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Firm Responses to an Interest Barrier: Empirical Evidence

Author

Listed:
  • Jarkko Harju

    (Tampere University, Finnish Centre of Excellence in Tax Systems Research (FIT), VATT Institute for Economic Research and CESifo)

  • Ilpo Kauppinen

    (VATT Institute for Economic Research and CESifo)

  • Olli Ropponen

    (Etla Economic Research)

Abstract

This paper studies the effects of an interest barrier (IB) that was introduced in Finland to restrict the profit-shifting opportunities of multinational enterprises (MNEs). We employ Orbis database on Finnish, Swedish and Danish MNEs and a difference-in-differences methodology, where Swedish and Danish MNEs serve as a control group. We find that Finnish MNEs responded to IB by decreasing their financial expenses. We also find that the most affected firms decreased their debt levels due to the reform. Our results suggest that the financial expense response is followed by a change in the use of transfer pricing as a method to shift profits between tax jurisdictions. We do not find evidence of total output changes among treated firms, suggesting that the IB did not affect the real activity of MNEs.

Suggested Citation

  • Jarkko Harju & Ilpo Kauppinen & Olli Ropponen, 2023. "Firm Responses to an Interest Barrier: Empirical Evidence," Working Papers 7, Finnish Centre of Excellence in Tax Systems Research.
    • Handle: RePEc:fit:wpaper:7
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate income tax; Multinational firms; Capital structure; Profit shifting; Interest barrier;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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