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International Debt Shifting: Do Multinationals Shift Internal or External Debt?

  • Schindler, Dirk
  • Møen, Jarle
  • Schjelderup, Guttorm
  • Tropina, Julia

Multinational companies can exploit the tax advantage of debt more aggressively than national companies. Besides utilizing the standard debt tax shield, multinationals can shift debt from affiliates in low-tax countries to affiliates in high-tax countries. We study the capital structure of multinationals and expand previous theory by incorporating debt tax shield effects from both internal and external capital markets. A main finding is that firm value is maximized if both internal and external debt is used, and that internal lending should be conducted through a financial center in the lowest-taxed affiliate. Testing our model using a large panel of German multinationals, we identify all three debt tax shields. Our estimates suggest that internal and external debt shifting are of about equal relevance.

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79749.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79749
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