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International Debt Shifting: Do Multinationals Shift Internal or External Debt?

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  • Jarle Møen
  • Dirk Schindler
  • Guttorm Schjelderup
  • Julia Tropina

Abstract

Multinational companies can exploit the tax advantage of debt more aggressively than national companies by shifting debt from affiliates in low tax countries to affiliates in high tax countries. Previous papers have either omitted internal debt or external debt from the analysis. We are the first to model the companies’ choice between internal and external debt shifting and show that it is optimal for them to use both types of debt to save taxes. Using a large panel of German multinationals, we find strong empirical support for our model. The estimated coefficients suggest that internal and external debt shifting are of about equal relevance. Since the tax variables that determine the incentive to shift internal and external debt are correlated both with each other and with the host country tax rate, previous estimates of the tax sensitivity of debt suffer from omitted variable bias.

Suggested Citation

  • Jarle Møen & Dirk Schindler & Guttorm Schjelderup & Julia Tropina, 2011. "International Debt Shifting: Do Multinationals Shift Internal or External Debt?," CESifo Working Paper Series 3519, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3519
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    1. repec:kap:itaxpf:v:24:y:2017:i:5:d:10.1007_s10797-016-9432-1 is not listed on IDEAS
    2. Scheuering, Uwe, 2013. "M&A and the Tax Benefits of Debt Financing," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79817, Verein für Socialpolitik / German Economic Association.
    3. Dirk Schindler & Guttorm Schjelderup, 2013. "Transfer Pricing and Debt Shifting in Multinationals," CESifo Working Paper Series 4381, CESifo Group Munich.
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    More about this item

    Keywords

    corporate taxation; multinationals; capital structure; international debt-shifting; tax avoidance;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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