The Impact of Thin Capitalization Rules on the Location of Multinational Firms' Foreign Affiliates

Valeria Merlo, Nadine Riedel and Georg Wamser

No 5449, CESifo Working Paper Series from CESifo

Abstract: This paper examines how restrictions on the tax-deductibility of interest cost affect location choices of multinational corporations (MNCs). Many countries have introduced so-called thin-capitalization rules (TCRs) to prevent MNCs from shifting tax base to countries with lower tax rates. As of 2012, in our sample of 172 countries, 61 countries have implemented a TCR. Using information on nearly all new foreign investments of German MNCs, we provide a number of new and interesting insights in how TCRs affect the decision of where to locate foreign entities. These results include estimates of own- and cross-elasticities of location choice and also novel results on the relative importance of tax base vs. tax rate effects. We finally provide estimates for different uncoordinated as well as coordinated policy scenarios.

Keywords: corporate taxes; location choices; multinational corporations; thin capitalization laws (search for similar items in EconPapers)
JEL-codes: H20 H70 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: The impact of thin‐capitalization rules on the location of multinational firms’ foreign affiliates (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_5449

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