EconPapers    
Economics at your fingertips  
 

Why countries differ in thin capitalization rules: The role of financial development

Mohammed Mardan ()

European Economic Review, 2017, vol. 91, issue C, 1-14

Abstract: The purpose of thin capitalization rules is to limit multinational firms' possibilities of engaging in tax planning via debt shifting. This paper analyzes the optimal design of thin capitalization rules in the presence of financial frictions when a host country, in the first stage, chooses the type of thin capitalization rule and then, in the second stage, decides about the strictness. We show that welfare under a safe haven rule is higher than under an earnings stripping rule if firms are not able to manipulate the interest rate on internal loans. Welfare, however, can be higher under an earnings stripping rule if firms are able to manipulate the interest rate on internal loans. We also show that the optimal level of internal interest deductions decreases with the financial development of the host country. Our results are consistent with countries' actual policy choice.

Keywords: Thin capitalization rule; Safe haven rule; Earnings stripping rule; Debt shifting; Financial development (search for similar items in EconPapers)
JEL-codes: H25 G38 F23 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0014292116301428
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Why Countries Differ in Thin Capitalization Rules: The Role of Financial Development (2015) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:91:y:2017:i:c:p:1-14

Access Statistics for this article

European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-07-22
Handle: RePEc:eee:eecrev:v:91:y:2017:i:c:p:1-14