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

Anti-tax avoidance policies aim to curb profit shifting by MNEs, yet their effects on capital costs and economic growth remain a critical question. This study examines the causal impacts of Earnings Stripping Rule (ESR)—a core anti–tax-avoidance measure adopted by more than ninety countries in the last decade—that limits profit shifting through debt channels but increases the cost of debt-financed capital. Using a large panel dataset on global MNE operations and a staggered difference-in-difference design, I compare the real activities of MNEs affected by ESR with those of unaffected groups. I find that ESR effectively reduces profit shifting and tax avoidance but also lowers investments in affected subsidiaries. MNEs offset these declines by reallocating capital and employ-ment toward unconstrained affiliates, primarily abroad. However, as the policy coverage expands across a group’s global footprint, this reallocation shifts from foreign to domes-tic units, closing the international escape margin and raising grouplevel tax liabilities. These findings suggest that international coordination is crucial for designing effective, non-distortionary anti-avoidance policies.