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The Impact of Thin-Capitalization Rules on Multinationals' Financing and Investment Decisions

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  • Thiess Buettner

    ()
    (Ifo Institute for Economic Research, Poschingerstr. 5, D-81679 Munich, Mannheim, Germany)

  • Michael Overesch

    (ZEW, L 7,1 D-68161 Mannheim, Postfach 103443 D-68034)

  • Ulrich Schreiber

    (Mannheim University and ZEW, Mannheim Business School, L 5, 6, 68131 Mannheim, Deutschland)

  • Georg Wamser

    (Ifo Institute for Economic Research, Poschingerstr. 5, D-81679 Munich, Mannheim, Germany)

Abstract

This paper analyzes the role of Thin-Capitalization rules for capital structure choice and investment decisions of multinationals. A theoretical analysis shows that the imposition of such rules tends to affect not only the leverage and the level of investment but also their tax-sensitivity. An empirical investigation of leverage and investment reported for affiliates of German multinationals in 24 countries in the period between 1996 and 2004 offers some support for the theoretical predictions. While Thin-Capitalization rules are found to be effective in restricting debt finance, investment is found to be more sensitive to taxes if debt finance is restricted.

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Bibliographic Info

Paper provided by University of Kentucky, Institute for Federalism and Intergovernmental Relations in its series Working Papers with number 2006-06.

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Length: 32 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:ifr:wpaper:2006-06

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Keywords: Corporate Income Tax; Multinationals; Leverage; Thin-Capitalization Rules; Firm-Level Data;

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  12. 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.
  13. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
  14. Keen, Michael, 2001. "Preferential Regimes Can Make Tax Competition Less Harmful," National Tax Journal, National Tax Association, vol. 54(n. 4), pages 757-62, December.
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