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Firm Responses to an Interest Barrier: Empirical Evidence

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  • Harju, Jarkko
  • Kauppinen, Ilpo
  • Ropponen, Olli

Abstract

This paper studies the effects of an interest barrier that was introduced in Finland to restrict the profit-shifting opportunities of multinational enterprises (MNEs). We employ full population data of Finnish, Swedish and Danish MNEs and a difference-in-differences methodology, where Swedish and Danish MNEs serve as a control group. We find that Finnish MNEs responded to the interest barrier by decreasing their financial expenses. Subsidiaries decreased also their longterm debt levels. We do not find evidence of debt-shifting being replaced by transfer pricing. Neither do we find evidence of changes in output, suggesting that the interest barrier did not create distortions by affecting the real activity of MNEs.

Suggested Citation

  • Harju, Jarkko & Kauppinen, Ilpo & Ropponen, Olli, 2017. "Firm Responses to an Interest Barrier: Empirical Evidence," Working Papers 90, VATT Institute for Economic Research.
    • Handle: RePEc:fer:wpaper:90
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    Cited by:

    1. Gideon Goerdt & Wolfgang Eggert, 2022. "Substitution across profit shifting methods and the impact on thin capitalization rules," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(3), pages 581-599, June.
    2. Christophe André & Hyunjeong Hwang, 2018. "Tax reform to support growth and employment in Finland," OECD Economics Department Working Papers 1468, OECD Publishing.
    3. Zarko Y. Kalamov, 2023. "Internal debt and welfare," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(1), pages 196-224, February.
    4. Baumann, Alexendra & Wohlrabe, Klaus, 2019. "Publikationen von Wirtschaftsforschungsinstituten im deutschsprachigen Raum - Eine bibliometrische Analyse [Publications of Economic Research Insitutes in the German Speaking Area - A bibliometric ," MPRA Paper 92240, University Library of Munich, Germany.
    5. Ropponen, Olli, 2021. "Interest Limitation Rules and Business Cycles: Empirical Evidence," ETLA Working Papers 90, The Research Institute of the Finnish Economy.

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    More about this item

    Keywords

    corporate taxation; multinational companies; yritysverotus; monikansalliset yritykset; pääomarakenne; korkovähennysrajoitus; Business regulation and international economics; G32; H25; H26;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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