Restricted interest deductibility and multinationals’ use of internal debt finance

Thiess Buettner, Michael Overesch and Georg Wamser
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Thiess Buettner: FAU
Michael Overesch: University of Cologne
Authors registered in the RePEc Author Service: Thiess Büttner

International Tax and Public Finance, 2016, vol. 23, issue 5, No 1, 785-797

Abstract: Abstract This paper reconsiders the role of interest deductibility for internal debt financing of multinational corporations (MNCs). We provide quasi-experimental evidence using restrictions on interest deductibility through thin-capitalization rules. Explicitly distinguishing between firms subject to a binding restriction and unrestricted firms, a panel data sample selection model is used to explore the tax sensitivity of the capital structure of foreign subsidiaries of MNCs. Our results confirm that the tax incentive for using internal loans is effectively removed for restricted subsidiaries. While internal debt financing of unrestricted subsidiaries positively responds to taxes, the effects are relatively small.

Keywords: Corporate taxation; Multinational firms; Internal debt; Thin-capitalization rules; Sample selection (search for similar items in EconPapers)
JEL-codes: F23 G32 H25 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s10797-015-9386-8

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