At A Cost: The Real Effects of Thin Capitalization Rules

February 5, 2021

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Format: Chicago

Ruud A. de Mooij, and Li Liu. At A Cost: The Real Effects of Thin Capitalization Rules, (USA: International Monetary Fund, 2021) accessed December 21, 2024

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.

Subject: Economic sectors, Financial crises

Keywords: Corporate tax policy, Debt shifting, Multinational investment, Thin capitalization rules

Publication Details

Pages:

17
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/023
Stock No:

WPIEA2021023
ISBN:

9781513568553
ISSN:

1018-5941

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