Tax Rules and Capital Reallocation: Real Effects of Anti-Tax Avoidance Policies

Usama Jamal ()
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Usama Jamal: CY Cergy Paris Université, THEMA

No 2025-16, Thema Working Papers from THEMA (Théorie Economique, Modélisation et Applications), CY Cergy-Paris University, ESSEC and CNRS

Abstract: Anti-tax avoidance policies aim to curb profit shifting by MNEs, yet their effects on capital costs and economic growth remain a critical question. This study examines the causal impacts of Earnings Stripping Rule (ESR)—a core anti–tax-avoidance measure adopted by more than ninety countries in the last decade—that limits profit shifting through debt channels but increases the cost of debt-financed capital. Using a large panel dataset on global MNE operations and a staggered difference-in-difference design, I compare the real activities of MNEs affected by ESR with those of unaffected groups. I find that ESR effectively reduces profit shifting and tax avoidance but also lowers investments in affected subsidiaries. MNEs offset these declines by reallocating capital and employ-ment toward unconstrained affiliates, primarily abroad. However, as the policy coverage expands across a group’s global footprint, this reallocation shifts from foreign to domes-tic units, closing the international escape margin and raising grouplevel tax liabilities. These findings suggest that international coordination is crucial for designing effective, non-distortionary anti-avoidance policies.

Keywords: Tax Avoidance; Multinational Investment; Profit Shifting (search for similar items in EconPapers)
JEL-codes: F23 H25 H26 H32 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-acc, nep-iaf and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:ema:worpap:2025-16

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