Corporate Tax Policy, Foreign Firm Ownership and Thin Capitalization

23 Pages Posted: 28 Jan 2004

See all articles by Clemens Fuest

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Thomas Hemmelgarn

European Commission

Date Written: December 2003

Abstract

This paper analyzes the implications of foreign firm ownership and international profit shifting through thin capitalization for corporate tax policy. We consider a model of interjurisdictional tax competition where the corporate tax serves as a backstop to the personal income tax, interest on debt is deductible from the corporate tax base and multinational firms may shift profit across countries through thin capitalization. We show that the problem of thin capitalization induces countries to reduce their corporate tax rates below the personal income tax rate and to broaden their tax bases. Moreover, foreign firm ownership leads to a reduction in corporate tax rates. We also show that there is scope for welfare enhancing tax coordination in our model. In the presence of both foreign firm ownership and thin capitalization, countries gain from a coordinated increase in corporate tax rates or from a coordinated broadening of the tax base.

Keywords: tax competition, income shifting.

JEL Classification: H21, H77, G32

Suggested Citation

Fuest, Clemens and Hemmelgarn, Thomas, Corporate Tax Policy, Foreign Firm Ownership and Thin Capitalization (December 2003). CESifo Working Paper Series No. 1096. Available at SSRN: https://ssrn.com/abstract=479725

Clemens Fuest (Contact Author)

ifo Institute – Leibniz Institute for Economic Research at the University of Munich

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Munich, DE 81679
Germany
++89-9224-1430 (Phone)

Ludwig-Maximilians-University, Munich ( email )

Schackstrasse 4 / II
Munich, DE 80539
Germany

Center for Economic Studies (CES) ( email )

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Germany
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Thomas Hemmelgarn

European Commission ( email )

J-79 05/230
Brussels, Brussels B-1049
Belgium

HOME PAGE: http://https://ec.europa.eu/taxation_customs/business/economic-analysis-taxation_en

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