German Inbound Investment, Corporate Tax Planning, and Thin-Capitalization Rules - A Difference-in-Differences Approach

Taxes play an important role in determining the capital structure of companies. Consequently,a multinational company would choose its capital structure according to differencesin international taxation. Unlike purely national firms, multinationals can also use intercompanyloans to shift profits between jurisdictions. Typically, high taxing countries tryto restrict such inter-company loans by imposing so-called thin-capitalization or earningstripping rules in order to limit adverse revenue consequences. Although, these rules aretheoretically suitable to get higher tax revenues, it is unclear whether governments caneffectively limit inter-company debt shifting.This paper investigates tax planning behavior by means of inter-company finance and theeffectiveness of fighting back via thin-capitalization rules. By using a simple theoreticalmodel, which considers the financing decision of a multinational and additionally takes intoaccount a thin-capitalization rule, we show the tax response of the internal debt share... [Michael Overesch, Georg Wamser)