Capital Structure and International Debt Shifting
47 Pages Posted: 25 Jul 2006
Date Written: July 2006
This paper presents a model that relates a multinational firm's optimal debt policy to taxation and to non-tax factors such as the desire to prevent bankruptcy. The model yields the predictions that a multinational's indebtedness in a country depends on national tax rates and differences between national and foreign tax rates. These differences matter as multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested with the aid of a broad European data set combining firm-level data and information on the international tax treatment of dividend and interest streams. Corporate debt policy indeed appears to reflect national corporate tax rates and international corporate tax rate differences but not nonresident dividend withholding taxes.
Keywords: corporate taxation, financial structure, debt shifting
JEL Classification: F23, G32, H25
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