Restricted interest deductibility and multinationals’ use of internal debt finance
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This paper reconsiders the role of interest deductibility for internal debt financing of multinational corporations (MNCs). We provide quasi-experimental evidence using restrictions on interest deductibility through thin-capitalization rules. Explicitly distinguishing between firms subject to a binding restriction and unrestricted firms, a panel data sample selection model is used to explore the tax sensitivity of the capital structure of foreign subsidiaries of MNCs. Our results confirm that the tax incentive for using internal loans is effectively removed for restricted subsidiaries. While internal debt financing of unrestricted subsidiaries positively responds to taxes, the effects are relatively small.
KeywordsCorporate taxation Multinational firms Internal debt Thin-capitalization rules Sample selection
JEL ClassificationH25 G32 F23
Data access by the Deutsche Bundesbank and financial support by the German Science Foundation (DFG) are gratefully acknowledged.
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