Multinational Capital Structure and Tax Competition
29 Pages Posted: 10 May 2010
Date Written: April 1, 2010
Abstract
This paper analyzes tax competition when welfare maximizing jurisdictions levy source-based corporate taxes and multinational enterprises choose tax-efficient capital-to-debt ratios. Under separate accounting, multinationals shift debt from low-tax to high-tax countries. The Nash equilibrium of the tax competition game is characterized by underprovision of publicly provided goods. Under formula apportionment, the country-specific capital-to-debt ratio of a multinational’s affiliate is independent of the jurisdiction’s tax rate. Public good provision is either too large or too small. If the debt externality is not negative, there is clearly underprovision under formula apportionment.
Keywords: multinational enterprises, financial policy, profit shifting, corporate taxation, tax competition
JEL Classification: F23, H25, H42, H73
Suggested Citation: Suggested Citation
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