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Corporate Taxes, Internal Borrowing, and the Lending Capacity within Multinational Firms

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  • Egger, Peter

    ()

  • Keuschnigg, Christian

    ()

  • Merlo, Valeria

    ()

  • Wamser, Georg

    ()

Abstract

This paper develops a theoretical model of multinational firms with an internal capital market. Main reasons for the emergence of such a market are tax avoidance through debt shifting and the existence of institutional weaknesses and financial frictions across host countries. The model serves to derive hypotheses regarding the role of local versus foreign characteristics such as profit tax rates, lack of institutional quality, financial underdevelopment, and productivity for internal debt at the level of a given foreign affiliate. The paper assesses hypotheses in a panel data-set covering the universe of German multinational firms and their internal borrowing. Numerous novel insights are gained. For instance, the tax-sensitivity in this data-set is many times higher than common wisdom would suggest. This accrues mainly to the non-selectivity of the sample at hand. Moreover, local and foreign (at other locations of a given affiliate) market conditions matter more or less symmetrically and in the opposite direction. There is a nonlinear trade-off between institutional quality or financial development on the one hand and higher profit tax rates on the other hand, and the strength of this trade-off depends on the characteristics of one location relative to the other locations a multinational firm has affiliates (or the parent company) in.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/econwp/EWP-1142.pdf
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Bibliographic Info

Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1142.

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Length: 51 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:usg:econwp:2011:42

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Keywords: Internal capital market; Debt shifting; Multinational firms; Firm-level data; Microeconometrics.;

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