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Multinational financial structure and tax competition

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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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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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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  • DOI: https://doi.org/10.1007/BF03399396

JEL-Classification

  • F23
  • H25
  • H42
  • H73

Keywords

  • Multinational enterprises
  • financial policy
  • corporate taxation
  • tax competition