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The Impact of Thin-Capitalization Rules on External Debt Usage – A Propensity Score Matching Approach

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  • Georg Wamser

Abstract

This paper analyzes how multinational enterprises respond to a restriction on interest deductions incurred for internal borrowing. The emphasis of the study is on a firm’s response with respect to external borrowing. The empirical investigation applies propensity score matching techniques and exploits the 2001 reform of the German thin-capitalization rule to solve endogeneity problems. The results suggest that restrictions on internal debt are associated with expansions in external debt finance, indicating a substitutional relationship. Since multinational enterprises can use internal debt to shift profits from high- to low-tax countries, this finding implies that policies aimed at securing corporate tax revenue possibly fail and should be subject to careful scrutiny by policymakers.

Suggested Citation

  • Georg Wamser, 2008. "The Impact of Thin-Capitalization Rules on External Debt Usage – A Propensity Score Matching Approach," ifo Working Paper Series 62, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
  • Handle: RePEc:ces:ifowps:_62
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    Cited by:

    1. Mardan, Mohammed, 2017. "Why countries differ in thin capitalization rules: The role of financial development," European Economic Review, Elsevier, vol. 91(C), pages 1-14.
    2. Jennifer Blouin & Harry Huizinga & Luc Laeven & Gaëtan Nicodème, 2013. "Thin capitalization rules and multinational firm capital structure," Working Papers 1323, Oxford University Centre for Business Taxation.
    3. Robert Philipowski, 2016. "Should profit shifting be prohibited? The importance of timing," Economics Bulletin, AccessEcon, vol. 36(4), pages 2365-2367.
    4. Gresik, Thomas A. & Schindler, Dirk & Schjelderup, Guttorm, 2017. "Immobilizing corporate income shifting: Should it be safe to strip in the harbor?," Journal of Public Economics, Elsevier, vol. 152(C), pages 68-78.
    5. Dreßler, Daniel & Scheuering, Uwe, 2012. "Empirical evaluation of interest barrier effects," ZEW Discussion Papers 12-046, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. Tatjana Jovanovic & Maja Klun, 2017. "Tax Policy Assessment in Slovenia – Case of Interest Tax Shield," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 1, pages 1-17, March.
    7. Overesch Michael, 2016. "Steuervermeidung multinationaler Unternehmen," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(2), pages 129-143, July.
    8. Ruf Martin & Schindler Dirk, 2015. "Debt Shifting and Thin-Capitalization Rules – German Experience and Alternative Approaches," Nordic Tax Journal, De Gruyter Open, vol. 2015(1), pages 17-33, September.
    9. Nicolay, Katharina & Nusser, Hannah & Pfeiffer, Olena, 2017. "On the interdependency of profit shifting channels and the effectiveness of anti-avoidance legislation," ZEW Discussion Papers 17-066, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    10. Dreßler, Daniel & Scheuering, Uwe, 2015. "Empirical evaluation of interest barrier effects," ZEW Discussion Papers 12-046 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    11. Egger, Peter H. & Wamser, Georg, 2015. "The impact of controlled foreign company legislation on real investments abroad. A multi-dimensional regression discontinuity design," Journal of Public Economics, Elsevier, vol. 129(C), pages 77-91.
    12. Thiess Buettner & Michael Overesch & Georg Wamser, 2016. "Restricted interest deductibility and multinationals’ use of internal debt finance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(5), pages 785-797, October.
    13. Pieter Van der Zwan & Danie Schutte & Waldo Kruggel & Joel Seshabela & Hayley Reynolds & Londiwe Khoza, 2017. "An evaluation of interest deduction limitations to counter base erosion in South Africa," WIDER Working Paper Series 035, World Institute for Development Economic Research (UNU-WIDER).
    14. Jarkko Harju & Ilpo Kauppinen & Olli Ropponen, 2017. "Firm Responses to an Interest Barrier: Empirical Evidence," EconPol Working Paper 3, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    15. Kalamov, Zarko Y., 2015. "Safe Haven vs. Earnings Stripping Rules: a Prisoner Dilemma?," EconStor Preprints 110895, ZBW - German National Library of Economics.
    16. 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.

    More about this item

    JEL classification:

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

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