International Debt Shifting: Do Multinationals Shift Internal Or External Debt?
Multinational companies can exploit the tax advantage of debt more aggressively than national companies by shifting debt from affiliates in low tax countries to affiliates in high tax countries. Previous papers have either omitted internal debt or external debt from the analysis. The authors are the first to model the companies' choice between internal and external debt shifting and show that it is optimal for them to use both types of debt to save taxes. Using a large panel of German multinationals, they find strong empirical support for their model. The estimated coefficients suggest that internal and external debt shifting is of about equal relevance.