Firms' financial choices and thin capitalization rules under corporate tax competition

Arbeitspapier

Thin capitalization rules have become an important element in the corporate tax systems of developed countries. This paper sets up a model where national and multinational firms choose tax-efficient financial structures and countries compete for multinational firms through statutory tax rates and thin capitalization rules that limit the tax-deductibility of internal debt flows. In a symmetric tax competition equilibrium each country chooses inefficiently low tax rates and inefficiently lax thin capitalization rules. We show that a coordinated tightening of thin capitalization rules benefits both countries, even though it intensifies competition via tax rates. When countries differ in size, the smaller country not only chooses the lower tax rate but also the more lenient thin capitalization rule.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 2429

Classification and Topics

• Classification: Wirtschaft ; State and Local Government; Intergovernmental Relations: Interjurisdictional Differentials and Their Effects ; Business Taxes and Subsidies including sales and value-added (VAT) ; Multinational Firms; International Business
• Subject: Thin capitalization ; capital structure ; tax competition ; Kapitalstruktur ; Körperschaftsteuerrecht ; Körperschaftsteuer ; Steuerwettbewerb ; Multinationales Unternehmen ; Finanzierung ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Haufler, Andreas ; Runkel, Marco
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/26474
• Last update: 10.03.2025, 11:45 AM CET