TY - JOUR AU - Egger, Peter AU - Keuschnigg, Christian AU - Merlo, Valeria AU - Wamser, Georg TI - Corporate Taxes and Internal Borrowing within Multinational Firms JF - National Bureau of Economic Research Working Paper Series VL - No. 18415 PY - 2012 Y2 - September 2012 DO - 10.3386/w18415 UR - http://www.nber.org/papers/w18415 L1 - http://www.nber.org/papers/w18415.pdf N1 - Author contact info: Peter Egger ETH Zurich Department of Management, Technology, and Economics Leonhardstrasse 21 8092 Zurich, Switzerland E-Mail: egger@kof.ethz.ch Christian Keuschnigg University of St.Gallen, FGN-HSG Varnbuelstrasse 19 CH-9000 St. Gallen Switzerland Tel: +41-71-224-3085 Fax: +41-71-224-2874 E-Mail: Christian.Keuschnigg@unisg.ch Valeria Merlo ETH Zurich Department of Management, Technology, and Economics Weinbergstrasse 35 8092 Zurich, Switzerland E-Mail: merlo@kof.ethz.ch Georg Wamser University of Tuebingen Department of Economics Melanchthonstr. 30 72070 Tuebingen, Germany E-Mail: georg.wamser@uni-tuebingen.de M1 - published as Peter Egger, Christian Keuschnigg, Valeria Merlo, Georg Wamser. "Corporate Taxes and Internal Borrowing within Multinational Firms," in Michael Devereux and Roger Gordon, organizers, "Business Taxation (Trans-Atlantic Public Economics Seminar)" American Economic Journal: Economic Policy, Volume 6, no. 2 (2014) M3 - presented at "Trans-Atlantic Public Economics Seminar", June 20-22, 2012 AB - This paper develops a theoretical model of multinational firms with an internal capital market. Main reasons for the emergence of such a market are tax avoidance through debt shifting and the existence of institutional weaknesses and financial frictions across host countries. The model serves to derive 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 at the level of a given foreign affiliate. The paper assesses hypotheses in a panel data-set covering the universe of German multinational firms and their internal borrowing. Numerous novel insights are gained. For instance, the tax-sensitivity found in this paper is many times higher than previous research suggests. This accrues mainly to three things: the consideration of the boundedness of the internal debt ratio as a dependent variable in comparison to its treatment as an unbounded variable in most of the previous work; the coverage of all (small and large) multinationals here rather than a focus on large units in previous work; and the inclusion of endogenous characteristics in other countries multinationals are invested in (due to endogenous weights) while previous work did not consider such effects at all or assumed them to be exogenous. Moreover, local and foreign (at other locations of a given affiliate) market conditions matter more or less symmetrically and in the opposite direction. There is a nonlinear trade-off between institutional quality or financial development on the one hand and higher profit tax rates on the other hand, and the strength of this trade-off depends on the characteristics of one location relative to the other ones a multinational firm has affiliates (or the headquarters) in. ER -