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Capital Structure and International Debt Shifting

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Author Info
Luc Laeven
Gaetan Nicodeme
Harry Huizinga

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

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Length: 37 pages
Date of creation: 26 Feb 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/39

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Keywords: Corporate taxation financial structure debt shifting Debt Tax rates Tax policy Capital Economic models

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  2. Hodder, James E & Senbet, Lemma W, 1990. " International Capital Structure Equilibrium," Journal of Finance, American Finance Association, vol. 45(5), pages 1495-1516, December. [Downloadable!] (restricted)
  3. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December. [Downloadable!] (restricted)
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  4. Jeffrey MacKie-Mason, 1988. "Do Taxes Affect Corporate Financing Decisions?," NBER Working Papers 2632, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, 02. [Downloadable!] (restricted)
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  6. Kenneth A. Froot & James R. Hines, Jr., 1995. "Interest Allocation Rules, Financing Patterns, and the Operations of U.S. Multinationals," NBER Working Papers 4924, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. James R. Hines Jr., 1994. "Credit and Deferral as International Investment Incentives," NBER Working Papers 4191, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Grubert, Harry, 1998. "Taxes and the division of foreign operating income among royalties, interest, dividends and retained earnings," Journal of Public Economics, Elsevier, vol. 68(2), pages 269-290, May. [Downloadable!] (restricted)
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  11. James R. Hines, Jr. & R. Glenn Hubbard, 1990. "Coming Home to America: Dividend Repatriations by U.S. Multinationals," NBER Working Papers 2931, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Simeon Djankov & Caralee McLiesh & Andrei Shleifer, 2005. "Private Credit in 129 Countries," NBER Working Papers 11078, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Frances Ruane & Padraig Moore, 2005. "Taxation and the Financial Structure of Foreign Direct Investment," The Institute for International Integration Studies Discussion Paper Series iiisdp88, IIIS. [Downloadable!]
  14. Hines, James R, Jr & Rice, Eric M, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 149-82, February. [Downloadable!] (restricted)
  15. Gordon, Roger H. & Lee, Young, 2001. "Do taxes affect corporate debt policy? Evidence from U.S. corporate tax return data," Journal of Public Economics, Elsevier, vol. 82(2), pages 195-224, November. [Downloadable!] (restricted)
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  16. Hovakimian, Armen & Hovakimian, Gayane & Tehranian, Hassan, 2004. "Determinants of target capital structure: The case of dual debt and equity issues," Journal of Financial Economics, Elsevier, vol. 71(3), pages 517-540, March. [Downloadable!] (restricted)
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  18. Hines, James Jr., 1994. "Credit and deferral as international investment incentives," Journal of Public Economics, Elsevier, vol. 55(2), pages 323-347, October. [Downloadable!] (restricted)
  19. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May. [Downloadable!] (restricted)
  20. 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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  1. Peter Egger & Wolfgang Eggert & Hannes Winner, 2007. "Saving Taxes Through Foreign Plant Ownership," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  2. Overesch, Michael & Voeller, Dennis, 2008. "The Impact of Personal and Corporate Taxation on Capital Structure Choices," ZEW Discussion Papers 08-020, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  3. Büttner, Thiess & Overesch, Michael & Schreiber, Ulrich & 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!]
    Other versions:
  4. Michael Pfaffermayr & Matthias Stöckl & Hannes Winner, . "Capital Structure, Corporate Taxation and Firm Age," Working Papers 2008-09, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
  5. Carone, Giuseppe & Nicodème, Gaëtan & Schmidt, Jan, 2007. "Tax revenues in the European Union: Recent trends and challenges ahead," MPRA Paper 3996, University Library of Munich, Germany. [Downloadable!]
  6. Overesch, Michael & Wamser, Georg, 2006. "German inbound investment, corporate tax planning, and thin-capitalization rules : a difference-in-differences approach," ZEW Discussion Papers 06-75, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
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