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

27 Pages Posted: 6 Jun 2020

See all articles by Valeria Merlo

Valeria Merlo

University of Tuebingen

Nadine Riedel

Ruhr University of Bochum

Georg Wamser

ETH Zurich; University of Tuebingen

Date Written: February 2020

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 their 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. In particular, stricter TCRs are found to negatively affect location choices of MNCs. Our 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.

Suggested Citation

Merlo, Valeria and Riedel, Nadine and Wamser, Georg and Wamser, Georg, The Impact of Thin‐Capitalization Rules on the Location of Multinational Firms’ Foreign Affiliates (February 2020). Review of International Economics, Vol. 28, Issue 1, pp. 35-61, 2020, Available at SSRN: https://ssrn.com/abstract=3619290 or http://dx.doi.org/10.1111/roie.12440

Valeria Merlo (Contact Author)

University of Tuebingen ( email )

Department of Economics
Nauklerstr. 47
Tübingen, 72074
Germany

Nadine Riedel

Ruhr University of Bochum

Universitätsstraße 150
Bochum, NRW 44780
Germany

Georg Wamser

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

ETH Zurich ( email )

Weinbergstr. 35
Zurich, 8003
Switzerland

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