Corporate Tax Policy, Foreign Firm Ownership and Thin Capitalization

By Clemens Fuest, Thomas E. Hemmelgarn. Social Science Research Network, 2005

135 citations recorded by the source corpus.

This paper analyzes the implications of foreign firm ownership and international profit shifting through thin capitalization for corporate tax policy. We consider a model of interjurisdictional tax competition where the corporate tax serves as a backstop to the personal income tax, interest on debt is deductible from the corporate tax base and multinational firms may shift profit across countries through thin capitalization. We show that the problem of thin capitalization induces countries to reduce their corporate tax rates below the personal income tax rate and to broaden their tax bases. Moreover, foreign firm ownership leads to a reduction in corporate tax rates. We also show that there is scope for welfare enhancing tax coordination in our model. In the presence of both foreign firm ownership and thin capitalization, countries gain from a coordinated increase in corporate tax rates or from a coordinated broadening of the tax base.

Subfields: Accounting, Economics and Econometrics, Political Science and International Relations

View Paper: https://www.semanticscholar.org/paper/2497aa6d25ee9f6706bc2f6760b527296578065c

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

1. Michael Overesch
2. G. Wamser
3. M. Runkel
4. P. Panteghini
5. Andreas Haufler
6. Dhammika Dharmapala

In Economics and Econometrics

1. M. Runkel
2. G. Wamser
3. P. Panteghini
4. Andreas Haufler
5. Michael Overesch
6. Dhammika Dharmapala

In Political Science and International Relations

1. G. Wamser
2. Michael Overesch
3. M. Runkel
4. P. Panteghini
5. Andreas Haufler

Citations in the corpus

• Corporate tax planning and thin-capitalization rules: evidence from a quasi-experiment (2010, background): “From a theoretical perspective, these rules are suitable for limiting profit shifting (e.g. Fuest and Hemmelgarn, 2005; Panteghini, 2006).”
• Firms' Financial Choices and Thin Capitalization Rules under Corporate Tax Competition (2012, methodology): “See Auerbach (2002) for more details and Fuest and Hemmelgarn (2005) for an analysis of tax competition when governments can choose both corporate and personal income taxes (but not thin capitalization rules).”
• The capital structure of multinational companies under tax competition (2009, background): “16For further details on this point see Fuest and Hemmelgarn (2005).”