foreign Firm Ownership and Thin Capitalization," CESifo Working Paper Series 1096, CESifo Group Munich.
  10. 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.
  11. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  12. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  13. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 147-175, November.
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Cited by:
  1. Maßbaum, Alexandra & Sureth, Caren, 2008. "The impact of thin capitalization rules on shareholder financing," arqus Discussion Papers in Quantitative Tax Research, arqus - Arbeitskreis Quantitative Steuerlehre 39, arqus - Arbeitskreis Quantitative Steuerlehre.

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