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Multinational Capital Structure and Tax Competition

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  • Matthias Wrede

Abstract

This paper analyzes tax competition when welfare maximizing jurisdictions levy source-based corporate taxes and multinational enterprises choose tax-efficient capital-to-debt ratios. Under separate accounting, multinationals shift debt from low-tax to high-tax countries. The Nash equilibrium of the tax competition game is characterized by underprovision of publicly provided goods. Under formula apportionment, the country-specific capital-to-debt ratio of a multinational’s affiliate is independent of the jurisdiction’s tax rate. Public good provision is either too large or too small. If the debt externality is not negative, there is clearly underprovision under formula apportionment.

Suggested Citation

  • Matthias Wrede, 2010. "Multinational Capital Structure and Tax Competition," CESifo Working Paper Series 3041, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3041
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    References listed on IDEAS

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    Cited by:

    1. Stefan Lutz, 2012. "Effects of taxation on European multi-nationals’ financing and profits," The School of Economics Discussion Paper Series 1214, Economics, The University of Manchester.

    More about this item

    Keywords

    multinational enterprises; financial policy; profit shifting; corporate taxation; tax competition;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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