Capital Structure and International Debt Shifting
Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)
European Central Bank (ECB); Centre for Economic Policy Research (CEPR)
Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management; CEPR and CESifo The views expressed in the article are those of the author and should not be attributed to the European Commission.
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.
Number of Pages in PDF File: 47
Keywords: corporate taxation, financial structure, debt shifting
JEL Classification: F23, G32, H25
Date posted: July 25, 2006