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The Impact of Thin Capitalization Rules on the Location of Multinational Firms' Foreign Affiliates

Author

Listed:
  • Valeria Merlo
  • Nadine Riedel
  • Georg Wamser

Abstract

This paper examines how restrictions on the tax-deductibility of interest cost affect location choices of multinational corporations (MNCs). Many countries have introduced so-called thin-capitalization rules (TCRs) to prevent MNCs from shifting tax base to countries with lower tax rates. As of 2012, in our sample of 172 countries, 61 countries have implemented a TCR. Using information on nearly all new foreign investments of German MNCs, we provide a number of new and interesting insights in how TCRs affect the decision of where to locate foreign entities. These results include estimates of own- and cross-elasticities of location choice and also novel results on the relative importance of tax base vs. tax rate effects. We finally provide estimates for different uncoordinated as well as coordinated policy scenarios.

Suggested Citation

  • Valeria Merlo & Nadine Riedel & Georg Wamser, 2015. "The Impact of Thin Capitalization Rules on the Location of Multinational Firms' Foreign Affiliates," CESifo Working Paper Series 5449, CESifo.
    • Handle: RePEc:ces:ceswps:_5449
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    References listed on IDEAS

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    Cited by:

    1. Zarko Y. Kalamov, 2020. "Safe haven or earnings stripping rules: a prisoner’s dilemma?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(1), pages 38-76, February.
    2. de Mooij, Ruud & Liu, Li, 2021. "At a cost: The real effects of thin capitalization rules," Economics Letters, Elsevier, vol. 200(C).
    3. Richard M. Bird, 2016. "Reforming International Taxation: Is the Process the Real Product?," Hacienda Pública Española / Review of Public Economics, IEF, vol. 217(2), pages 159-180, June.
    4. Eichfelder, Sebastian & Kluska, Mike & Knaisch, Jonas & Selle, Juliane, 2021. "Senkung der Unternehmenssteuerlast versus Förderung von Investitionen: Was ist die bessere Strategie zur Förderung der Standortattraktivität Deutschlands?," arqus Discussion Papers in Quantitative Tax Research 266, arqus - Arbeitskreis Quantitative Steuerlehre.
    5. Simon Behrendt & Georg Wamser, 2018. "Tax-Response Heterogeneity and the Effects of Double Taxation Treaties on the Location Choices of Multinational Firms," CESifo Working Paper Series 6869, CESifo.
    6. Overesch Michael, 2016. "Steuervermeidung multinationaler Unternehmen," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(2), pages 129-143, July.
    7. Feulefack Kemmanang, Ludovic, 2021. "Does resource dependence cushion the impact of thin capitalization rules on foreign investment inflows? Evidence from Africa," Resources Policy, Elsevier, vol. 72(C).
    8. Jaqueline Hansen & Valeria Merlo & Georg Wamser, 2023. "Taxes, Profit Shifting, and the Real Activities of MNEs: Evidence from Corporate Tax Notches," CESifo Working Paper Series 10593, CESifo.
    9. De Mooij, Ruud & Hebous, Shafik, 2018. "Curbing corporate debt bias: Do limitations to interest deductibility work?," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 368-378.
    10. Kayis-Kumar, Ann, 2016. "What's BEPS got to do with it? Exploring the effectiveness of thin capitalisation rules," MPRA Paper 75741, University Library of Munich, Germany.

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    More about this item

    Keywords

    corporate taxes; location choices; multinational corporations; thin capitalization laws;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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