Real Responses to Anti-tax Avoidance: Evidence from the UK Worldwide Debt Cap
66 Pages Posted: 17 Oct 2020 Last revised: 21 Apr 2021
Date Written: April 1, 2020
We analyze how multinational firms reallocate real operations and debt across their affiliates in response to anti-tax avoidance policies. The UK introduced a worldwide debt cap in 2010, generating a quasi-natural experiment that limited interest deductibility for a group of multinational firms. We find that multinationals affected by the reform reduced the amount of debt held in the UK and increased debt held abroad. Affected multinationals reallocated a share of their real operations away from the UK. Our findings provide causal evidence for tax-motivated debt and real activity reallocation within multinationals and show how multinationals can circumvent tax avoidance regulations.
JEL Classification: H25, H26
Suggested Citation: Suggested Citation