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|
|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.