The Impact of Thin Capitalization Rules on the Location of Multinational Firms' Foreign Affiliates

37 Pages Posted: 4 Aug 2015

See all articles by Valeria Merlo

Valeria Merlo

University of Tuebingen

Nadine Riedel

Oxford University CBT; University of Hohenheim

Georg Wamser

University of Tuebingen; ETH Zurich

Date Written: July 31, 2015

Abstract

This paper examines how restrictions on the tax-deductibility of interest cost affect location choices of multinational corporations (MNCs). Many countries have introduced so-called thin-capitalization rules (TCRs) to prevent MNCs from shifting tax base to countries with lower tax rates. As of 2012, in our sample of 172 countries, 61 countries have implemented a TCR. Using information on nearly all new foreign investments of German MNCs, we provide a number of new and interesting insights in how TCRs affect the decision of where to locate foreign entities. These results include estimates of own- and cross-elasticities of location choice and also novel results on the relative importance of tax base vs. tax rate effects. We finally provide estimates for different uncoordinated as well as coordinated policy scenarios.

Keywords: corporate taxes, location choices, multinational corporations, thin capitalization laws

JEL Classification: H200, H700

Suggested Citation

Merlo, Valeria and Riedel, Nadine and Wamser, Georg, The Impact of Thin Capitalization Rules on the Location of Multinational Firms' Foreign Affiliates (July 31, 2015). CESifo Working Paper Series No. 5449. Available at SSRN: https://ssrn.com/abstract=2639102

Valeria Merlo

University of Tuebingen ( email )

Department of Economics
Nauklerstr. 47
Tübingen, 72074
Germany

Nadine Riedel

Oxford University CBT ( email )

Park End Street
Oxford, Oxfordshire OX1 1HP
United Kingdom

University of Hohenheim ( email )

Stuttgart
Germany

Georg Wamser (Contact Author)

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

ETH Zurich ( email )

Weinbergstr. 35
Zurich, 8003
Switzerland

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