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

Author

Listed:
  • Andreas Haufler

    (University of Munich)

  • Marco Runkel

    (University of Magdeburg)

Abstract
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.

Suggested Citation

  • Andreas Haufler & Marco Runkel, 2008. "Firms' financial choices and thin capitalization rules under corporate tax competition," Working Papers 0815, Oxford University Centre for Business Taxation.
    • Handle: RePEc:btx:wpaper:0815
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    References listed on IDEAS

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    More about this item

    Keywords

    thin capitalization; capital structure; tax competition;
    All these keywords.

    JEL classification:

    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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