At A Cost: The Real Effects of Thin Capitalization Rules
February 5, 2021
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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.
Subject: Economic sectors, Financial crises
Keywords: corporate tax policy, debt shifting, multinational investment, thin capitalization rules
Pages:
17
Volume:
2021
DOI:
Issue:
023
Series:
Working Paper No. 2021/023
Stock No:
WPIEA2021023
ISBN:
9781513568553
ISSN:
1018-5941
