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Corporate Taxes and Internal Borrowing Within Multinational Firms

Type of publication Peer-reviewed
Publikationsform Original article (peer-reviewed)
Publication date 2014
Author Keuschnigg Christian, Egger Peter, Merlo Valeria, Wamser Georg ,
Project Taxation, Banking, and Sovereign Risk
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Original article (peer-reviewed)

Journal American Economic Journal: Economic Policy
Volume (Issue) 6(2)
Page(s) 54 - 93
Title of proceedings American Economic Journal: Economic Policy
DOI 10.1257/pol.6.2.54


This study develops a theoretical model of a multinational firm with an internal capital market. Hypotheses regarding the role of local versus foreign characteristics such as profit tax rates, lack of institutional quality, financial underdevelopment, and productivity for internal debt financing at the level of foreign affiliates are derived and assessed empirically in a panel dataset covering the universe of German multinationals. We show that differences in nontax incentives given by fundamentals in local and foreign markets can offset or reinforce tax incentives. The results point at a many times higher tax-sensitivity of internal debt financing compared to previous research.