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Capital Structure and International Debt Shifting

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  • Luc Laeven
  • Harry Huizinga
  • Gaetan Nicodeme

Abstract

This paper presents a model of a multinational firm''s optimal debt policy that incorporates international taxation factors. The model yields the prediction that a multinational firm''s indebtedness in a country depends on a weighted average of national tax rates and differences between national and foreign tax rates. These differences matter because multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested using a novel firm-level dataset for European multinationals and their subsidiaries, combined with newly collected data on the international tax treatment of dividend and interest streams. Our empirical results show that corporate debt policy indeed not only reflects domestic corporate tax rates but also differences in international tax systems. These findings contribute to our understanding of how corporate debt policy is set in an international context.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/39.

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Length: 37
Date of creation: 01 Feb 2007
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Handle: RePEc:imf:imfwpa:07/39

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Keywords: Tax rates; Capital; Economic models; tax rate; tax system; international tax; foreign tax; tax incentive; marginal tax rate; interest payments; multinational firms; capital structure; foreign tax credit; tax relief; corporate tax; tax rate differences; corporate tax rates; home country; fixed assets; tax differences; statutory tax rate; corporate income tax; corporate taxation; effect of taxation; parent company; corporate tax rate; foreign tax credits; tax systems; double taxation; interest income; tax benefits; retained earnings; foreign tax rates; effective tax rates; foreign-source income; tax treatment; tax liability; tax countries; direct investment; foreign direct investment; corporate income taxation; tax revenues; national tax rates; high-tax countries; domestic tax; investors; depreciable assets; dividend payments; foreign taxes; tax planning; corporate income tax revenues; credit guarantees; income tax system; business tax; corporate tax return; income tax revenues; nominal interest rates; rate of tax; taxable income; investment incentives; national tax journal; higher tax rates; tax journal; foreign companies; tax purposes; tax coordination; indirect tax; marginal tax rates; multinational companies; tax policy; change in tax policy; tax minimization; tax advantages; local business tax; risk premium; tax reforms; domestic taxation; investment decisions; tax havens; effects of taxation; income shifting; corporate income taxes; income taxes; dividend repatriations; international taxation; tax return; income tax rates; external financing; institutional investors; tax income;

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References

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