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Thin Capitalization Rules And Multinational Firm Capital Structure
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Book Synopsis Thin Capitalization Rules and Multinational Firm Capital Structure by : Jennifer Blouin
Download or read book Thin Capitalization Rules and Multinational Firm Capital Structure written by Jennifer Blouin and published by International Monetary Fund. This book was released on 2014-01-24 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals. We construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. Using confidential data on the internal and total leverage of foreign affiliates of US multinationals, we find that thin capitalization rules significantly affect multinational firm capital structure. Specifically, restrictions on an affiliate’s debt-to-assets ratio reduce this ratio on average by 1.9%, while restrictions on an affiliate’s borrowing from the parent-to-equity ratio reduce this ratio by 6.3%. Also, restrictions on borrowing from the parent reduce the affiliate’s debt-to-assets ratio by 0.8%, which shows that rules targeting internal leverage have an indirect effect on the overall indebtedness of affiliate firms. The impact of capitalization rules on affiliate leverage is higher if their application is automatic rather than discretionary. Furthermore, thin capitalization regimes have aggregate firm effects: they reduce the firm’s aggregate interest expense but lower firm valuation. Overall, our results show than thin capitalization rules, which thus far have been understudied, have a substantial effect on the capital structure within multinational firms, with implications for the firm’s market valuation.
Book Synopsis Thin Capitalization Rules and Multinational Firm Capital Structure by : Jennifer Blouin
Download or read book Thin Capitalization Rules and Multinational Firm Capital Structure written by Jennifer Blouin and published by . This book was released on 2014 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals. We construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. Using confidential data on the internal and total leverage of foreign affiliates of US multinationals, we find that thin capitalization rules affect multinational firm capital structure in a significant way. Specifically, restrictions on an affiliate's debt-to-assets ratio reduce this ratio on average by 1.9%, while restrictions on an affiliate's borrowing from the parent-to-equity ratio reduce this ratio by 6.3%. Also, restrictions on borrowing from the parent reduce the affiliate's debt to assets ratio by 0.8%, which shows that rules targeting internal leverage have an indirect effect on the overall indebtedness of affiliate firms. The impact of capitalization rules on affiliate leverage is higher if their application is automatic rather than discretionary. Furthermore, we show that thin capitalization regimes have aggregate firm effects: they reduce the firm's aggregate interest expense bill but lower firm valuation. Overall, our results show than thin capitalization rules, which thus far have been understudied, have a substantial effect on the capital structure within multinational firms, with implications for the firm's market valuation.
Book Synopsis Thin Capitalization Rules and Multinational Firm Capital Structure by :
Download or read book Thin Capitalization Rules and Multinational Firm Capital Structure written by and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Impact of Thin-Capitalization Rules on Multinationals' Financing and Investment Decisions by : Thiess Büttner
Download or read book The Impact of Thin-Capitalization Rules on Multinationals' Financing and Investment Decisions written by Thiess Büttner and published by . This book was released on 2016 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the effectiveness of thin-capitalization rules in preventing debt finance by intercompany loans and explores their consequences for corporate decisions. A theoretical discussion emphasizes that limitations of the deduction of interest owed to foreign affiliates would not only affect multinationals' capital structure choice but also investment. An empirical investigation exploits a large firm-level panel dataset of multinationals in order to analyze the impact of thin-capitalization rules on capital structure choice and investment in the OECD and some further European countries in the time period between 1996 and 2004. The results indicate that thin-capitalization rules are effective in curbing tax planning via intercompany loans. However, investment is found to be adversely affected.
Book Synopsis At A Cost: The Real Effects of Thin Capitalization Rules by : Ruud A. de Mooij
Download or read book At A Cost: The Real Effects of Thin Capitalization Rules written by Ruud A. de Mooij and published by International Monetary Fund. This book was released on 2021-02-05 with total page 17 pages. Available in PDF, EPUB and Kindle. Book excerpt: Thin capitalization rules (TCRs) aim to mitigate profit shifting by multinational corporations (MNCs) but, by raising the cost of capital for affected affiliates, can also negatively affect real investment. Exploiting unique panel data on multinational companies in 34 countries during 2006-2014, we estimate that the size of this adverse investment effect can be large, and dependent on the statutory corporate tax rate and the tightness of the safe-haven ratio. Negative investment effects are more pronounced for highly-levered firms for which TCRs are more likely to be binding.
Book Synopsis The Capitalization Rules and Multinational Firm Capital Structure by : Jennifer Blouin
Download or read book The Capitalization Rules and Multinational Firm Capital Structure written by Jennifer Blouin and published by . This book was released on 2014 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Impact of Thin-Capitalization Rules on Multinationals' Financing and Investment Decisions by : Thiess Buettner
Download or read book The Impact of Thin-Capitalization Rules on Multinationals' Financing and Investment Decisions written by Thiess Buettner and published by . This book was released on 2008 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the role of Thin-Capitalization rules for capital structure choice and investment decisions of multinationals. A theoretical analysis shows that the imposition of such rules tends to affect not only the leverage and the level of investment but also their tax-sensitivity. An empirical investigation of leverage and investment reported for affiliates of German multinationals in 24 countries in the period between 1996 and 2004 offers some support for the theoretical predictions. While Thin-Capitalization rules are found to be effective in restricting debt finance, investment is found to be more sensitive to taxes if debt finance is restricted.
Book Synopsis The Importance of Escape Clauses by : Martin Eckhoff Andresen
Download or read book The Importance of Escape Clauses written by Martin Eckhoff Andresen and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Escape clauses, where small firms are exempt from particular tax rules, is a crucial feature of a number of corporate tax schemes, but creates incentives to avoid taxation by manipulating the measures that determine inclusion. We evaluate the impact of thin capitalization rules, which commonly feature such escape clauses across the world, by exploiting the introduction of these rules in Norway in 2014. Combining difference-in-differences, regression discontinuity and bunching estimates, we show that what appears to be a strong response in the capital structure among exposed firms primarily reflect within-group reallocation of debt to avoid exposure to the rules. We observe sharp bunching among both new and existing subsidiaries at both thresholds for rule inclusion, and find that internal corporate group debt is offloaded to these bunching subsidiaries in order to avoid additional tax costs. As a result, significant and large effects on firm-level capital structure in response to the thin capitalization rules is driven by reshuffling of capital within corporate groups with little real effects. Re-estimating the difference-in-difference specification at the corporate group level confirms this finding, questioning the extent to which thin capitalization rules affect the real economy due to the presence of escape clauses.
Book Synopsis The Impact of Thin-capitalization Rules on Multinationals' Financing and Investment Decisions by : Thiess Büttner
Download or read book The Impact of Thin-capitalization Rules on Multinationals' Financing and Investment Decisions written by Thiess Büttner and published by . This book was released on 2008 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Curbing Corporate Debt Bias by : Ruud A. de Mooij
Download or read book Curbing Corporate Debt Bias written by Ruud A. de Mooij and published by International Monetary Fund. This book was released on 2017-02-10 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: Tax provisions favoring corporate debt over equity finance (“debt bias”) are widely recognized as a risk to financial stability. This paper explores whether and how thin-capitalization rules, which restrict interest deductibility beyond a certain amount, affect corporate debt ratios and mitigate financial stability risk. We find that rules targeted at related party borrowing (the majority of today’s rules) have no significant impact on debt bias—which relates to third-party borrowing. Also, these rules have no effect on broader indicators of firm financial distress. Rules applying to all debt, in contrast, turn out to be effective: the presence of such a rule reduces the debt-asset ratio in an average company by 5 percentage points; and they reduce the probability for a firm to be in financial distress by 5 percent. Debt ratios are found to be more responsive to thin capitalization rules in industries characterized by a high share of tangible assets.
Book Synopsis Capital Structure and International Debt Shifting by : Mr. Luc Laeven
Download or read book Capital Structure and International Debt Shifting written by Mr. Luc Laeven and published by International Monetary Fund. This book was released on 2007-02-01 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 because 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. Our 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 our understanding of how corporate debt policy is set in an international context.
Book Synopsis Why Countries Differ in Thin Capitalization Rules by : Mohammed Mardan
Download or read book Why Countries Differ in Thin Capitalization Rules written by Mohammed Mardan and published by . This book was released on 2015 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the absence of financial frictions, the purpose of thin capitalization rules is to limit multinational firms' possibilities of engaging in tax planning via debt shifting. This paper analyzes the effects of thin capitalization rules in the case where firms have limited access to external funding. First, we show that a host country allows positive internal interest deductions if its financial development is sufficiently low. This amount increases when the financial development of the host country worsens. Then we ask which of the two most common thin capitalization rules used in practice is better suited to maximizing welfare of the host country. We show that welfare under a safe haven rule is higher than under an earnings stripping rule if firms are not able to manipulate transfer prices. Welfare, however, can be higher under an earnings stripping rule if firms are able to manipulate transfer prices. The analysis provides an explanation for why countries differ in the strictness and in the type of thin capitalization rule.
Book Synopsis The Impact of Thin Capitalization Rules on Shareholder Financing by :
Download or read book The Impact of Thin Capitalization Rules on Shareholder Financing written by and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Tax Policy, Leverage and Macroeconomic Stability by : International Monetary Fund. Fiscal Affairs Dept.
Download or read book Tax Policy, Leverage and Macroeconomic Stability written by International Monetary Fund. Fiscal Affairs Dept. and published by International Monetary Fund. This book was released on 2016-12-10 with total page 78 pages. Available in PDF, EPUB and Kindle. Book excerpt: Risks to macroeconomic stability posed by excessive private leverage are significantly amplified by tax distortions. ‘Debt bias’ (tax provisions favoring finance by debt rather than equity) has increased leverage in both the household and corporate sectors, and is now widely recognized as a significant macroeconomic concern. This paper presents new evidence of the extent of debt bias, including estimates for banks and non-bank financial institutions both before and after the global financial crisis. It presents policy options to alleviate debt bias, and assesses their effectiveness. The paper finds that thin capitalization rules restricting interest deductibility have only partially been able to address debt bias, but that an allowance for corporate equity has generally proved effective. The paper concludes that debt bias should feature prominently in countries’ tax reform plans in the coming years.
Book Synopsis Capital Structure and Corporate Governance by : Lorenzo Sasso
Download or read book Capital Structure and Corporate Governance written by Lorenzo Sasso and published by Kluwer Law International B.V.. This book was released on 2013-08-01 with total page 248 pages. Available in PDF, EPUB and Kindle. Book excerpt: Despite a clear distinction in law between equity and debt, the results of such a categorization can be misleading. The growth of financial innovation in recent decades necessitates the allocation of control and cash-flow rights in a way that diverges from the classic understanding. Some of the financial instruments issued by companies, so-called hybrid instruments, fall into a grey area between debt and equity, forcing regulators to look beyond the legal form of an instrument to its practical substance. This innovative study, by emphasizing the agency relations and the property law claims embedded in the use of such unconventional instruments, analyses and discusses the governance regulation of hybrids in a way that is primarily functional, departing from more common approaches that focus on tax advantages and internal corporate control. The author assesses the role of hybrid instruments in the modern company, unveiling the costs and benefits of issuing these securities, recognizing and categorizing the different problem fields in which hybrids play an important role, and identifying legal and contracting solutions to governance and finance problems. The full-scale analysis compares the U.K. law dealing with hybrid instruments with the corresponding law of the most relevant U.S. jurisdictions in relation to company law. The following issues, among many others, are raised: decisions under uncertainty when the risks of opportunism of the parties is very high; contract incompleteness and ex post conflicts; protection of convertible bondholders in mergers and acquisitions and in assets disposal; use of convertible bonds to reorganise and restructure a firm; timing of the conversion and the issuer’s call option; majority-minority conflict in venture capital financing; duty of loyalty; fiduciary duties to preference shareholders; and financial contract design for controlling the board’s power in exit events. Throughout, the analysis includes discussion, comparison, and evaluation of statutory provisions, existing legal standards, and strategies for protection. It is unlikely that a more thorough or informative account exists of the complex regulatory problems created by hybrid financial instruments and of the different ways in which regulatory regimes have responded to the problems they raise. Because business parties in these jurisdictions have a lot of scope and a strong incentive to contract for their rights, this book will also be of uncommon practical value to corporate counsel and financial regulators as well as to interested academics.
Book Synopsis Taxes and the Financial Structure of German Inward FDI by : Fred Ramb
Download or read book Taxes and the Financial Structure of German Inward FDI written by Fred Ramb and published by . This book was released on 2005 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis International Corporate Tax Avoidance: A Review of the Channels, Magnitudes, and Blind Spots by : Sebastian Beer
Download or read book International Corporate Tax Avoidance: A Review of the Channels, Magnitudes, and Blind Spots written by Sebastian Beer and published by International Monetary Fund. This book was released on 2018-07-23 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper reviews the rapidly growing empirical literature on international tax avoidance by multinational corporations. It surveys evidence on main channels of corporate tax avoidance including transfer mispricing, international debt shifting, treaty shopping, tax deferral and corporate inversions. Moreover, it performs a meta analysis of the extensive literature that estimates the overall size of profit shifting. We find that the literature suggests that, on average, a 1 percentage-point lower corporate tax rate will expand before-tax income by 1 percent—an effect that is larger than reported as the consensus estimate in previous surveys and tends to be increasing over time. The literature on tax avoidance still has several unresolved puzzles and blind spots that require further research.
