Corporate tax planning and thin-capitalization rules: evidence from a quasi-experiment

Michael Overesch and Georg Wamser

Applied Economics, 2010, vol. 42, issue 5, 563-573

Abstract: This article investigates tax-planning behaviour by means of inter-company finance and the effectiveness of government countermeasures via thin-capitalization rules. A simple theoretical model which considers the financing decision of a multinational company is used to obtain empirical implications. The empirical analysis, based on German inbound investment data from 1996 to 2004, confirms a significant impact of tax-rate differentials on the use of inter-company debt. The effectiveness of the German thin-capitalization rule is tested by using legal amendments as natural experiments. The results suggest that thin-capitalization rules induce significantly lower internal borrowing. Hence, tax planning via internal finance is effectively limited by thin-capitalization rules.

Date: 2010
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DOI: 10.1080/00036840701704477

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