Firm Responses to an Interest Barrier: Empirical Evidence

Jarkko Harju, Ilpo Kauppinen and Olli Ropponen

No 7, Working Papers from Finnish Centre of Excellence in Tax Systems Research

Abstract: This paper studies the effects of an interest barrier (IB) that was introduced in Finland to restrict the profit-shifting opportunities of multinational enterprises (MNEs). We employ Orbis database on Finnish, Swedish and Danish MNEs and a difference-in-differences methodology, where Swedish and Danish MNEs serve as a control group. We find that Finnish MNEs responded to IB by decreasing their financial expenses. We also find that the most affected firms decreased their debt levels due to the reform. Our results suggest that the financial expense response is followed by a change in the use of transfer pricing as a method to shift profits between tax jurisdictions. We do not find evidence of total output changes among treated firms, suggesting that the IB did not affect the real activity of MNEs.

Keywords: Corporate income tax; Multinational firms; Capital structure; Profit shifting; Interest barrier (search for similar items in EconPapers)
JEL-codes: G32 H25 H26 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2023-02
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-eur, nep-mfd and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in FIT Working Paper Series, Finnish Center of Excellence in Tax Systems Research
Published in VATT Working Paper Series

Downloads: (external link)
https://verotutkimus.fi/verotutkimus/wp-content/up ... t-Barrier-160323.pdf Revised version, 2023 (application/pdf)
https://www.doria.fi/handle/10024/148927 First version, 2017 (application/pdf)

Related works:
Working Paper: Firm Responses to an Interest Barrier: Empirical Evidence (2017)
Working Paper: Firm Responses to an Interest Barrier: Empirical Evidence (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fit:wpaper:7

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