Discussion Paper Details

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Title: Capital Structure and International Debt Shifting

Author(s): Harry Huizinga, Luc Laeven and Gaëtan Nicodème

Publication Date: October 2006

Keyword(s): corporate taxation, debt shifting and financial structure

Programme Area(s): Financial Economics

Abstract: This paper presents a model that relates a multinational firm's optimal debt policy to taxation and to non-tax factors such as the desire to prevent bankruptcy. The model yields the predictions that a multinational's indebtedness in a country depends on 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 with the aid of a broad European data set combining firm-level data and information on the international tax treatment of dividend and interest streams. Corporate debt policy indeed appears to reflect national corporate tax rates and international corporate tax rate differences but not non-resident dividend withholding taxes.

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Bibliographic Reference

Huizinga, H, Laeven, L and Nicodème, G. 2006. 'Capital Structure and International Debt Shifting'. London, Centre for Economic Policy Research.