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At A Cost: The Real Effects of Thin Capitalization Rules

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  • Ruud A. de Mooij
  • Ms. Li Liu

Abstract

Thin capitalization rules (TCRs) aim to mitigate profit shifting by multinational corporations (MNCs) but, by raising the cost of capital for affected affiliates, can also negatively affect real investment. Exploiting unique panel data on multinational companies in 34 countries during 2006-2014, we estimate that the size of this adverse investment effect can be large, and dependent on the statutory corporate tax rate and the tightness of the safe-haven ratio. Negative investment effects are more pronounced for highly-levered firms for which TCRs are more likely to be binding.

Suggested Citation

  • Ruud A. de Mooij & Ms. Li Liu, 2021. "At A Cost: The Real Effects of Thin Capitalization Rules," IMF Working Papers 2021/023, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2021/023
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    More about this item

    Keywords

    debt shifting; multinational investment; corporate tax policy; thin capitalization rules;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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