At A Cost: The Real Effects of Thin Capitalization Rules

Author/Editor:

Ruud A. de Mooij ; Li Liu

Publication Date:

February 5, 2021

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

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.

Series:

Working Paper No. 2021/023

Frequency:

regular

English

Publication Date:

February 5, 2021

ISBN/ISSN:

9781513568553/1018-5941

Stock No:

WPIEA2021023

Format:

Paper

Pages:

17

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