German Inbound Investment, Corporate Tax Planning, and Thin Capitalization Rules - a Difference-in-Differences Approach

29 Pages Posted: 16 Nov 2006 Last revised: 26 Aug 2008

See all articles by Michael Overesch

Michael Overesch

Universität zu Köln

Georg Wamser

University of Tuebingen; ETH Zurich

Date Written: 2006

Abstract

This paper investigates tax planning behavior by means of inter-company finance and the effectiveness of fighting back via thin-capitalization rules. A simple theoretical model, which considers the financing decision of a multinational company, is used to obtain empirical implications. The empirical analysis, based on German inbound investment data from 1996 until 2004, supports a significant impact of tax rate differences on the use of intra-company debt. The effectiveness of the German thin-capitalization rule is tested by using legal amendments as natural experiments. The results suggest that the German thin-capitalization rule induces significantly lower intra-firm debt-levels of inbound investments. Hence, tax planning via intra-firm finance is effectively limited.

Keywords: Corporate Income Tax, Multinationals, Thin-Capitalization Rule, Difference-in-Differences, Firm-Level Data

JEL Classification: G32, H25, H26

Suggested Citation

Overesch, Michael and Wamser, Georg, German Inbound Investment, Corporate Tax Planning, and Thin Capitalization Rules - a Difference-in-Differences Approach (2006). ZEW - Centre for European Economic Research Discussion Paper No. 06-075. Available at SSRN: https://ssrn.com/abstract=945327 or http://dx.doi.org/10.2139/ssrn.945327

Michael Overesch (Contact Author)

Universität zu Köln ( email )

Albertus-Magnus-Platz
WiSo-Gebäude
Cologne, 50923
Germany
0221/470-5605 (Phone)

HOME PAGE: http://www.steuer.uni-koeln.de/

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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