The Effect of Tax Havens on Host Country Welfare

Thomas Gresik, Dirk Schindler and Guttorm Schjelderup

No 2015/19, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

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: Tax havens; welfare; multinational corporations; FDI; transfer pricing (search for similar items in EconPapers)
JEL-codes: F23 H25 O10 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2015-04-24
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Working Paper: The Effect of Tax Havens on Host Country Welfare (2015)
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