Firms' Financial Choices and Thin Capitalization Rules under Corporate Tax Competition

By Andreas Haufler, M. Runkel. Social Science Research Network, 2012

154 citations recorded by the source corpus.

Thin capitalization rules have become an important element in the corporate tax systems of developed countries. This paper sets up a model where national and multinational firms choose tax-efficient financial structures and countries compete for multinational firms through statutory tax rates and thin capitalization rules that limit the tax-deductibility of internal debt flows. In a symmetric tax competition equilibrium, each country chooses inefficiently low tax rates and inefficiently lax thin capitalization rules. We show that a coordinated tightening of thin capitalization rules benefits both countries, even though it intensifies competition via tax rates. When countries differ in size, the smaller country not only chooses the lower tax rate but also the more lenient thin capitalization rule.

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

View Paper: https://www.semanticscholar.org/paper/273c4e4f8b9d85199c04a42628060621b5f856de

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Citations in the corpus

Thin Capitalization Rules and Multinational Firm Capital Structure (2014, background): “3 At a theoretical level, Haufler and Runkel (2012) show that tax competition between two identical countries leads to inefficiently low tax rates and inefficiently lax thin capitalization rules (and inefficiently high tax-deductible internal debt of multinational firms), hence a coordinated tighten”
The impact of thin-capitalization rules on the capital structure of multinational firms (2012, unknown): “…theoretical literature, restricting opportunities for tax planning might result in adverse consequences for multinationals’ investment and reinforce tax competition (Keen, 2001; Janeba and Smart, 2003; Peralta, Wauthy and van Ypersele, 2006; Bucovetsky and Haufler, 2008; Haufler and Runkel, 2008).”