## At A Cost: The Real Effects of Thin Capitalization Rules

_IMF Working Papers, February 5, 2021_

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## Bibliographic details
- Authors: Ruud A. de Mooij, Li Liu
- Published: February 5, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513568553.001

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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.
- Using unique panel data on multinational companies in 34 countries during 2006-2014, the authors 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.

### Key findings and estimates
- Adverse investment effects of TCRs can be large.
- The magnitude of the negative investment effect depends on:
  - the statutory corporate tax rate, and
  - the tightness of the safe-haven ratio.
- Negative investment effects are more pronounced for highly-levered firms (firms for which TCRs are more likely to bind).

### Policy implications and considerations
- Policymakers should weigh the revenue and base-protection benefits of TCRs against potential real-economy costs through higher cost of capital and reduced investment.
- Design features that matter include:
  - statutory corporate tax rate,
  - the safe-haven ratio’s tightness, and
  - firm leverage profiles (with highly-levered firms more affected).
- Assessment of TCRs should account for distributional effects across firms with different leverage and investment sensitivities.

*IMF Working Paper No. 2021/023 — "At A Cost: The Real Effects of Thin Capitalization Rules" by Ruud A. de Mooij and Li Liu, February 5, 2021.*

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_Source: https://www.imf.org/en/publications/wp/issues/2021/02/05/at-a-cost-the-real-effects-of-thin-capitalization-rules-49999_