Substitution across Profit-Shifting Methods and the Impact on Thin Capitalization Rules

Wolfgang Eggert and Gideon Goerdt

No 8046, CESifo Working Paper Series from CESifo

Abstract: Thin capitalization rules limit firms’ ability to deduct internal interest payments from taxable income, thereby restricting debt shifting activities of multinational firms. Since multinational firms can limit their tax liability in several ways, regulation of debt shifting may have an impact on other profit shifting methods. We therefore provide a model under which a multinational firm can shift profits out of a host country by issuing internal debt from an entity located in a tax haven and by manipulating transfer prices on internal goods and services. The focus of this paper is the analysis of regulatory incentives, (𝑖) if a multinational firm treats debt shifting and transfer pricing as substitutes or (𝑖𝑖) if the methods are not directly connected. The results provide an explanation for why hybrid thin capitalization rules are used. These insights can add to the existing literature since the results explain why hybrid rules can result in improvements in welfare if multinational firms treat methods of profit shifting as substitutes.

Keywords: thin capitalization rules; profit shifting methods; substitution (search for similar items in EconPapers)
JEL-codes: H20 H70 K30 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-pbe
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Journal Article: Substitution across profit shifting methods and the impact on thin capitalization rules (2022)
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