Working Paper: CEPR ID: DP16068
Authors: Katarzyna Bilicka; Jing Xing; Yaxuan Qi
Abstract: We analyze how multinational firms reallocate real operations and debt across their affiliates in response to anti-tax avoidance policies. The UK introduced a worldwide debt cap in 2010, generating a quasi-natural experiment that limited interest deductibility for a group of multinational firms. We find that multinationals affected by the reform reduced the amount of debt held in the UK and increased debt held abroad. Affected multinationals reallocated a share of their real operations away from the UK. Our findings provide causal evidence for tax-motivated debt and real activity reallocation within multinationals and show how multinationals can circumvent tax avoidance regulations.
Keywords: debt shifting; multinational companies; capital reallocation
JEL Codes: H25; H26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Worldwide Debt Cap (WDC) (F34) | reduction in gateway ratios (F62) |
| Worldwide Debt Cap (WDC) (F34) | decrease in UK net debt (H63) |
| Worldwide Debt Cap (WDC) (F34) | increase in worldwide gross debt (F65) |
| Worldwide Debt Cap (WDC) (F34) | reallocation of real activities (R30) |
| Worldwide Debt Cap (WDC) (F34) | shift of operations to non-UK jurisdictions (F29) |
| Foreign MNCs (F23) | greater flexibility in circumventing WDC (Y50) |
| Domestic MNCs (F23) | lesser flexibility in circumventing WDC (L15) |