Capital Structure and International Debt Shifting

By Luc Laeven, Harry Huizinga, Gaetan Nicodeme

February 1, 2007

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Luc Laeven, Harry Huizinga, and Gaetan Nicodeme. Capital Structure and International Debt Shifting, (USA: International Monetary Fund, 2007) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper presents a model of a multinational firm's optimal debt policy that incorporates international taxation factors. The model yields the prediction that a multinational firm's indebtedness in a country depends on a weighted average of national tax rates and differences between national and foreign tax rates. These differences matter because multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested using a novel firm-level dataset for European multinationals and their subsidiaries, combined with newly collected data on the international tax treatment of dividend and interest streams. Our empirical results show that corporate debt policy indeed not only reflects domestic corporate tax rates but also differences in international tax systems. These findings contribute to our understanding of how corporate debt policy is set in an international context.

Subject: Credit, Marginal effective tax rate, Tax incentives, Transnational corporations, Withholding tax

Keywords: Capital structure, Multinational firm, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/039
Stock No:

WPIEA2007039
ISBN:

9781451866032
ISSN:

1018-5941

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