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Evaluating the effects of ACE systems on multinational debt financing and investment

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  • Hebous, Shafik
  • Ruf, Martin

Abstract

Theory recommends aligning the tax treatment of debt and equity. A few countries, notably Belgium, have introduced an allowance for corporate equity (ACE) to achieve tax neutrality. We study the effects of adopting an ACE on debt financing, passive investment, and active investment of multinational firms, using high-quality administrative data on virtually all German-based multinationals. We use two main identification strategies, based on (1) synthetic control methods and (2) variations across affiliates within the multinational group. Our results suggest that an ACE reduces the corporate debt ratio of multinational affiliates. Additionally, an ACE increases intra-group lending and other forms of passive investment but has no effects on production investment of multinational affiliates. The findings indicate that a unilateral implementation of an ACE system generates a tax planning opportunity using a structure combining the benefits from the ACE with interest deductions.

Suggested Citation

  • Hebous, Shafik & Ruf, Martin, 2017. "Evaluating the effects of ACE systems on multinational debt financing and investment," Journal of Public Economics, Elsevier, vol. 156(C), pages 131-149.
  • Handle: RePEc:eee:pubeco:v:156:y:2017:i:c:p:131-149
    DOI: 10.1016/j.jpubeco.2017.02.011
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    4. Shafik Hebous & Alexander D Klemm, 2018. "A Destination-Based Allowance for Corporate Equity," IMF Working Papers 18/239, International Monetary Fund.
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    9. Shafik Hebous & Alfons J.Weichenrieder & Alfons Weichenrieder, 2015. "What Do We Know about the Tax Planning of German-based Multinational Firms?," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 12(04), pages 15-21, January.
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    16. Fatica, Serena & Heynderickx, Wouter & Pagano, Andrea, 2018. "Banks, debt and risk: assessing the spillovers of corporate taxes," Working Papers 2018-09, Joint Research Centre, European Commission (Ispra site).

    More about this item

    Keywords

    ACE; Financial structure; Corporate taxation; Debt bias; Multinational firms;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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