Faculty of Economics and Business Administration Publications Database

Corporate Tax Planning and Thin-Capitalization Rules: Evidence from a Quasi-Experiment

Overesch, Michael
Wamser, Georg
Volume: 42
Number: 5
Pages: 563 - 573
ISSN-Print: 0003-6846
Link External Source: Online Version
Year: 2010
Abstract: This article investigates tax-planning behaviour by means of inter-company finance and the effectiveness of government countermeasures via thin-capitalization rules. A simple theoretical model which considers the financing decision of a multinational company is used to obtain empirical implications. The empirical analysis, based on German inbound investment data from 1996 to 2004, confirms a significant impact of tax-rate differentials on the use of inter-company debt. The effectiveness of the German thin-capitalization rule is tested by using legal amendments as natural experiments. The results suggest that thin-capitalization rules induce significantly lower internal borrowing. Hence, tax planning via internal finance is effectively limited by thin-capitalization rules.