Capital Structure and International Debt Shifting

39 Pages Posted: 4 Mar 2007

See all articles by Luc Laeven

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Gaëtan Nicodème

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.

Harry Huizinga

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2007

Abstract

This paper presents a model of a multinational firm's optimal debt policy that incorporates international taxation factors. The model yields the prediction that a multinational firm's indebtedness in a country depends on a weighted average of national tax rates and differences between national and foreign tax rates. These differences matter because multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested using a novel firm-level dataset for European multinationals and their subsidiaries, combined with newly collected data on the international tax treatment of dividend and interest streams. Our empirical results show that corporate debt policy indeed not only reflects domestic corporate tax rates but also differences in international tax systems. These findings contribute to our understanding of how corporate debt policy is set in an international context.

Keywords: Debt, Tax rates, Tax policy, Capital, Economic models

JEL Classification: F23, G32, H25

Suggested Citation

Laeven, Luc A. and Nicodeme, Gaetan and Huizinga, Harry, Capital Structure and International Debt Shifting (February 2007). IMF Working Paper No. 07/39, Available at SSRN: https://ssrn.com/abstract=967880

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gaetan Nicodeme

Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management ( email )

50 Avenue Roosevelt
Brussels 1050
Belgium

CEPR and CESifo The views expressed in the article are those of the author and should not be attributed to the European Commission.

No Address Available

Harry Huizinga

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2623 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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