Free DP Download 29 April 2021 - REAL RESPONSES TO ANTI-TAX AVOIDANCE: Evidence from the UK Worldwide Debt Cap

Thursday, April 29, 2021

REAL RESPONSES TO ANTI-TAX AVOIDANCE: Evidence from the UK Worldwide Debt Cap
Katarzyna Bilicka, Yaxuan Qi, Jing Xing
CEPR DP No. 16068 April 2021

The UK’s worldwide debt cap (WDC) reform in 2010, part of a new “worldwide approach” to anti-tax avoidance measures, was effective at curbing excessive borrowing by Multinational Corporations (MNCs) in the UK. It also resulted in MNCs shifting significant proportions of their real business activities overseas, with foreign countries benefitting from the reallocation of investment and employment. However, the reallocation of business activities did not bring more tax revenue to foreign countries due to debt shifting occurring at the same time.

These are among the main findings of a new CEPR study by Katarzyna Bilicka, Yaxuan Qi and Jing Xing, which provides the very first empirical investigation of the impact of a new form of debt-related anti-tax avoidance policy affects multinationals' debt and real activities allocations, using the UK as a case study. Among the findings: .

  • MNCs adjust their debt, operations, and organizational structures across different jurisdictions in response to the WDC. 
  • Multinationals affected by the reform reduced the amount of debt held in the UK and increased debt held abroad, shifting debt across borders to minimise the impact of the WDC.
  • Only foreign MNCs reduced the size of their UK operations significantly, while expanding the size of their non-UK operations more than domestic MNCs.
  • The WDC helped the UK tax authority to increase tax payments from affected domestic MNCs.
  • As affected foreign MNCs significantly reduced the size of their UK real operations, the WDC failed to collect more tax revenue from them even with their lower level of UK net debt.
  • Although affected MNCs shift debt abroad, their foreign tax payments did not significantly change.
  • Affected multinationals shrank their business operation in the UK while expanding it elsewhere. On average, over the period 2010-2014, affected MNCs reduced total assets, fixed assets, and employment in the UK by 7.5%, 11.4%, and 3.9% respectively.
  • Foreign countries, on the other hand, benefit from such reallocation as investment and employment shift there. However, the reallocation of business activities did not bring  more tax revenue to foreign countries due to debt shifting occurring at the same time.

Such measures are becoming more prominent policy tools, with countries like the United States implementing similar restrictions in December 2017. These findings provide causal evidence for tax-motivated debt and real activity reallocation within multinationals and show how multinationals can circumvent tax avoidance regulations. 


 

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