DP16068 Real Responses to Anti-tax Avoidance: Evidence from the UK Worldwide Debt Cap
Author(s): | Katarzyna Bilicka, Yaxuan Qi, Jing Xing |
Publication Date: | April 2021 |
Keyword(s): | capital reallocation, Debt shifting, Multinational companies |
JEL(s): | H25, H26 |
Programme Areas: | Public Economics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=16068 |
We analyze how multinational firms reallocate real operations and debt across their affiliates in response to anti-tax avoidance policies. The UK introduced a worldwide debt cap in 2010, generating a quasi-natural experiment that limited interest deductibility for a group of multinational firms. We find that multinationals affected by the reform reduced the amount of debt held in the UK and increased debt held abroad. Affected multinationals reallocated a share of their real operations away from the UK. Our findings provide causal evidence for tax-motivated debt and real activity reallocation within multinationals and show how multinationals can circumvent tax avoidance regulations.