Real responses to anti-tax avoidance: Evidence from the UK Worldwide Debt Cap

We analyze how multinational firms reallocate real operations and debt across their affiliates in response to anti-tax avoidance policies. The UK introduced a worldwide debt cap in 2010, generating a quasi-natural experiment that limited interest deductibility for a group of multinational firms. We find that multinationals affected by the reform reduced the amount of debt held in the UK and increased debt held abroad. Affected multinationals reallocated a share of their real operations away from the UK. Our findings provide causal evidence for tax-motivated debt and real activity reallocation within multinationals and show how multinationals can circumvent tax avoidance regulations.11We would like to thank Jennifer Blouin, Steve Bond, Travis Chow, Mike Devereux, Jim Hines, Krzysztof Karbownik, James O’Donovan, Daniela Scur, Michael Stimmelmayr, Juan Carlos Suarez Serrato, Shiheng Wang, Bohui Zhang and three anonymous referees for their comments. Further thanks to the participants of National Tax Association conference, Utah Tax Invitational, China International Conference in Finance, Asia Meeting of Econometric Society, Ce2 workshop, Oxford University Centre for Business Taxation Summer Symposium, Fanhai International School of Finance at Fudan University seminar, Australian National University, International Institute of Public Finance Annual Congress and European Economic Association Congress for their helpful suggestions. Xing acknowledges financial support from National Natural Science Foundation of China (No. 71903125), Shanghai Pujiang Program (No. 16PJC056) and Shanghai Institute of International Finance and Economics. All omissions and errors are our own.