Profit Shifting by Debt Financing in Europe

Francesca Barion, Raffaele Miniaci, Paolo Panteghini and Maria Laura Parisi

No 2985, CESifo Working Paper Series from CESifo

Abstract: This article aims at analyzing the link between subsidiaries’ capital structure and taxation in Europe. First we introduce a trade-off model, which studies a MNCs’ financial strategy and shows how debt policy allows multinational groups to shift profits from low-tax to high-tax jurisdictions. By letting the MNC choose both leverage and the percentage of profit shifting, we depart from the relevant literature which has mainly focused on the latter. Using the AMADEUS dataset we show that: i) subsidiaries’ leverage increases with the statutory tax rate, levied in the country where it operates; ii) this positive effect is lower, the higher the parent company tax rate is. Furthermore, an increase in the parent company’s tax rate is estimated to raise its subsidiaries’ leverage.

Keywords: capital structure; default; multinationals; profit shifting; taxation (search for similar items in EconPapers)
JEL-codes: G31 H25 H32 (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Profit shifting by debt financing in Europe (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_2985

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