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

Author

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  • Zarko Kalamov

Abstract

This paper analyzes how internal debt financing of multinational firms 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. If the multinational firm additionally manipulates transfer prices, the adverse short term welfare effects may extend to the long term.

Suggested Citation

  • Zarko Kalamov, 2020. "Not All Profit Shifting Is Created Equal? An Analysis of Internal Debt," CESifo Working Paper Series 8144, CESifo.
    • Handle: RePEc:ces:ceswps:_8144
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp8144.pdf
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    More about this item

    Keywords

    internal debt; profit shifting; tax havens;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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