Capital Structure and International Debt Shifting

By Harry Huizinga, G. Nicodème, Luc Leaven. Social Science Research Network, 2007

514 citations recorded by the source corpus.

This paper presents a model of a multinational firm's optimal debt policy that incorporates international taxation factors. The model yields the prediction that a multinational firm's indebtedness in a country depends on a weighted average of national tax rates and differences between national and foreign tax rates. These differences matter as multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested using a novel firm-level dataset for European multinationals and their subsidiaries, combined with newly collected data on the international tax treatment of dividend and interest streams. The empirical results show that corporate debt policy indeed not only reflects domestic corporate tax rates but also differences in international tax systems. These findings contribute to understanding how corporate debt policy is set in an international context.

Subfields: Accounting

View Paper: https://www.semanticscholar.org/paper/43f97e4c3f51f9edc94f43b648dec7faaafd46ed

How researchers see this paper

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In Accounting

1. L. Simone
2. G. Wamser
3. Luc Laeven
4. P. Panteghini
5. Thiess Buettner
6. M. Runkel
7. G. Nicodème
8. Andreas Haufler

Citations in the corpus

• The capital structure of multinational companies under tax competition (2009, background): “This result is in line with the model estimated by Huizinga et al. (2006) .”
• Thin Capitalization Rules and Multinational Firm Capital Structure (2014, background): “Similar to Desai, Hines and Foley (2004), Huizinga, Laeven, and Nicodème (2008) report that a 10% increase in the local tax rate is associated with a rise in the ratio of a foreign affiliate’s total debt to assets ratio of about 2% using data from 32 European countries between 1994 and 2003.”
• Firms' Financial Choices and Thin Capitalization Rules under Corporate Tax Competition (2012, background): “Huizinga et al. (2008) provide more general evidence that the capital structure of European multinationals is adapted in a tax-minimizing way to international differences in corporate tax systems and rates.”
• International Trade, Multinational Activity, and Corporate Finance (2015, unknown): “For example, Huizinga et al. (2008) analyze the capital structure of European multinationals and show that these firms actively use debt in managing their tax exposure.”
• INTERNAL DEBT AND MULTINATIONAL PROFIT SHIFTING: EMPIRICAL EVIDENCE FROM FIRM-LEVEL PANEL DATA (2013, background): “While it proved impossible to augment the current analysis based on 145 countries with information about withholding taxes, Huizinga et al. (2008) note that withholding taxes on interest payments are mainly zero within Europe, where most of the foreign direct investment of German multinationals is…”
• Capital Structure, Corporate Taxation and Firm Age (2012, unknown): “…payments by shifting debt from a low-tax jurisdiction to a high-tax jurisdiction taking advantage of the high-interest deduction in the high-tax jurisdiction (see Desai, Foley and Hines 2004, Huizinga, Laeven and Nicod´eme 2008, Egger, Eggert, Keuschnigg and Winner 2010, for empirical evidence).”
• Saving Taxes Through Foreign Plant Ownership (2010, unknown): “The third aforementioned line of work determines a multinational firm’s optimal debt policy depending on taxation (see, e.g., Grubert and Mutti, 1991; Hines and Rice, 1994; Weichenrieder, 1998; Desai, Foley, and Hines, 2004; Huizinga, Laeven, and Nicodème, 2006).”
• Do Transfer Pricing Laws Limit International Income Shifting? Evidence from European Multinationals (2013, unknown): “Altshuler and Grubert (2003), Huizinga et al. (2008) and Buettner and Wamser (2013) moreover determine the effect of corporate taxation on the multinational’s debt-equity structure providing evidence in favour of tax-motivated debt-shifting.”
• The international zero-leverage phenomenon (2013, unknown): “An explanation is that multinational firms are able to shift their leverage into countries with the most favorable tax regime, and thus the country of origin’s tax code is not restrictive in their choice of leverage (Desai and Dharnapal, 2004; Huizinga et al., 2008).”
• Capital Structure Choice and Company Taxation: A Meta-Study (2013, unknown): “More recently, improved data availability favored the assessment of tax effects on capital structures of European multinationals (Huizinga et al. (2008); Buettner et al. (2009); Mintz and Weichenrieder (2010)).”