Abstract
AbstractThis paper examines how restrictions on the tax deductibility of interest cost affect location choices of multinational corporations (MNCs). Many countries have introduced so‐called thin‐capitalization rules (TCRs) to prevent MNCs from shifting their tax base to countries with lower tax rates. As of 2012, in our sample of 172 countries, 61 countries have implemented a TCR. Using information on nearly all new foreign investments of German MNCs, we provide a number of new and interesting insights in how TCRs affect the decision of where to locate foreign entities. In particular, stricter TCRs are found to negatively affect location choices of MNCs. Our results include estimates of own‐ and cross‐elasticities of location choice and also novel results on the relative importance of tax base vs. tax rate effects. We finally provide estimates for different uncoordinated as well as coordinated policy scenarios.
Highlights
Policymakers all over the world increasingly respond to public outrage about how little taxes are payed by multinational corporations (MNCs) like Apple, Amazon, Google, Facebook, Microsoft or Starbucks
Recent reports about substantial tax avoidance by these firms as well as tight public budgets after the financial crisis have provoked governments to take drastic measures to prevent avoidance activities.1. This government action is supported by the OECD report on base erosion and profit shifting (BEPS) published in 2013, in which the OECD raises concerns about corporate tax revenue losses, recognizing that profit shifting by MNCs is “a pressing and current issue for a number of jurisdictions” (OECD, 2013a, p.5)
In addition to the variables listed in the previous section, the specification shown in Table 2 includes interactions of the non-tax determinants with the salesto-total-asset ratio (SAT A) of the parent
Summary
Policymakers all over the world increasingly respond to public outrage about how little taxes are payed by multinational corporations (MNCs) like Apple, Amazon, Google, Facebook, Microsoft or Starbucks. Recent reports about substantial tax avoidance by these firms as well as tight public budgets after the financial crisis have provoked governments to take drastic measures to prevent avoidance activities.. Recent reports about substantial tax avoidance by these firms as well as tight public budgets after the financial crisis have provoked governments to take drastic measures to prevent avoidance activities.1 This government action is supported by the OECD report on base erosion and profit shifting (BEPS) published in 2013, in which the OECD raises concerns about corporate tax revenue losses, recognizing that profit shifting by MNCs is “a pressing and current issue for a number of jurisdictions” (OECD, 2013a, p.5). The BEPS report recommends to “limit base erosion via interest deductions and other financial payments” (OECD, 2013b, Action 4, p.17)
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