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Multinational financial structure and tax competition

Swiss Journal of Economics and Statistics volume 149, pages 381–404 (2013)Cite this article

Summary

This paper analyzes tax competition when welfare maximizing jurisdictions levy source-based corporate taxes and multinational enterprises choose tax-efficient capital-to-debt ratios. Under separate accounting, multinationals shift debt from low-tax to high-tax countries. The Nash equilibrium of the tax competition game is characterized by underprovision of publicly provided goods. Under formula apportionment, the country-specific capital-to-debt ratio of a multinational’s affiliate is independent of the jurisdiction’s tax rate. Public good provision is either too large or too small. However, there is clearly underprovision under formula apportionment if the debt externality is not negative.

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Authors and Affiliations

  1. School of Business and Economics, University of Erlangen-Nuremberg, 3931, 90020, Nuremberg, Germany

    Matthias Wrede

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  1. Matthias Wrede
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Correspondence to Matthias Wrede.

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A previous version of the paper titled “Multinational Capital Structure and Tax Competition” was presented at the CESifo Public Sector Economics conference in 2010, at PET 2010, at the IIPF congress 2010, and at a research seminar at the University of Magdeburg. Many thanks to the participants, in particular Nadine Riedel, and an anonymous referee and the editor of this journal, Klaus Neusser. The usual disclaimer applies.

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Open Access This article is distributed under the terms of the Creative Commons Attribution 2.0 International License ( https://creativecommons.org/licenses/by/2.0 ), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Wrede, M. Multinational financial structure and tax competition. Swiss J Economics Statistics 149, 381–404 (2013). https://doi.org/10.1007/BF03399396

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