Vortrag
Heterogeneity in Tax-Motivated Profit Shifting and Its Effects on Corporate Investment

Martin Simmler


28th Annual Congress of the European Economic Association : EEA 2013
Göteborg, Schweden, 26.08.2013 - 30.08.2013



Abstract:
This study provides evidence on the causal impact of debt shifting activities of multinational companies on capital accumulation. My identification strategy exploits the corporate tax reform 2008 in Germany as a quasi-natural experiment. This reform reduced the corporate income tax rate by 10 percentage points. Depending on the location of the parent company, the reform abolished the tax incentive to shift profits abroad via debt financing for some German subsidiaries. I show that these firms react less to the reduction in the German corporate income tax, although their debt ratio declined stronger. Further, I present evidence that the tax rate of the parent company matters for the investment spending of the subsidiary only if firms use debt shifting.

Abstract

This study provides evidence on the causal impact of debt shifting activities of multinational companies on capital accumulation. My identification strategy exploits the corporate tax reform 2008 in Germany as a quasi-natural experiment. This reform reduced the corporate income tax rate by 10 percentage points. Depending on the location of the parent company, the reform abolished the tax incentive to shift profits abroad via debt financing for some German subsidiaries. I show that these firms react less to the reduction in the German corporate income tax, although their debt ratio declined stronger. Further, I present evidence that the tax rate of the parent company matters for the investment spending of the subsidiary only if firms use debt shifting.



JEL-Classification: H25;F23;G31;G32
Keywords: Debt shifting, capital accumulation, corporate income taxation
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