Harry Huizinga () (Tilburg University and CEPR.) Luc Laeven () (International Monetary Fund and CEPR.) Gaëtan Nicodème () (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and European Commission.)
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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 as 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 a foreign subsidiary’s capital structure reflects local corporate tax rates as well as tax rate differences vis-à-vis the parent firm and other foreign subsidiaries, although the overall economic effect of taxes on leverage appears to be small. Ignoring the international debt shifting arising from differences in national tax rates woudunderstate the impact of national taxes on debt policies by about 25%.
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Paper provided by Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) in its series Working Papers CEB with number
07-015.RS.
Find related papers by JEL classification: F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
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