Tax Rules and Capital Reallocation: Real Effects of Anti-Tax Avoidance Policies

Governments worldwide are strengthening corporate tax enforcement to protect revenue, yet the impact of these policies on internal capital allocation within multinational firms remains underexplored. This paper examines the real and fiscal effects of Earnings Stripping Rules (ESR)—a major reform limiting debt-based profit shifting, now adopted by over 90 jurisdictions. Using a large affiliate-level panel and multiple research designs, I document that ESR adoption triggers sharp increases in reported profits and effective tax rates, but simultaneously reduces local investment and employment. Multinational groups offset these declines by reallocating activity to affiliates in non-adopting jurisdictions, effectively preserving an international escape margin. Notably, this reallocation pattern reverses when ESR adoption is coordinated globally: domestic sister affiliates expand, and foreign reallocation ceases. These findings demonstrate that the real effects of enforcement depend critically on policy coordination, determining whether anti-avoidance rules distort the geography of global capital or raise revenue without displacing economic activity abroad.