The Effect of Tax Havens on Host Country Welfare

36 Pages Posted: 25 Apr 2015  

Thomas A. Gresik

University of Notre Dame - Department of Economics and Econometrics

Dirk Schindler

Norwegian School of Economics (NHH); CESifo (Center for Economic Studies and Ifo Institute)

Guttorm Schjelderup

Norwegian School of Economics (NHH) - Department of Business and Management Science

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Date Written: April 24, 2015

Abstract

Multinational corporations can shift income into low-tax countries through transfer pricing and debt financing. While most developed countries use thin capitalization rules to limit the extent to which a subsidiary can be financed with internal debt, a number of developing countries do not. In this paper, we analyze the effect on FDI and host country welfare of thin capitalization rules when multinationals can also shift income via transfer prices. We show that while permissive thin capitalization limits may be needed in developing countries to attract FDI, the amount of debt financing allowed by the permissive limits facilitates more aggressive transfer pricing and results in lower host country welfare.

Keywords: Tax havens, welfare, multinational corporations, FDI, transfer pricing

JEL Classification: F23, H25, O10

Suggested Citation

Gresik, Thomas A. and Schindler, Dirk and Schjelderup, Guttorm, The Effect of Tax Havens on Host Country Welfare (April 24, 2015). NHH Dept. of Business and Management Science Discussion Paper No. 2015/19. Available at SSRN: https://ssrn.com/abstract=2598437 or http://dx.doi.org/10.2139/ssrn.2598437

Thomas A. Gresik

University of Notre Dame - Department of Economics and Econometrics ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Dirk Schindler

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, 5045
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Guttorm Schjelderup (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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