Working Paper: CEPR ID: DP5882
Authors: Harry Huizinga; Luc Laeven; Gaetan Nicodeme
Abstract: This paper presents a model that relates a multinational firm's optimal debt policy to taxation and to non-tax factors such as the desire to prevent bankruptcy. The model yields the predictions that a multinational's indebtedness in a country depends on national tax rates and differences between national and foreign tax rates. These differences matter as multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested with the aid of a broad European data set combining firm-level data and information on the international tax treatment of dividend and interest streams. Corporate debt policy indeed appears to reflect national corporate tax rates and international corporate tax rate differences but not non-resident dividend withholding taxes.
Keywords: Corporate taxation; Debt shifting; Financial structure
JEL Codes: F23; G32; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| national tax rates (H29) | multinational firms' leverage (F23) |
| international tax rate differences (H87) | debt policy of subsidiaries (G32) |
| corporate tax policy (H32) | overall indebtedness (G32) |
| tax incentives for debt shifting (H26) | overall indebtedness (G32) |
| international debt shifting (F34) | average corporate income taxation in high-tax countries (H25) |