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

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Author Info
Michael Overesch
Georg Wamser ()

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

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Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion

References listed on IDEAS
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  1. Paolo Panteghini, 2006. "The Capital Structure of Multinational Companies Under Tax Competition," Working Papers ubs0606, University of Brescia, Department of Economics. [Downloadable!]
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  2. Thiess Buettner & Michael Overesch & Ulrich Schreiber & Georg Wamser, 2006. "Taxation and Capital Structure Choice – Evidence from a Panel of German Multinationals," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  3. Ramb, Fred & Weichenrieder, Alfons J, 2005. "Taxes and the financial structure of German inward FDI," Discussion Paper Series 1: Economic Studies 2005,05, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  4. MacKie-Mason, Jeffrey K, 1990. " Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-93, December. [Downloadable!] (restricted)
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  5. Jack M. Mintz & Michael Smart, 2001. "Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada," International Tax Program Papers 0402, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto, revised Apr 2003. [Downloadable!]
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  6. Meyer, Bruce D, 1995. "Natural and Quasi-experiments in Economics," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(2), pages 151-61, April.
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  7. Fuest, Clemens & Hemmelgarn, Thomas, 2005. "Corporate tax policy, foreign firm ownership and thin capitalization," Regional Science and Urban Economics, Elsevier, vol. 35(5), pages 508-526, September. [Downloadable!] (restricted)
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  8. 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. [Downloadable!] (restricted)
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  9. Luc Laeven & Gaetan Nicodeme & Harry Huizinga, 2007. "Capital Structure and International Debt Shifting," IMF Working Papers 07/39, International Monetary Fund. [Downloadable!]
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  10. Schreiber, Ulrich & Overesch, Michael & Büttner, Thiess & Wamser, Georg, 2006. "The Impact of Thin-Capitalization Rules on Multinationals? Financing and Investment Decisions," ZEW Discussion Papers 06-68, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
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  11. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November. [Downloadable!] (restricted)
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Cited by:
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  1. Alfons Weichenrieder & Helen Windischbauer, 2008. "Thin-Capitalization Rules and Company Responses Experience from German Legislation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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