Not All Profit Shifting Is Created Equal? An Analysis of Internal Debt

Zarko Kalamov

No 8144, CESifo Working Paper Series from CESifo

Abstract: This paper analyzes how internal debt financing of multinational firms affects high-tax countries. It uses a dynamic small open economy model and takes into account that internal debt impacts both the multinational firms’ investment decisions and the government's tax policy. The government has incentives to redistribute income from firm owners to workers. If the government’s redistributive motive is not too strong, internal debt reduces welfare in the short term by decreasing tax revenues. However, debt financing stimulates capital accumulation and exerts a positive long term welfare impact. If the multinational firm additionally manipulates transfer prices, the adverse short term welfare effects may extend to the long term.

Keywords: internal debt; profit shifting; tax havens (search for similar items in EconPapers)
JEL-codes: F23 H25 H70 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-dge and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8144

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