The Effect of Tax Havens on Host Country Welfare

Thomas Gresik, Dirk Schindler and Guttorm Schjelderup

No 5314, CESifo Working Paper Series from CESifo

Abstract: Multinational corporations can shift income into low-tax countries through transfer pricing and debt financing. While most developed countries use thin capitalization rules to limit the extent to which a subsidiary can be financed with internal debt, a number of developing countries do not. In this paper, we analyze the effect on FDI and host country welfare of thin capitalization rules when multinationals can also shift income via transfer prices. We show that while permissive thin capitalization limits may be needed in developing countries to attract FDI, the amount of debt financing allowed by the permissive limits facilitates more aggressive transfer pricing and results in lower host country welfare.

Keywords: multinationals; profit shifting; foreign direct investments; welfare (search for similar items in EconPapers)
JEL-codes: D69 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp5314.pdf (application/pdf)

Related works:
Working Paper: The Effect of Tax Havens on Host Country Welfare (2015)
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:ces:ceswps:_5314

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().