Not All Profit Shifting is Created Equal? An Analysis of Internal Debt

Kalamov, Zarko

doi:10.2139/ssrn.3552384

Cited by 1 publication

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References 42 publications

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“…This paper subsumes an earlier version that was entitled “Not all Profit Shifting is Created Equal? An Analysis of Internal Debt” (Kalamov, 2020). Open access funding enabled and organized by Projekt DEAL.…”

Section: Acknowledgmentsmentioning

confidence: 99%

Internal debt and welfare

Kalamov¹

2022

J Public Economic Theory

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This paper analyzes how multinational firms' internal debt financing affects high-tax countries. It uses a dynamic small open economy model and takes into account that internal debt impacts both the multinational firms' investment decisions and the government's tax policy.The government has incentives to redistribute income from firm owners to workers. If the government's redistributive motive is not too strong, internal debt reduces welfare in the short term by decreasing tax revenues.However, debt financing stimulates capital accumulation and exerts a positive long-term welfare impact. | INTRODUCTIONMultinational enterprises (MNEs) shift a large proportion of their profits to tax havens. In 2015 more than $600 billion, or 36% of multinationals' worldwide profits, were shifted (Tørsløv et al., 2018). Internal debt serves as one of the main channels of international tax planning and accounts for 25%-30% of the shifted profits (Beer et al., 2020;Heckemeyer & Overesch, 2017). Hence, in its initiative on base erosion and profit shifting, the OECD calls for, inter alia, measures to address base erosion through internal debt (OECD, 2013(OECD, , 2015. Moreover, the number of countries applying thin-capitalization rules (TCRs; i.e., rules that limit interest deductibility) increases over time (Merlo & Wamser, 2015). 1 Here, I analyze the welfare effects of internal debt in the short and long run. I show that these effects are not necessarily negative. Furthermore, they may be nonmonotone, with negative short-and positive long-term welfare implications.

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Section: Acknowledgmentsmentioning

confidence: 99%

Internal debt and welfare

Kalamov¹

2022

J Public Economic Theory

View full text Add to dashboard Cite

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Not All Profit Shifting is Created Equal? An Analysis of Internal Debt

Cited by 1 publication

References 42 publications

Internal debt and welfare

Internal debt and welfare

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