This note provides a novel argument why countries may have incentives to allow for some profit shifting to low-tax jurisdictions. The reason is that a tightening of transfer pricing policies by high-tax countries may lead to more aggressive tax rate competition by low-tax countries.

We present empirical evidence suggesting that the effect of the host country corporate tax rate on the debt ratio of multinational affiliates in developing economies is positive and larger than the same effect for affiliates in developed economies.