Profit Shifting by Debt Financing in Europe

46 Pages Posted: 18 Mar 2010

See all articles by Francesca Barion

Francesca Barion

University of Brescia - Department of Economics

Raffaele Miniaci

University of Brescia - Department of Economics and Management

Paolo M. Panteghini

Department of Economics and Management; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Maria Laura Parisi

University of Brescia, Department of Economics and Management

Date Written: March 2010

Abstract

This article aims at analyzing the link between subsidiaries’ capital structure and taxation in Europe. First we introduce a trade-off model, which studies a MNCs’ financial strategy and shows how debt policy allows multinational groups to shift profits from low-tax to high-tax jurisdictions. By letting the MNC choose both leverage and the percentage of profit shifting, we depart from the relevant literature which has mainly focused on the latter. Using the AMADEUS dataset we show that: i) subsidiaries’ leverage increases with the statutory tax rate, levied in the country where it operates; ii) this positive effect is lower, the higher the parent company tax rate is. Furthermore, an increase in the parent company’s tax rate is estimated to raise its subsidiaries’ leverage.

Keywords: capital structure, default, multinationals, profit shifting, taxation

JEL Classification: G31, H25, H32

Suggested Citation

Barion, Francesca and Miniaci, Raffaele and Panteghini, Paolo M. and Parisi, Maria Laura, Profit Shifting by Debt Financing in Europe (March 2010). CESifo Working Paper Series No. 2985, Available at SSRN: https://ssrn.com/abstract=1573499

Francesca Barion

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy

Raffaele Miniaci

University of Brescia - Department of Economics and Management ( email )

Via San Faustino 74B
Brescia, 25122
Italy

Paolo M. Panteghini (Contact Author)

Department of Economics and Management ( email )

Contrada Santa Chiara 50
BRESCIA, BS 25122
Italy

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Maria Laura Parisi

University of Brescia, Department of Economics and Management ( email )

via San Faustino 74/b
Brescia, 25122
Italy
+39 0302988826 (Phone)
+39 0302988837 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
193
Abstract Views
1,123
rank
171,345
PlumX Metrics