At A Cost: The Real Effects of Thin Capitalization Rules

At A Cost: The Real Effects of Thin Capitalization Rules
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Volume/Issue: Volume 2021 Issue 023
Publication date: February 2021
ISBN: 9781513568553
$18.00
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Topics covered in this book

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Economics- Macroeconomics , Economics / General , International - Economics , debt shifting , multinational investment , corporate tax policy , thin capitalization rules

Summary

Thin capitalization rules (TCRs) aim to mitigate profit shifting by multinational corporations (MNCs) but, by raising the cost of capital for affected affiliates, can also negatively affect real investment. Exploiting unique panel data on multinational companies in 34 countries during 2006-2014, we estimate that the size of this adverse investment effect can be large, and dependent on the statutory corporate tax rate and the tightness of the safe-haven ratio. Negative investment effects are more pronounced for highly-levered firms for which TCRs are more likely to be binding.