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Firms' financial choices and thin capitalization rules under corporate tax competition

  • Andreas Haufler

    ()

    (University of Munich)

  • Marco Runkel

    ()

    (University of Magdeburg)

Thin capitalization rules have become an important element in the corporate tax systems of developed countries. This paper sets up a model where national and multinational firms choose tax-efficient financial structures and countries compete for multinational firms through statutory tax rates and thin capitalization rules that limit the tax-deductibility of internal debt flows. In a symmetric tax competition equilibrium each country chooses inefficiently low tax rates and inefficiently lax thin capitalization rules. We show that a coordinated tightening of thin capitalization rules benefits both countries, even though it intensifies competition via tax rates. When countries differ in size, the smaller country not only chooses the lower tax rate but also the more lenient thin capitalization rule.

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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 0815.

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Date of creation: 2008
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Handle: RePEc:btx:wpaper:0815
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