Thin capitalization rules and multinational firm capital structure.
Date: 2014-03-13
Institutions: Directorate-General for Taxation and Customs Union
Subjects: capital movement, corporation tax, market capitalisation, multinational enterprise, tax on capital, tax relief, tax system

  Thin Capitalization Rules and Multinational Firm Capital Structure 
Jennifer Blouin1 
(Wharton, University of Pennsylvania) 

Harry Huizinga 
(Tilburg University and CEPR) 

Luc Laeven 
(International Monetary Fund and CEPR) 

Gaëtan Nicodème 
(European Commission, ULB, CESifo and CEPR) 

December 2013 

Abstract:  This  paper  examines  the  impact  of  thin  capitalization  rules  that  limit  the  tax 
deductibility of interest on the capital structure of the foreign affiliates of US multinationals. We 
construct  a  new  data  set  on  thin  capitalization  rules  in  54  countries  for  the  period  1982-2004. 
Using  confidential  data  on  the  internal  and  total  leverage  of  foreign  affiliates  of  US 
multinationals, we find that thin capitalization rules affect multinational firm capital structure in 
a significant way. Specifically, restrictions on an affiliate’s debt-to-assets ratio reduce this ratio 
on average by 1.9%, while restrictions on an affiliate’s borrowing from the parent-to-equity ratio 
reduce this ratio by 6.3%. Also, restrictions on borrowing from the parent reduce the affiliate’s 
debt to assets ratio by 0.8%, which shows that rules targeting internal leverage have an indirect 
effect on the overall indebtedness of affiliate firms. The impact of capitalization rules on affiliate 
leverage  is  higher  if  their  application  is  automatic  rather  than  discretionary.  Furthermore,  we 
show  that  thin  capitalization  regimes  have  aggregate  firm  effects:  they  reduce  the  firm’s 
aggregate  interest  expense  bill  but  lower  firm  valuation.  Overall,  our  results  show  than  thin 
capitalization  rules,  which  thus  far  have  been  understudied,  have  a  substantial  effect  on  the 
capital structure within multinational firms, with implications for the firm’s market valuation. 

Key words: Thin capitalization rule; Multinational firm; Capital structure; Taxation 
JEL classifications: G32, H25 

1  Jennifer  Blouin  is  Associate  Professor  of  Accounting  at  Wharton,  University  of  Pennsylvania.  Contact 
information:  blouin@wharton.upenn.edu,  Phone:  (215)  898  1266;  Harry  Huizinga  is  Professor  of  Economics  at 
Tilburg University and Research Fellow at the CEPR; Luc Laeven is Lead Economist at the International Monetary 
Fund, Professor of Finance at Tilburg University, and Research Fellow at the CEPR; and Gaëtan Nicodème is Head 
of Unit at the European Commission’s General Directorate for Taxation and Customs Union and Adjunct Professor 
in Economics at ULB. The statistical analysis of firm-level data on U.S. multinational companies was conducted by 
Jennifer Blouin at the Bureau of Economic Analysis, Department of Commerce under arrangements that maintain 
legal confidentiality requirements. The views expressed in this study are those of the authors and do not reflect those 
of the US Department of Commerce, the European Commission, the IMF, or IMF Board. We appreciate the helpful 
comments  of  Fritz  Foley,  Niels  Johannesen,  Richard  Sansing,  Dirk  Schindler,  Terry  Shevlin,  and  seminar 
participants  at  the  University  of  Chicago,  Stanford  University,  Erasmus  University  in  Rotterdam,  the  Solvay 
Brussels School of Economics and Management, Free University of Brussels, the Norwegian School of Economics 
(NHH  Bergen),  the  University  of  North  Carolina’s  Global  Issues  in  Accounting  Conference,  the  2013  ZEW/CBT 
Conference in Mannheim, the 2013 CESifo Public Sector Conference, and Oxford University’s tax symposium. 

1 
 
 
 
 
 
 
                                                 
1.  Introduction 

Interest on debt is generally deductible from taxable income at the corporate level. This 

provides  firms  with  an  incentive  to  finance  their  operations  with  debt  rather  than  equity, 

especially in high tax countries (Graham, 1996, 2000; MacKie-Mason, 1990). To counteract the 

negative  consequences  of  debt  finance  for  tax  collection,  many  countries  have  instituted  thin 

capitalization  rules  that  restrict  the  deductibility  of  interest  above  a  certain  debt  level.  In 

principle,  multinational  enterprises  can  adjust  the  leverage  of  their  foreign  subsidiaries  easily 

through international debt shifting (Desai, Foley, and Hines, 2004; Huizinga, Laeven, Nicodème, 

2008).  This  suggests  that  quantitative  restrictions  on  foreign  affiliates  in  the  form  of  thin 

capitalization  rules  can  be  an  important  determinant  of  foreign  affiliate  leverage.  However, 

studies of capital structure in the corporate finance literature typically capture tax advantages of 

debt exclusively using information on tax rates, without consideration of other differences in tax 

codes  that  constrain  leverage  and  thus  the  value  of  tax  shields  (see,  for  example,  Rajan  and 

Zingales,  1995).  This  is  surprising  given  the  prevalence  of  these  measures  and  their  potential 

influence on capital structure decisions. Thin capitalization rules thus are an important source of 

understudied variation in tax rates in capital structure studies.  

This paper examines how thin capitalization rules worldwide affect the capital structure 

of  foreign  affiliates  of  US  multinational  firms.  Countries’  thin  capitalization  regimes  differ 

among  several  key  dimensions.  First,  they  tend  to  vary  in  the  definition  of  the  maximum  debt 

ratio,  beyond  which  interest  on  debt  is  no  longer  deductible.  The  definitions  of  the  maximum 

debt  ratios  fall  into  two  main  categories:  either  they  restrict  total  debt  (relative  to  assets  or 

alternatively  equity),  or  they  limit  debt  from  related  parties  (relative  to  equity).  Second,  thin 

capitalization  rules  differ  in  the  treatment  of  interest  on  debt  determined  to  be  excessive.  For 

2 
instance, interest deductibility may be denied only for interest on debt in excess of the limit or on 

all debt, and also possibly be requalified as a dividend with unfavorable tax consequences. Third, 

countries vary in the zeal of their enforcement of thin capitalization rules. In some countries, the 

rules trigger an automatic disallowance of interest deductions so there is not subjectivity in the 

thin capitalization thresholds. Yet, other countries apply some discretion in their application, and 

consider  the  corporate  indebtedness  at  similar,  but  unrelated,  firms  (i.e.,  firms  that  stand  at 

“arm’s length”) to determine whether interest deductibility is limited.  

The  effect  of  thin  capitalization  rules  on  multinational  firm  leverage  is  not  a  priori 

evident. Despite clear evidence from managerial survey results reported in Graham and Harvey 

(2001) that tax implications are important determinants of firm leverage, the empirical literature 

on taxation and capital structure, as reviewed in Auerbach (2002) and Graham (2003), has found 

it remarkably difficult to identify strong effects of tax incentives on capital structure, due in part 

to measurement problems and lack of variation in tax rates. This suggests we should expect to 

find  it  similarly  challenging  to  establish  strong  effects  of  thin  capitalization  rules  on  affiliate 

leverage.  Moreover,  thin  capitalization  rules  can  be  very  detailed  and  we  therefore  need  to 

capitalize on the heterogeneity in these rules to identify clear effects. As Desai, Foley, and Hines 

(2004)  point  out:  “These  rules  are  typically  vaguely  worded  and  seldom,  though  arbitrarily, 

imposed, making their effects difficult to analyze quantitatively; any impact they have is likely to 

reduce  the  estimated  significance  of  factors  influencing  total  indebtedness.”  Also,  their 

effectiveness  will  depend  on  the  extent  to  which  they  are  enforced  by  local  tax  authorities. 

Finally,  even  if  we  find  that  thin  capitalization  rules  constrain  affiliate  leverage,  as  one  would 

expect, it is not a priori clear what their impact is on overall firm leverage and valuation because 

3 
multinational  firms  can  relocate  debt  and  activity  away  from  countries  with  strict  thin 

capitalization rules.   

We address these concerns by using both broad measures of thin capitalization rules that 

simply  denote  whether  such  rules  are  in  place,  in  addition  to  specific,  well-defined  aspects  of 

thin capitalization rules, to thus strike a balance between power and precision in identifying the 

sensitivity of  affiliate leverage to thin  capitalization rules. Moreover, we achieve  identification 

by exploiting the substantial cross-country and time variation in thin capitalization rules, and by 

considering the differential impact of these rules across affiliates within the same multinational 

firm, thus contributing to the broader literature on taxation and debt, where the lack of variation 

in  corporate  income  tax  rates  has  made  it  difficult  to  isolate  taxation  effects.  In  addition,  we 

study the aggregate implications of thin capitalization rules by investigating their impact on the 

firm’s overall leverage, interest expense bill, and market valuation. 

For  our  empirical  analysis,  we  have  constructed  a  unique  data  set  on  each  of  these 

dimensions of thin capitalization regimes for 54 countries over the years 1982-2004. The end of 

the sample period is determined by the last year for which we have detailed debt information on 

foreign affiliates.2 There is much variation across countries both in terms of the existence of thin 

capitalization rules and whether such rules apply to total or internal leverage. For 2004, we find 

that 27 of these 54 countries had enacted explicit thin capitalization regimes. This group can be 

divided into 16 countries that restricted total leverage (i.e., the ratio of total debt to assets), while 

11  countries  restricted  internal  leverage  (i.e.,  the  ratio  of  debt  from  related  parties  to  equity). 

Furthermore, 17 countries apply their thin capitalization rules automatically, while 10 countries 

apply discretion based on comparisons with corporate indebtedness in arm’s length situations. 

2 Note that the 2009 BEA annual (BE-10 and BE-11) surveys do not include as detailed information on the types of 
liabilities as prior surveys. 

4 
                                                 
Our  empirical  analysis  relates  information  on  the  existence  and  stringency  of  thin 

capitalization regimes to the total or internal leverage of foreign affiliates of US multinationals 

using  confidential  data  from  the  US  Bureau  of  Economic  Analysis.  Given  the  prevalence  of 

restrictions  on  total  leverage  in  2004,  we  first  consider  how  these  restrictions  affect  the  total 

leverage of foreign affiliates. On average, the existence of a total leverage restriction reduces an 

affiliate’s total leverage by 1.9%. Stricter regimes reduce total leverage more; we find that lower 

allowable total leverage ratios are associated with lower levels of leverage.  

In analogous fashion, we consider the impact of thin capitalization rules that limit internal 

leverage  on  US  affiliate  internal  leverage.  The  existence  of  such  rules  on  average  reduces  the 

internal leverage ratio by 6.3%. In addition, internal leverage declines with the allowable internal 

leverage  ratio.  The  large  average  impact  of  restrictions  on  internal  debt  may  reflect  that 

multinationals can easily adjust internal leverage on the basis of tax considerations.  

A  high  responsiveness  of  internal  debt  to  restrictions  on  internal  leverage  suggests  that 

such restrictions can have a material impact on  an affiliate’s total leverage as well. Indeed, we 

find that  the existence of  restrictions  on internal  leverage on  average  reduces total  leverage by 

0.8%.  Restrictions  on  internal  leverage  thus  materially  affect  the  foreign  affiliate’s  overall 

leverage, going beyond affecting whether the parent firm funds its foreign affiliate through debt 

or equity. 

The  impact  of  thin  capitalization  rules  on  leverage  ratios  depends  importantly  on  how 

they  are  applied.  The  impact  of  the  existence  of  thin  capitalization  rules  generally  on  total 

leverage,  in  particular,  is  about  twice  as  large  if  their  application  is  objective  (i.e.,  automatic 

rather  discretionary).  In  addition,  an  impact  on  total  leverage  of  internal  leverage  restrictions 

specifically is only found if its application is automatic. 

5 
As  an  extension,  we  exploit  variation  over  time  in  thin  capitalization  rules  to  examine 

how  new  thin  capitalization  regimes  affect  the  various  leverage  ratios  in  the  first  years   

following their introduction by estimating  regressions of our leverage ratios in first differences 

between benchmark years. The short-term response of thin capitalization rules generally tends to 

be  smaller  than  the  average  or  long-term  response.  However,  total  leverage  (internal  leverage) 

responds quickly and fully to the introduction of a total (internal) leverage restriction. 

Furthermore, we show that thin capitalization regimes have aggregate firm effects. They 

reduce the multinational firm’s aggregate interest expense bill and lower the overall valuation of 

the  firm,  consistent  with  a  reduced  worldwide  deductibility  of  interest  from  taxable  income. 

Taken  together,  our  results  suggest  that  thin  capitalization  rules  are  an  effective  policy 

instrument to constrain leverage within the prescribed limits, with implications for firm valuation 

as a whole. 

Previously, Desai, Foley and Hines (2004) have examined the impact of taxation on the 

capital  structure  of  US  multinationals  using  the  same  data  source  from  the  US  Bureau  of 

Economic Analysis. Using data over the 1982-1994, they  find that a 10% increase  in the host-

country  tax  rate  raises  the  total  debt  to  assets  ratio  of  US  foreign  affiliates  by  2.6%  (in  their 

regression  1  of  Table  II).  We  extend  their  analysis  by  considering  the  joint  impact  of  host-

country taxation and thin capitalization rules on affiliate leverage through 2004. In a regression 

analogous to Desai, Foley and Hines (2004), we find that a 10% higher local tax increases the 

total debt to assets ratio by 2.0%, consistent with their findings for an earlier period.  

Other  work  on  the  impact  of  taxation  on  the  capital  structure  of  multinational  firms 

similarly  tends  to  ignore  thin  capitalization  rules.  Similar  to  Desai,  Hines  and  Foley  (2004), 

Huizinga,  Laeven,  and  Nicodème  (2008)  report  that  a  10%  increase  in  the  local  tax  rate  is 

6 
associated  with  a  rise  in  the  ratio  of  a  foreign  affiliate’s  total  debt  to  assets  ratio  of  about  2% 

using data from 32 European countries between 1994 and 2003. Similar results are also obtained 

by  Mintz  and  Weichenrieder  (2005)  using  data  on  the  foreign  subsidiaries  of  German 

multinational  firms.  Using  data  on  affiliates  of  US  multinationals,  as  we  do,  Hines  and  Rice 

(1994) show that US firms typically can arrange their finances to benefit from the deductibility 

of interest expense in high-tax countries by deferring US taxes until profits are repatriated from 

foreign  affiliates.  Froot  and  Hines  (1995)  examine  the  effects  of  limits  to  the  deductibility  of 

interest  expenses  due  to  the  US  allocation  rules  on  the  financing  of  US  multinational  firms; 

Desai and Hines (1999) analyze changes in joint venture capital structure in response to foreign 

tax credit limitations; Altshuler and Grubert (2003) study inter-affiliate transactions motivated by 

tax rules among affiliates of US multinationals; and Newberry and Dhaliwal (2001) examine the 

role  of  local  tax-loss  carry-forwards  on  the  international  location  of  debt  issuance  by  US 

multinationals.  

To  the  best  of  our  knowledge,  ours  is  the  first  paper  to  consider  the  role  of  thin 

capitalization rules in the context of US multinational firms. Empirical analysis on the economic 

effects  of  thin  capitalization  rules  has  so  far  been  limited  to  German  firms,  using  the 

Bundesbank’s MiDi database, which provides data on German multinationals  and  their  foreign 

affiliates. A first set of papers investigate the impact of a change to Germany’s thin cap rule in 

2001,  which  reduced  the  limit  on  the  internal  debt  to  equity  ratio  from  3  to  1.5,  on  affiliate 

leverage. Wamser (2008) finds that firms for which the rule was binding prior to the 2001 reform 

increased their external debt to capital ratio by 2.5% compared to those for which the rule was 

not  binding.  Weichenrieder  and  Windischbauer  (2008)  find  a  similar  result  and  point  to  a 

loophole in the legislation which offers a more lenient thin cap rule for holding companies.  

7 
A second set of papers look more generally at the effectiveness of thin capitalization rules 

in  the  host  countries  of  foreign  affiliates  of  German  multinationals.  Overesch  and  Wamser 

(2010)  find  a  negative  effect  of  thin  capitalization  rules  on  internal  debt  based  on  German 

inbound investment data from 1996 to 2004. Finally, Buettner, Overesch, Schreiber and Wamser 

(2012) take into account information on thin capitalization rules to investigate the tax sensitivity 

of the capital structure of the foreign subsidiaries of German multinationals.3 In particular, they 

use data on the existence and maximum debt ratio of thin capitalization regimes in 29 countries 

over the 1996-2004 period. They report that the existence of a thin capitalization rule reduces the 

impact of a 10% tax increase on the ratio of total debt to assets for German foreign subsidiaries 

from  2.1%  to  1.6%.  Their  regression  analysis,  however,  does  not  directly  control  for  the 

existence  of  thin  capitalization  rules,  and  thus  potentially  confounds  the  direct  impact  of  thin 

capitalization rules per se with their indirect effect through a changed tax sensitivity of leverage. 

In our estimation, we explicitly include information on thin capitalization rules where indicated. 

In  addition,  we  collect  information  on  thin  capitalization  rules  for  a  much  broader  set  of  54 

countries, which allows us to distinguish the effects of the existence of thin capitalization rules 

targeting  total  versus  internal  leverage  on  foreign-affiliate  capital  structure.  Furthermore,  our 

data  set  on  thin  capitalization  rules  is  more  detailed,  which  allows  us  to  estimate  how  various 

features of thin capitalization regimes, including the method of applying thin capitalization rules, 

affect their impact on foreign-affiliate capital structure. And, unlike existing work, we consider 

the aggregate implications for leverage and valuation for the firm as a whole. 

3 At a theoretical level, Haufler and Runkel (2012) show that tax competition between two identical countries leads 
to  inefficiently  low  tax  rates  and  inefficiently  lax  thin  capitalization  rules  (and  inefficiently  high  tax-deductible 
internal  debt  of  multinational  firms),  hence  a  coordinated  tightening  of  thin  capitalization  rules  benefits  both 
countries, even though it intensifies competition via tax rates. 

8 
                                                 
The  paper  continues  as  follows.  Section  2  presents  our  international  data  set  on  thin 

capitalization rules. Section 3 discusses the firm-level and other country-level data used in this 

study. Section 4 presents the empirical results. Section 5 concludes. 

2.  Thin capitalization rules 

This  section  describes  our  international  data  set  on  thin  capitalization  regimes.  We  have 

collected  information  on  the  existence  and  main  features  of  thin  capitalization  regimes  in  54 

countries  over  the  1980-2004  period.  This  information  has  been  gathered  from  a  variety  of 

sources,  including  the  International  Bureau  for  Fiscal  Documentation,  Brosens  (2004),  and 

national tax authorities. Our focus is on regimes applicable to firms that are affiliates of foreign 

parents. 

In  practice,  thin  capitalization  regimes  differ  widely  across  countries  in  the  restrictions 

they  put  on  the  tax  deductibility  of  interest  on  company  debt,  in  the  discretion  that  authorities 

have in applying these restrictions, and in the alternative tax treatment of company interest that is 

applicable in case full interest deductibility is denied. 

Table 1 provides information on thin capitalization rules internationally in 2004. As seen 

in column 1, 27  out  of  54 countries in  the  sample had an  explicit thin  capitalization regime in 

that year.4 The year of first introduction of an explicit thin capitalization regime is indicated in 

column 2. Early adopters included Canada in 1972 and France in 1979,  followed by Australia, 

Indonesia, the United Kingdom, and the United States in the 1980s. Other countries enacted their 

thin capitalization rules after 1990. For completeness, the table also denotes the year of adoption 

4  Several  other  countries  implicitly  limited  interested  deductibility  of  foreign  subsidiaries  by  having  general  anti-
abuse provisions against excessive deductions of interest from taxable income. 

9 
 
                                                 
for  those  countries  that  introduced  thin  capitalization  rules  after  2004,  the  end  of  our  sample 

period. 

Thin capitalization  regimes  cap the amount of  debt for which interest is tax deductible. 

Typically,  interest  deductibility  is  restricted  if  a  measure  of  the  company’s  debt  relative  to  its 

assets  or  equity  exceeds  a  certain  ratio.  The  exact  definitions  of  the  debt  measure  in  the 

numerator of the ratio and of assets or equity in its denominator vary widely across countries. As 

seen in column 3, the pertinent debt measure can be total debt, internal debt from a single related 

party, total internal debt, total internal foreign debt, or total foreign debt. The thin capitalization 

ratio  considers  the  relevant  debt  measure  relative  to  total  assets  (only  for  the  case  of  New 

Zealand),  total  equity,  internal  equity  from  a  single  related  party,  total  internal  equity,  total 

internal foreign equity, or total foreign equity, as seen in column 4. The main distinction among 

the  various  possible  definitions  of  the  thin  capitalization  ratio  is  whether  it  restricts  interest 

deductibility  for  total  debt  or  internal  debt.  In  the  table,  16  countries  are  seen  to  limit  interest 

deductibility  for  total  debt,  while  11  countries  limit  the  deductibility  for  internal  debt.  The 

numerical value of the thin capitalization ratio is presented in column 5. Argentina, for instance, 

imposes a ratio of total debt to total equity of 2. 

Some  countries  restrict  the  applicability  of  the  thin  capitalization  regime  to  foreign 

subsidiaries  that  are  substantially  owned  by  their  foreign  parent.  Column  6  lists  the  minimum 

ownership share of the foreign parent for the thin capitalization regime to apply. In the case of 

Denmark,  for  instance,  the  thin  capitalization  regime  only  applies  if  the  foreign  parent  has  a 

substantial ownership share of 50% or more. The minimum substantial ownership share for the 

thin capitalization rule to apply can be based on direct and/or indirect ownership of the foreign 

affiliate. As seen in column 7, 17 countries are seen to also include indirect ownership. 

10 
Countries  differ  importantly  in  how  strictly  they  apply  the  thin  capitalization  ratio  in 

determining  the  interest  deductibility  for  resident  foreign  subsidiaries.  Application  of  the  thin 

capitalization ratio can be automatic which means that interest deductibility is always restricted 

if the foreign  subsidiary’s debt ratio exceeds  the relevant ratio (and never restricted if the  debt 

ratio is less than the relevant ratio, the so-called “safe harbor”). Alternatively, a country can use 

discretion in applying the thin capitalization ratio, considering a foreign subsidiary’s leverage in 

comparison  to  the  leverage  of  similar  resident  firms  that  are  not  foreign  subsidiaries  (i.e., 

comparing  actual  leverage  to  leverage  on  an  arm’s  length  basis).  Column  8  shows  that  17 

countries apply their thin capitalization rule automatically. 

Next,  countries  apply  one  of  two  primary  methods  to  limit  interest  deductibility  if 

leverage is found to exceed the pertinent ratio. First, they can simply deny some or all interest 

deductibility. Second, they can reclassify the excess interest as dividends. The second method of 

interest  limitation  implies  that  nonresident  dividend  withholding  taxes  apply,  rather  than 

nonresident  interest  withholding  taxes.  Hence,  reclassification  of  interest  as  dividends  is  the 

harsher  remedy,  if  the  pertinent  dividend  withholding  tax  exceeds  the  alternative  interest 

withholding tax. In column 9, we see that 18 countries only restrict interest deductibility, while 9 

countries in addition reclassify interest as dividends.  

The disallowance of interest can apply to interest on all debt, as is the case in Latvia, or 

only  to  interest  on  debt  in  excess  of  the  ratio  limit,  as  is  the  case  in  all  other  countries  (see 

column  10).  At  the  same  time,  the  affected  interest  payments  can  be  interest  payments  to  the 

provider  of  credit  on  a  net  basis,  as  in  the  case  of  the  Netherlands,  or  alternatively  on  a  gross 

basis, as in all other cases (see column 11). Finally, the thin capitalization rule can apply to debt 

11 
from all sources (including domestic sources), to debt only from foreign sources, or to debt from 

foreign, non-EU sources, as in the case of Spain (see column 12). 

In  the  empirical  work,  we  include  variables  reflecting  the  existence,  stringency,  and 

automatic application of thin capitalization rules based on information as reflected in Table 1. 

3.   Multinational firm and country data 

Our empirical work uses data on the financial statements of US multinationals and their 

foreign  affiliates  as  collected  by  the  Bureau  of  Economic  Analysis  in  its  annual  survey  of  US 

Direct  Investment  Abroad.  Such  reporting  is  made  on  a  confidential  and  compulsory  basis, 

which enhances the representativeness of the data. Our sample contains data for five benchmark 

years (1982, 1989, 1994, 1999 and 2004) and 54,273 affiliate-year observations.  

The  empirical  analysis  considers  the  impact  of  thin  capitalization  regimes  on  two 

affiliate-firm leverage variables. First, Total leverage is the ratio of total US foreign affiliate debt 

to  assets.  This  total  leverage  variable  is  directly  affected  by  thin  capitalization  regimes  that 

restrict total debt. Second, Internal leverage is the ratio of internal debt owed to the US parent to 

equity, and is directly affected by thin capitalization regimes that target internal debt.5 To gauge 

the  broader  implications  of  restrictions  on  internal  debt  for  affiliate  leverage,  we  in  addition 

examine the Internal debt share, defined as the ratio of internal debt relative to total debt. From 

Panel A of Table 2, we see that Total leverage, Internal leverage and Internal debt share have 

mean  values  of  0.552,  0.154,  and  0.084  in  the  overall  sample,  respectively.  However,  there  is 

5 The BEA data provide three categories of liabilities: (a) trade accounts and trade notes payable (current); (b) other 
current liabilities and long-term debt and (c) o ther noncurrent liabilities. Our total leverage variables are based on 
category (b). Because the BEA combines categories (a) and (b) for reporting internal liabilities, our internal leverage 
includes trade credit. As a limitation, the BEA data do not provide any information on intercompany debt with other 
affiliates  in  the  organization.  The  only  information  provided  is  the  liability  to  the  US  parent.    So,  there  may  be 
affiliates  that  appear  to  have  low  intercompany  debt  while  in  reality  holding  debt  from  other  affiliates  within  the 
group.   

12 
 
                                                 
much  variation in these leverage ratios across firms.  For  example, while Internal debt share is 

close to zero for the median affiliate firm in the sample, the standard deviation of Internal debt 

share  is  substantial  at  0.352.  Additionally,  as  seen  in  Figure  1,  all  three  debt  variables  have 

trended  down  over  the  1982-2004  period.  The  average  of  Total  leverage  in  particular  has 

declined from 59.4% in 1982 to 51.0% in 2004, while Internal leverage declined from 12.0% in 

1982 to 2.5% in 2004.  Over the same period, Internal debt share declined from 14.9% to 6.0%, 

indicating a reduced reliance on internal finance by US multinationals. 

The empirical analysis relates the affiliate debt variables to tax policy variables, as well 

as a host of affiliate-level and host-country control variables. To allow comparison with earlier 

results in the literature, our choice of control variables is determined by those used in previous 

studies on international capital structures, in particular those by Rajan and Zingales (1995) and 

Desai, Foley, and Hines (2004). Our measure of tax incentives is Country tax rate, constructed as 

the median corporate tax rate in the affiliate host country estimated annually using affiliate-level 

effective tax rates.6 A higher corporate tax burden is expected to increase affiliate leverage. The 

decline in Country  tax rate in Figure 1, along  with the  declines  in  Total leverage  and Internal 

leverage,  is  consistent  with  this.  The  concomitant  decline  in  Internal  debt  share  suggests  a 

relatively large sensitivity of internal debt to host-country taxation. 

We  define  several  variables  to  represent  the  existence,  stringency,  and  method  of 

application of thin capitalization regimes. To start, Thin cap restriction is a dummy variable that 

equals  1  if  a  country  has  an  explicit  thin  capitalization,  and  zero  otherwise.  From  Panel  A  of 

Table  2,  we  see  that  a  thin  capitalization  regime  applies  in  58.1%  of  our  affiliate-year 

observations. Next, we distinguish whether the regime restricts the use of total debt or the use of 

6 We follow Desai, Foley and Hines (2001) and estimate the country level tax rate as the median of affiliates’ ratio 
of tax expense to pre-tax income. We eliminate affiliate observations with negative net income in our country-level 
tax rate estimates. 

13 
                                                 
internal  debt.  Specifically,  Total  leverage  restriction is  a  dummy  variable  that  equals  1  if  a 

country  imposes  a  restriction  related  to  total  debt  (relative  to  assets  or  equity),  and  zero 

otherwise,  while  Internal leverage  restriction  is  a  dummy  variable  that  equals  1  if  a  country 

imposes  a  restriction  on  the  use  of  internal  debt  (relative  to  equity).  Mean  values  for  these 

variables in Table 2 imply that the thin capitalization restriction applies to total debt in 25.2% of 

our observations (or 43.4% of the affiliates facing thin capitalization interest limitations). 

As  a  measure  of  thin  capitalization  regime  stringency,  Total  leverage  ratio  is  the 

maximum  value  of  the  ratio  of  total  debt  to  assets.  The  Total  leverage  ratio is  constructed  as 

where 

 is the maximum total debt-to-equity ratio, in case the ratio test applies to the total 

debt to equity ratio. Total leverage ratio has a value of one if no total leverage restriction applies. 

The sample mean for this variable is 0.904. Analogously, Internal leverage ratio is the maximum 

value of the ratio of internal debt to the sum of internal debt and equity. Internal leverage ratio is 

constructed as 

(cid:84)
(cid:14)1

(cid:84)

 where (cid:84) is the maximum internal debt to equity  ratio, in case an internal 

leverage  restriction  applies.  Internal  leverage  ratio  has  a  value  of  one  if  no  internal  leverage 

restriction  applies.  The  mean  value  for  this  variable  is  0.895.  To  capture  discretion  in  the 

application of the thin capitalization regime, Arm’s length is a dummy variable that equals 1 if 

the application of the thin capitalization rules is based on subjective criteria such as comparisons 

to  peers,  and  zero  otherwise.  Arm’s  length  is  one  in  40.6%  of  the  instances  where  a  thin 

capitalization regime is in force. 

Next, there are four non-tax, affiliate-level control variables constructed using BEA data.

First,  Net  PPE/assets  is  the  ratio  of  net  property,  plant  and  equipment  to  total  assets  in  the 

affiliate.  Tangible  assets  can  be  depreciated  and  provide  a  non-debt  tax  shield  to  minimize 

14taxable  profit  (DeAngelo  and  Masulis,  1980).  At  the  same  time,  tangible  assets  may  serve  as 

collateral enhancing leverage (Rajan and Zingales, 1995). Second, EBITDA/assets is the ratio of 

earnings before interest, depreciation and amortization to total assets. Profitable firms may have 

easier  access  to  credit,  providing  a  positive  relation  between  EBITDA/assets  and  leverage. 

Conversely, profitable firms have the means to pay down their debts reducing their leverage (as 

suggested by the pecking order theory  of Myers and Majluf (1984)). Third, Log of sales is the 

logarithm  of  sales  as  a  proxy  for  affiliate  size.7  Larger  firms  may  have  easier  access  to  credit 

thanks to higher asset diversification and lower bankruptcy risks giving rise to higher leverage. 

Fourth,  Growth  options  is  the  compounded  annual  growth  rate  of  total  affiliate  sales  at  the 

industry  and  country  level.  This  variable  captures  the  prospects  of  future  profitability  and  the 

implied borrowing capacity. Hence, this variable is expected to be positively related to leverage. 

We use three host-country level variables as additional controls. First, Creditor rights is 

an index of creditor rights from Djankov, McLiesh and Shleifer (2007). Better creditor rights are 

generally expected to facilitate leverage. Better creditor rights, however, by deepening  external 

debt markets may reduce the need for internal finance, and hence could be negatively related to 

internal  leverage.  Second,  Political  risk  is  the  annual  index  of  political  risk  from  the 

International  Country  Risk  Guide,  rescaled  so  that  a  higher  score  indicates  a  higher  risk.  Its 

impact on leverage is a priori ambiguous. Higher political risks may lead creditors to reduce their 

lending to companies in the host country. On the  other hand,  from  a  company’s  perspective, a 

higher  political  risk  may  encourage  borrowing  to  reduce  the  value  at  risk  in  the  host  country. 

Third,  Rate  of  inflation  is  the  annual  percentage  change  in  the  consumer  price  index  from  the 

World  Development  Indicators  database  of  the  World  Bank.  Inflation  is  potentially  negatively 

7  Sales is preferred to assets because this latter appears in the denominator of our dependent variables. In addition, 
using assets would create a bias towards asset-intensive industries. 

15 
                                                 
related to leverage if it increases the risk premium to be paid to obtain credit. On the other hand, 

higher inflation rates generally engender higher nominal interest rates increasing the value of the 

debt tax shield, which could increase leverage. 

Panel  B  of  Table  2  reports  regression  variables  at  the  aggregate  firm  level  (the  next 

section  provides  more  details  on  the  construction  of  these  variables).  Aggregate  thin  cap 

restriction is the ratio of the sum of the assets of foreign affiliates subject to a thin capitalization 

restriction  relative  to  the  total  assets  of  the  consolidated  firm.  Aggregate  total  leverage 

restriction  is  the  ratio  of  the  sum  of  the  assets  of  foreign  affiliates  subject  to  a  total  leverage 

restriction  relative  to  the  total  assets  of  the  consolidated  firm.    Aggregate  internal  leverage 

restriction is the ratio of the sum of the assets of foreign affiliates subject to an internal leverage 

restriction relative to the total assets of the consolidated firm.  Aggregate interest expense is the 

ratio  of  total  interest  expense  to  total  assets  of  the  consolidated  worldwide  firm.  Aggregate 

interest  expense  to  debt  is  the  ratio  of  total  interest  expense  to  total  debt  of  the  consolidated 

worldwide firm.  

The  data  indicate  that  thin  capitalization  rules  are  relevant  from  the  perspective  of  the 

multinational firm as a whole, with on average about 15 percent of the multinational firm’s assets 

being subject to a thin capitalization restriction. Among these assets, on average about 6 percent 

of assets are subject to a total leverage restriction and about 9 percent of assets are subject to an 

internal leverage restriction.  Interest expense on debt averages about 11  percent,  reflecting that 

borrowing  costs  are  denominated  in  nominal  terms  and  subject  to  sovereign  risk  in  the  host 

country of the affiliate firm. 

Panel  C  of  Table  2  provides  correlations  among  main  debt,  tax  policy,  and  control 

variables.  Total  leverage  is  seen  to  be  positively  correlated  with  the  Country  tax  rate,  and 

16 
negatively correlated with Thin cap restriction, Total leverage restriction and Internal leverage 

restriction.  Among  the  host-country  control  variables,  Total  leverage  is  positively  correlated 

with Creditor rights and negatively correlated with Political risk. Furthermore, Country tax rate 

and Thin cap restriction are positively correlated, indicating that high-tax host countries are more 

likely  to  have  thin  capitalization  regimes.  Consistent  with  this,  Country  tax  rate  is  positively 

related to Internal leverage restriction, but contrary to this it is negatively correlated with Total 

leverage restriction. 

4.   Empirical results 

This section presents empirical results on the impact of thin capitalization regimes on the 

capital structure of the foreign affiliates of US multinationals. In subsection 4.1, we present the 

results of univariate tests of the effects of the introduction of thin capitalization regimes on total 

and  internal  leverage.  Subsection  4.2  presents  the  results  of  regressions  that  relate  these  two 

variables and also the internal debt share to the existence of thin capitalization regimes and the 

implied  limits  on  debt  ratios.  Subsection  4.3  presents  several  extensions.  First,  we  examine 

whether thin capitalization regimes affect the main debt ratios differently depending on whether 

the rules are applied automatically or take into account arm’s length considerations.  Second, we 

exploit  cross-country  variation  over  time  in  the  introduction  of  thin  capitalization  regimes  to 

examine  how  new  thin  capitalization  regimes  affect  the  various  debt  ratios  in  the  short-term, 

defined as the first year after their introduction. Finally, in subsection 4.4 we construct measures 

of the extent to which US multinationals are subject to thin capitalization regimes worldwide at 

the  consolidated  firm  level  to  see  whether  global  thin  capitalization  regimes  affect  valuation, 

total leverage, and interest payments at the level of the overall multinational firm. 

17 
 
4.1 The impact of introductions of thin capitalization regimes 

In  this  subsection,  we  report  univariate  tests  of  the  impact  of  introductions  of  thin 

capitalization  rules  on  mean  values  of  affiliate  total  and  internal  leverage.  Focusing  on  these 

regime changes enhances the identification of the impact of thin capitalization rules on affiliate 

debt because it is unlikely that the introduction of thin capitalization rules in non-US countries is 

endogenously  determined  by  US  affiliate  capital  structures.  During  the  sample  period,  eight 

countries have introduced a total leverage restriction where we have sufficient data to construct 

ex ante and ex post mean leverage values. Panel A of Table 3 lists the country names, the ex ante 

and ex post mean values of Total leverage and Internal leverage, and the significance levels of 

tests  regarding  whether  ex  post  and  ex  ante  mean  values  of  the  total  and  internal  leverage 

variables  are  different.  For  all  eight  introductions,  the  ex  post  mean  value  of  Total  leverage  is 

seen  to  be  lower  than  the  ex  ante  mean  value.  Across  these  cases,  the  introduction  of  a  total 

leverage  restriction  reduces  mean  Total  leverage  on  average  by  4.5%.  The  reduction  in  total 

leverage  is  statistically  significant  in  three-quarters  of  the  countries.  Internal  leverage,  in  turn, 

also  declined  in  all  eight  cases,  and  significantly  in  six  cases.  The  mean  decline  in  Internal 

leverage is 4.5%. 

During  the  sample  period,  seven  countries  introduced  an  internal  leverage  restriction 

where we can compare ex ante and ex post mean leverage variables as seen in Panel B.8 In each 

of these seven cases, the introduction occasioned a drop in the mean Total leverage variable, and 

the  drop  in  mean  Total  leverage  is  statistically  significant  for  all  but  one  introductions.    The 

overall  mean  drop  in  Total  leverage  was  4.6%.  In  all  seven  instances,  we  also  observe  a 

8 Note that Australia has adopted both an internal and external thin capitalization regimes during our sample period. 
In 1987, Australia adopted an internal leverage restriction and then changed to a total level restriction in 2002. 

18 
 
                                                 
reduction  in  Internal  leverage,  with  six  of  these  reductions  being  statistically  significant.  The 

overall mean drop in Internal leverage is 3.3%. These results suggest that the introduction of thin 

capitalization rules tends to have a significant causal effect on affiliate leverage. In what follows, 

we  confirm  this  using  regression  analysis  when  controlling  for  other  contemporaneous  factors 

that  could  potentially  confound  these  univariate  tests.  But  first  we  turn  to  regressions  that 

estimate the average effect of thin capitalization rules on affiliate leverage. 

4.2 Regression results 

In  this  section,  we  report  regressions  that  relate  measures  of  US  affiliate  borrowing  to 

variables  describing  various  aspects  of  thin  capitalization  regimes,  in  addition  to  traditional 

correlates of capital structure employed in the literature (see, for  example, Rajan and Zingales, 

1995;  and  Desai,  Foley,  and  Hines,  2004).  As  discussed,  there  is  much  variation  in  thin 

capitalization  rules,  with  43%  of  thin  capitalization  regimes  in  our  sample  restricting  total 

leverage. We start with considering the determinants of Total leverage, including information on 

the existence  and stringency  of thin  capitalization regimes that restrict total leverage.  Then we 

consider  analogously  how  thin  capitalization  regimes,  and  in  particular  regimes  that  restrict 

internal leverage, affect the Internal leverage variable.  

Next,  we  consider  whether  internal  leverage  restrictions  affect  the  affiliate  financing 

structure beyond the ratio of internal debt to equity. Internal leverage restrictions possibly change 

the mix of internal and external debt of the firm. To examine this, we first consider the impact of 

internal leverage restrictions  on the Internal debt share. The evidence of Table 3 suggests that 

internal leverage  restrictions affect Total leverage as well. To conclude, therefore, we examine 

the  relationship  between  internal  leverage  restrictions  and  Total  leverage  as  well.  Throughout, 

19 
 
regressions include parent, industry, and year fixed effects. Standard errors control for potential 

two-way clustering across observations at the country and industry level. 

Table  4  reports  regressions  of  an  affiliate’s  total  leverage.  Regression  1  relates  this 

variable to Country tax rate and control variables. The estimated coefficient for the country tax 

rate  is  0.197  and  it  is  significant  at  1%.  Thus,  affiliates  in  high-tax  host  countries  have  higher 

total  leverage  to  benefit  more  from  interest  deductibility.  Among  the  control  variables,  total 

leverage is positively  and significantly related to Net PPE/assets,  consistent with the view that 

tangible  assets  may  serve  as  collateral  for  borrowings.  EBITDA/assets  obtains  a  negative  and 

significant coefficient, suggesting that profitable firms are able to pay down their debts. Log of 

sales enters the regression with a positive and significant coefficient, indicating that larger firms 

may have better access to credit. Creditor rights receives a positive and significant coefficient, as 

creditor  protection  may  increase  the  supply  of  credit  to  the  firm.  Political  risk  negatively  and 

significantly  affects  total  leverage.  Total  leverage  is  negatively  related  to  Inflation,  as  interest 

rates  may  incorporate  higher  risk  premiums  in  highly  inflationary  environments.  Finally,  total 

leverage is positively related to Growth opportunities, but the estimated coefficient is statistically 

insignificant. Overall, these results confirm the findings in Desai, Foley, and Hines (2004) that 

were estimated using the same dataset for an earlier period. 

 Regression 2 includes the Thin cap restriction dummy variable that signals the existence 

of a thin capitalization regime. This variable obtains a coefficient of -0.0214 that is significant at 

the 1% level, indicating that thin capitalization regimes generally reduce affiliate total leverage. 

The tax variable  now  obtains a somewhat higher  coefficient of 0.223  that is  significant  at  1%, 

suggesting that the estimate on the tax variable is biased downward in regression 1 on account of 

20 
the missing thin capitalization variable. In unreported regressions, we find that this reduction in 

leverage is driven by a decrease in debt rather than an increase in assets. 

A thin capitalization regime reduces or eliminates the incentive to take on more debt so 

as to reduce taxable income. Hence, thin capitalization regimes potentially reduce the sensitivity 

of  the  affiliate’s  borrowing  to  a  country’s  corporate  income  tax  rate.  To  test  this,  regression  3 

includes  an  interaction  term  of  the  Country  tax  rate  and  Thin  cap  restriction  variables.  In  this 

regression, Thin cap restriction and its interaction with Country tax rate obtain coefficients of -

0.272 and 0.0183, respectively, that are insignificant. 

In  regression  4,  we  replace  the  Thin  cap  restriction  variable  by  the  Total  leverage 

restriction variable starting from regression 2. The Total leverage restriction variable obtains a 

coefficient  of  -0.0186  that  is  significant  at  1%.  As  expected,  thin  capitalization  regimes  that 

target total leverage serve to reduce total leverage. Regression 5 includes an interaction term of 

Country tax rate with Total leverage restriction. The total leverage restriction variable obtains a 

coefficient  of  -0.0445  that  is  significant  at  1%,  but  the  interaction  term  is  statistically 

insignificant.  

A key feature of a thin capitalization regime that restricts total leverage is the quantitative 

value  of  the  maximum  total  leverage.  In  regressions  6  and  7,  we  replace  the  Total  leverage 

restriction variable with the Total leverage ratio, found in regressions 3 and 4. The total leverage 

ratio in these  two regressions obtains coefficients of 0.0307 and 0.119, respectively,  which are 

significant  at  10%  and  5%,  respectively.  Recall  that  the  definition  of  the  total  leverage  ratio 

implies  that  the  more  lenient  the  regime,  the  higher  this  ratio,  hence  we  expect  positive 

coefficients.  These  results  therefore  indicate  that  a  looser  quantitative  restriction  on  total 

leverage enables the affiliate to maintain higher total leverage. The interaction term of Country 

21 
tax  rate  and  Total  leverage  ratio  in  regression  7  is  negative  and  statistically  significant 

suggesting  that  tighter  thin  capitalization  limits  are  less  constraining  in  affiliates  facing  higher 

tax rates.  

Overall,  Table  4  shows  that  thin  capitalization  regimes,  and  in  particular  the  Total 

leverage  restriction  and  the  Total  leverage  ratio  variables,  have  a  material  impact  on  Total 

leverage. 

Thin  capitalization  regimes  that  restrict  internal  leverage  are  expected  to  have  a  direct 

impact  on  internal  leverage.  This  is  what  we  consider  next.  Table  5  presents  regressions  that 

relate  Internal  leverage  to  thin  capitalization  regimes,  and,  in  particular,  to  information  on  the 

existence  and  quantitative  value  of  regimes  that  restrict  internal  leverage.  Otherwise,  the 

regressions in Table 5 are fully analogous to those in Table 4. 

In regression 1, the Country tax rate receives a coefficient of 0.368 that is significant at 

the 1% level. In regression 2, the Thin cap restriction dummy enters with a negative coefficient 

of -0.0800 that is significant at 1%. Regression 3 adds the interaction of the Country tax rate and 

the  Thin  cap  restriction  dummy  variable,  yielding  an  estimated  coefficient  that  is  statistically 

insignificant. Regression 4 includes the Internal leverage restriction variable instead of the Thin 

cap restriction variable, yielding a coefficient of -0.0629 that is significant at 1%. This variable 

and  its  interaction  with  Country  tax  rate  are  both  statistically  insignificant  in  regression  5. 

Regression  6  includes  the  Internal  leverage  ratio.  This  variable  is  estimated  with  a  positive 

coefficient of 0.196 that is significant at 1%. This is evidence that a quantitative relaxation of an 

internal leverage restriction engenders higher internal leverage, as is to be expected. Regression 

7 in addition includes an interaction of Country tax rate and Internal leverage ratio, providing 

statistically insignificant coefficients for both the internal leverage ratio itself and the interacted 

22 
variable.  Overall,  Table  5  shows  that  thin  capitalization  regimes  that  restrict  internal  leverage 

have a material impact on this leverage variable.  

Next, we consider whether internal leverage restrictions affect the financing structure of 

the  US  foreign  affiliate  more  broadly,  beyond  the  internal  leverage  ratio.  In  particular,  we 

consider  in  turn  the  impact  of  this  type  of  restriction  on  the  Internal  debt  share  and  Total 

leverage. 

Table  6  show  regressions  of  the  Internal  debt  share  that  apart  from  the  different 

dependent  variable  are  analogous  to  Table  5.  Regression  1  displays  a  positive  relationship 

between the Internal debt share and the Country tax rate, with an estimated coefficient for the 

tax variable of 0.117 that is significant at 1%. This is consistent with the view that internal debt 

is  more  tax  sensitive  than  external  debt.  In  regression  2,  Thin  cap  restriction  has  a  negative 

coefficient  that  is  significant  at  10%  suggesting  that  internal  debt  is  more  sensitive  to  thin 

capitalization  restrictions.  In  regression  6,  the  coefficient  on  Internal  leverage  ratio  is  positive 

and  significant.  This  is evidence  that  internal  debt  expands  relative  to  total  debt  if  the  internal 

leverage  restriction  is  loosened.  The  Internal  leverage  restriction  and  its  interaction  with 

Country  tax  rate,  in  turn,  are  estimated  with  significant  positive  and  negative  coefficients  in 

regression 7, suggesting that the internal debt to total debt ratio increases relatively little in high-

tax countries as the internal leverage restriction is relaxed. 

Next, we consider the indirect impact of thin capitalization regimes that restrict internal 

leverage on total leverage in Table 7. While thin capitalization rules that restrict internal leverage 

have  a  direct  bearing  only  on  internal  leverage,  they  may  affect  total  leverage  indirectly  if 

internal and external leverage are imperfect substitutes. This is indeed what we find. Specifically, 

regressions  1  and  2  in  Table  7  include  the  Internal  leverage  restriction  and  are  otherwise 

23 
 
analogous to regressions 4 and 5 of Table 4. The Internal leverage restriction enters regression 1 

of  Table  7  with  a  coefficient  of  -0.0082  that  is  significant  at  1%.  Comparing  regression  4  in 

Table 4 with regression 1 in Table 7, we see that the impact of an internal leverage restriction on 

total  leverage  is  about  half  the  impact  of  a  total  leverage  restriction  on  the  same  leverage 

variable.  In  regression  2,  the  estimated  coefficients  for  Internal  leverage  restriction  and  its 

interaction with Country tax rate, however, are both insignificant.  

Regressions  3  and  4  of  Table  4  are  analogous  to  regressions  6  and  7  of  Table  4.  In 

regression  3,  the  Internal  leverage  ratio  enters  with  a  positive  coefficient  that  is  significant  at 

5%.  In  regression  4,  Internal  leverage  ratio  and  its  interaction  with  Country  tax  rate  obtain 

coefficients that are both insignificant. Overall, restrictions on internal leverage appear to have a 

significant impact on total leverage. 

Results presented thus far may be influenced by the decision where to locate affiliates. To 

address  concerns  that  location  decisions  are  driving  the  results,  in  unreported  regressions  we 

rerun the regressions in Tables 4 to 7 for the sample of parents with affiliates in the same set of 

countries over the period 1982 to 2004.  The results are qualitatively unaltered. 

4.3  Extensions 

We first consider how discretion in the application of thin capitalization rules affects the 

financing structure of the foreign affiliates of US multinationals. Discretion in the application of 

the thin capitalization rules is captured by the Arm’s length variable which signals that interest 

limitation  is  not  automatic,  but  entails  some  subjectivity  on  the  basis  of  arm’s  length 

considerations.  Of  all  thin  capitalization  regimes,  40.6%  allow  for  some  discretion  based  on 

arm’s length considerations. Regression 1 of Table 8 includes the Thin cap restriction variable 

24 
 
and  its  interaction  with  the  Arm’s  length  variable  in  a  total  leverage  regression  similar  to 

regression  2  of  Table  4.  Thin  cap  restriction  and  its  interaction  with  Arm’s  length  obtain 

coefficients  of  -0.0276  and  0.0169,  respectively,  which  are  both  significant.  This  suggests  that 

the impact of a thin capitalization rule on total leverage is reduced by 61% (=0.0169/0.0276) if 

rules  are  applied  based  on  arm’s  length  considerations.  Regression  2  includes  Total  leverage 

restriction  and  its  interaction  with  Arm’s  length  in  a  total  leverage  regression,  yielding  a 

coefficient of -0.0229 for the Total leverage restriction variable that is significant at 1% and a 

coefficient  of  0.0109  for  its  interaction  with  Arm’s  length  that  is  insignificant.  These  point 

estimates  suggest  that  discretion  reduces  the  impact  of  total  leverage  restrictions  on  total 

leverage  by  48%  (=0.0109/0.0229),  although  the  effect  is  not  significant.  In  regression  3, 

Internal  leverage  restriction  and  its  interaction  with  Arm’s  length  obtain  estimates  of  -0.0200 

and  0.0244  that  are  significant  at  5%  and  10%,  respectively,  suggesting  that  discretion  fully 

completely cancels out the effect of internal leverage restrictions on total leverage. 

Regression  4  includes  Thin  cap  restriction  and  its  interaction  with  Arm’s  length  in  an 

Internal leverage regression, while regression 5 includes the Internal leverage restriction and its 

interaction with Arm’s length in such a regression. In both regressions, the interaction terms are 

statistically  insignificant.  Finally,  regression  6  includes  Thin  cap  restriction  and  its  interaction 

with Arm’s length in an Internal debt share regression, while regression 7 includes the Internal 

leverage restriction and its interaction with Arm’s length in such a regression. None of these thin 

capitalization variables are statistically significant in these two regressions. 

Overall,  Table  8  provides  some  evidence  that  discretion  reduces  the  impact  of  thin 

capitalization rules on total leverage, but not on internal leverage or the internal debt share. 

25 
Next,  we  are  interested  to  see  whether  the  introduction  of  a  new  thin  capitalization 

regime prompts US multinationals to quickly adapt the capital structure of their foreign affiliates 

to the new regime, and, in particular, in the first years of implementation. To do this, we estimate 

a set of financial ratio regressions analogous to those in Table 8 in first differences (without the 

Arm’s  length  variable).  These  first  difference  regressions  also  mitigate  concerns  that  omitted 

variables  may  influence  our  results.  The  first  differences  are  differences  between  benchmark 

years, which cover periods lasting either five or seven years. The results are reported in Table 9, 

with  Δ  denoting  that  variables  are  expressed  in  first  differences  between  benchmark  years.  

Regression 1 includes Δ Thin cap restriction in a regression of Δ Total leverage. Note that Δ Thin 

cap  restriction  equals  1  (-1)  in  the  first  years  of  implementation  (abolishment)  of  a  thin 

capitalization rule, while it is zero in all other years.  Δ Thin cap restriction receives a coefficient 

of  -0.0113  that  is  significant  at  10%,  suggesting  that  the  introduction  of  a  thin  capitalization 

restriction reduces the total leverage ratio by 1.13% in its first years. This estimated coefficient is 

about half of the estimate of -0.0214 for the Thin cap restriction variable in the  corresponding 

Total leverage regression 2 in Table 4, suggesting that the short-run impact of the introduction of 

a thin capitalization regime is about half of its average or long-term effect.  

The Δ Total leverage restriction variable receives a coefficient of -0.0248 in the Δ Total 

leverage  regression  2  of  Table  9  that  is  significant  at  5%  and  of  similar  magnitude  as  the 

corresponding coefficient of -0.0186 in the level regression 4 of Table 4. Hence, the majority of 

the effect of a total leverage restriction on total leverage appears to materialize during the first 

years following its introduction.  

In the Δ Internal leverage regression 4, the included Δ Thin cap restriction variable has a 

coefficient of -0.0452 that is significant at 5% and about half of the corresponding estimate in the 

26 
level  regression  2  of  Table  5.  However,  the  Δ  Internal  leverage  restriction  variable  obtains  a 

coefficient of -0.117 in regression 5 that is significant at 5% and is almost twice as large as the 

corresponding estimate in the level regression 4 of Table 5. This suggests that internal leverage 

reacts very quickly to a change in the internal leverage restriction, and may even overreact in the 

short run. At any  rate,  the evidence suggests  that the multinational firm can adjust  the internal 

leverage  of  a  foreign  affiliate  relatively  quickly,  possibly  because  this  does  not  involve  any 

external creditors.  

In the Δ Internal debt share regressions 6 and 7 the Δ Thin cap restriction and Δ Internal 

leverage  restriction  are  estimated  with  insignificant  coefficients,  which  could  reflect  that  the 

first-years adjustment in this variable tends to be rather small. 

Generally, we report evidence that the financial structure of the foreign  affiliates of US 

multinationals, and in particular total and internal leverage, take considerably longer than a few 

years to adjust to a change in the thin capitalization regime generally. However, Total (Internal) 

leverage reacts relatively quickly to the introduction of a Total (Internal) leverage restriction. 

4.4  Aggregate firm implications of thin capitalization rules 

To  conclude,  we  consider  how  thin  capitalization  regimes  facing  the  foreign  affiliates  of 

US multinationals affect the valuation, leverage, and interest expenses of the multinational firm 

as  a  whole.  To  start,  we  consider  how  thin  capitalization  regimes  affect  firm  valuation  as 

measured by Tobin’s q, where this variable is constructed as the ratio of the market value of the 

overall  firm’s  equity  plus  debt  to  total  assets  using  data  from  the  Compustat  and  CRSP 

databases. Thin capitalization  regimes  are  expected to affect  firm valuation  negatively,  as  they 

imply a reduced tax advantage of debt finance.  In regression 1 of Table 10, Tobin’s q is related 

27 
 
to  the  Aggregate  thin  cap  restriction  variable  that  measures  the  extent  to  which  the 

multinational’s operations worldwide are subject to a thin capitalization regime. Specifically, this 

aggregate variable is constructed as the ratio of the sum of the assets of foreign affiliates subject 

a thin cap restriction to the total assets of the consolidated firm. Aggregate thin cap restriction is 

seen  to  obtain  an  insignificant  coefficient  in  regression  1.  In  regression  2,  the  aggregate  thin 

capitalization variable is split into analogous separate variables that measure the extent to which 

the multinational’s operations are subject to a total leverage restriction and an internal leverage 

restriction. Aggregate total leverage restriction obtains a negative and significant coefficient in 

regression 2, while Aggregate internal leverage restriction is estimated to be insignificant.  

In regressions 3 and 4, we replace Tobin’s q in regressions 2 and 3 by Tobin’s q net of the 

firm’s  industry  mean  Tobin’s  q  to  account  for  systemic  differences  in  firm  valuation  at  the 

industry level, and obtain  very similar results. 

The  economic  effect  of  total  leverage  restrictions  on  firm  valuation  is  substantial.  The 

coefficient estimates in regression 4 imply that a one standard deviation increase in the aggregate 

total  leverage  restriction  variable  of  0.113  would  translate  into  a  decrease  in  industry-adjusted 

Tobin’s  q  of  0.051, which is substantial  given its mean of -0.239  and  its standard deviation of 

1.539.  

In  regressions  5  and  6,  the  dependent  variable  is  the  ratio  of  debt  to  assets  of  the 

consolidated worldwide firm.  The aggregate thin capitalization regime variables are estimated to 

be  insignificant  in  both  regressions.  The  absence  of  a  significant  impact  of  the  aggregate  thin 

capitalization  variables  on  worldwide  leverage  suggests  that  the  multinational  firm  engages  in 

debt  shifting  from  countries  with  thin  capitalization  regimes  towards  countries  that  lack  such 

regimes so as to keep overall leverage constant. 

28 
In regressions 7 and 8, the dependent variable is the ratio of interest expenses to total assets 

of the consolidated firm. In regression 7, this interest expense ratio is seen to be negatively and 

significantly related to the aggregate thin capitalization regime variable, while in regression 8 it 

is  negatively  and  significantly  related  to  the  separate  aggregate  total  and  internal  leverage 

restriction variables. The reduced worldwide interest expenses on account of thin capitalization 

regimes may reflect that any international debt shifting that occurs leads to lower borrowings in 

high-interest  countries,  and  vice  versa.  Also,  the  lower  interest  expenses  may  reflect  that  thin 

capitalization  regimes  cause  the  multinational  to  choose  financial  structures  that  overall  imply 

less risk to external creditors, for instance on account of more internal equity funding of foreign 

affiliates. 

Finally,  in  regressions  9  and  10  we  repeat  the  aggregate  interest  expense  regressions  in 

columns 7 and 8 by using the ratio of aggregate interest expenses to total debt (rather than assets) 

at the consolidated firm level as the dependent variable. We obtain qualitatively similar results 

when scaling interest expenses by total debt rather than total assets, indicating that results are not 

driven  by  differences  in  aggregate  leverage,  consistent  with  the  results  on  aggregate  debt  in 

regressions 5 and 6.  

The  economic  effect  of  thin  capitalization  restrictions  on  aggregate  interest  expenses  is 

significant. The coefficient estimates in regression 9 imply that a one standard deviation increase 

in the aggregate thin capitalization restriction variable of 0.186 would translate into a decrease in 

aggregate interest expenses 0.025, which is substantial given its mean of 0.111 and its standard 

deviation of 0.199.  

29 
Taken together, these results imply that thin capitalization rules affect the capital structure 

within  multinational  firms,  with  aggregate  implications  for  the  interest  expense  and  firm 

valuation of multinational firms. 

5.   Conclusions 

This paper examines the impact of thin capitalization rules that limit the tax deductibility 

of  interest  on  the  leverage  of  the  foreign  affiliates  of  US  multinationals.  For  this  purpose,  we 

construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. The 

data  set  provides  information  about  the  existence  of  explicit  thin  capitalization  rules,  their 

stringency,  and  their  application.  Overall,  in  our  sample  thin  capitalization  regimes  restrict  the 

ratio  of  an  affiliate’s  total  debt  to  assets  in  about  43%  of  the  cases.  In  other  cases,  thin 

capitalization rules restrict the ratio of an affiliate’s indebtedness to related parties relative to its 

equity.  

The  presence  of  restrictions  on  an  affiliate’s  ratio  of  overall  debt  to  assets  on  average 

reduces this leverage ratio by 1.9%. Restrictions on the ratio of an affiliate’s borrowing from the 

parent  company  to  its  equity,  in  turn,  on  average  reduce  the  targeted  leverage  ratio  by  6.3%. 

Furthermore,  restrictions  on  borrowing  from  the  parent  on  average  reduce  the  overall  debt  to 

assets  ratio  of  the  affiliate  by  0.8%.  This  shows  that  restrictions  on  borrowing  from  related 

parties have an important role in affecting the affiliate’s overall capital structure, going beyond 

merely affected the parent firm’s choice between injecting the foreign affiliate with debt finance 

or equity finance. 

30 
 
Further, we find that the impact of thin capitalization rules on affiliate leverage is higher, 

if their application is automatic rather than discretionary.9 Finally, by exploiting changes in thin 

capitalization  regimes  over  time,  we  find  that  the  first-year  impact  of  new  capitalization  rules 

generally on affiliate leverage tends to be part of the long-term effect.  However, total leverage 

(internal  leverage)  responds  quickly  and  fully  to  the  introduction  of  a  total  (internal)  leverage 

restriction. 

Thin capitalization rules on the affiliates  of US multinational  firms  are found  to reduce 

the  overall  valuation  of  the  firm,  consistent  with  a  reduced  worldwide  deductibility  of  interest 

from taxable income. 

Overall,  our  results  show  than  thin  capitalization  rules,  which  thus  far  have  been 

understudied,  have  a  substantial  effect  on  capital  structure  within  multinational  firms.  They 

therefore provide an important qualification of existing studies on capital structure and taxation 

of  multinational  firms,  which  thus  far  has  generally  ignored  the  effects  of  thin  capitalization 

rules.  More  broadly,  our  results  offer  new  evidence  on  the  relevance  of  taxation  for  corporate 

debt, by focusing on thin capitalization rules that, more than statutory corporate income tax rates, 

display great variation across countries. 

9 This suggests that the application of thin capitalization rules should be automatic if the purpose is to limit tax base 
erosion through interest deductions. The OECD (2013, p. 17) has announced that it intends to develop 
recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest 
payments by September 2015. 

31 
 
 
                                                 
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33 
Table 1. Characteristics of thin capitalization rules at year-end 2004 

This table shows key characteristics of thin capitalization rules in selected countries at year-end 2004. D denotes total debt; IID 
denotes individual internal (i.e., from a single related party) debt; TID denotes total internal debt; TIFD denotes total internal 
foreign debt; TFD denotes total foreign debt; E denotes total equity; IIE denotes individual internal equity; TIE denotes total 
internal  equity;  TIFE  denotes  total  internal  foreign  equity;  TFE  denotes  total  foreign  equity;  A  denotes  total  assets;  RoE 
denotes  return  on  equity.  Data  are  from  International  Bureau  for  Fiscal  Documentation,  Brosens  (2004),  and  national  tax 
authorities. 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

(10) 

(11) 

(12) 

y
r
t
n
u
o
C

Argentina 
Australia 
Austria 
Belgium 
Brazil 
Canada 
Chile 
China 
Colombia 
Costa Rica 
Croatia 
Czech Republic  
Denmark 
Finland 
France 
Germany 
Greece 
Hong Kong 
Hungary 
India 
Indonesia 

e
l
u
r

t
i
c
i
l
p
x
E

t
s
r
i
f

f
o

r
a
e
Y

n
o
i
t
c
u
d
o
r
t
n
i

Yes 
Yes 
No12 
Yes13 
No 
Yes 
Yes 
No 
No 
No 
No 
Yes 
Yes 
No19 
Yes 
Yes20 
No 
No21 
Yes 
No 
Yes 

1999 
1987 

1992 
2010 
1972 
2001 
2008 

1993 
1999 

1979 
1994 

1993 

1985 

r
o
t
a
r
e
m
u
n

n
o
i
t
i
n
i
f
e
D

D 
D 

IID 

IID 
D 

TFD 
D18 

IID 
IID 

D 

D 

r
o
t
a
n
i
m
o
n
e
d

n
o
i
t
i
n
i
f
e
D

E 
E 

E 

IIE 
E 

E 
E 

E 
IIE 

E 

E 

o
i
t
a
R

2 
3 

1 

2 
3 

416 
4 

1.5 
1.5 

3 

3 

g
n
i
d
l
o
h
e
r
a
h
s

l
a
i
t
n
a
t
s
b
u
S

g
n
i
d
l
o
h
e
r
a
h
s

)
d
n
I
(

t
c
e
r
i
d
n
i

r
o

)
r
i

D

(

t
c
e
r
i

D

s
n
o
i
t
a
r
e
d
i
s
n
o
c

r
o

)
o
t
u
A

(

c
i
t
a
m
o
t
u
A

)
L
A

(
h
t
g
n
e
l

'

s
m
r
a

g
n
i
s
u

?
t
b
e
d

-
n
o
n

:
y
d
e
m
e
R

)
v
i
D

(
d
n
e
d
i
v
i
d

r
o

s
a

n
o
i
t
a
c
i
f
i
s
s
a
l
c
e
r

)
d
N

(

y
t
i
l
i
b
i
t
c
u
d
e
d

g
n
i
d
e
e
c
x
e

r
o

l
l
a

r
o
F

No 
15% 

Dir 
Ind 

No 

Dir 

25% 
No 

Ind 
Dir 

Auto 
AL 

AL14 

Auto 
Auto 

Div 
Nd 

Exc 
Exc 

Div 

Exc 

Nd 
Div15 

Exc 
Exc 

25% 
50% 

50% 
25% 

Ind 
Ind 

Dir 
Ind 

Auto 
AL 

Auto 
AL 

No 

Dir 

Auto 

No 

Dir 

AL 

Div17 
Nd 

Nd 
Div 

Nd 

Nd 

Exc 
Exc 

Exc 
Exc 

Exc 

Exc 

0
1
?
)
I

N

(

t
s
e
r
e
t
n
i

t
e
n

r
o

)
I
(

t
s
e
r
e
t
n
i

f

O

,
l
l

A

:
o
t

y
l
p
p
a

s
e
l
u
R

1
1

U
E
-
n
o
N

,
n
g
i
e
r
o
F

I 
I 

I 

I 
I 

I 
I 

I 
I 

I 

I 

Foreign 
Foreign 

All 

Foreign 
All 

Foreign 
All 

All 
All 

All 

All 

10 Interest owed to affiliated entities minus interest received from these entities. 
11 Following the decision of the European Court of Justice in the Lankhorst-Hohorst case of 2003, members of the European 
Union  are  not  allowed  to  discriminate  between  their  national  companies  and  other  EU  companies.  From  2004,  thin 
capitalization rules were either extended to domestic companies (Denmark, Germany, Italy, and United Kingdom) or repealed 
for EU companies (France, Spain). 
12 General anti-abuse rules. 
13 The rule applies to loan from individual shareholder or director. 
14 Consideration of the market rate. 
15 Sanction is higher taxation (35% instead of 4%).  
16 The ratio is 10 if foreign non-related party. 
17 Reclassification as dividend not explicit but taxation at same rate.  
18 Minimum threshold for controlled debt of DKK 10 million (about €1.3 million).  
19 General anti-abuse rules with possible reclassification as dividend. 
20 Since 2008, Germany applies an earnings stripping rule. 
21 But general rule that all interest payment to foreign companies are not deductible. 

34 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
Ireland 
Israel 
Italy 
Japan 
Latvia 
Lithuania 
Malaysia 
Mexico 
Netherlands 
New Zealand 
Norway 
Pakistan 
Panama 
Peru 
Philippines 
Poland 
Portugal 

Russia 
Singapore 
Slovenia 
Slovakia 
South Korea 
Spain 
Sri Lanka 
Switzerland 
Sweden 
Taiwan 
Thailand 
Turkey 
Ukraine 
United Kingdom 
Venezuela 
Vietnam 
United States31 

No22 
No 
Yes23 
Yes 
Yes 
Yes 
No 
No 
Yes 
Yes 
No 
Yes 
No 
Yes 
No 
Yes 
Yes 

Yes 
No 
Yes 
No29 
Yes 
Yes 
No 
Yes 
No 
No 
No 
No 
No 
Yes 
No 
No 
Yes32 

2004 
1992 
2003 
2004 

2005 
2004 
1996 

IID 
TIFD 
TID 
D 

IIE 
TIFE 
E 
E 

5 
3 
4 
4 

25% 
50% 
No 
50% 

AL 

Ind 
Ind  Auto24 
Auto 
Dir 
AL 
Ind 

Div 
Nd 
Nd25 
Nd 

D26 
D 

E27  
A 

3 
0.75 

33% 
No 

Ind 
Dir 

Auto 
Auto 

Exc 
Exc 
All 
Exc 

Exc 
Exc 

Exc 

Exc 

Exc 
Exc 

Nd 
Nd 

Nd 

Nd 

Nd 
Nd 

50% 

Ind 

Auto 

No 

Dir 

Auto 

25% 
10% 

Ind 
Ind  

Auto 
AL 

20% 

Ind 

Auto 

Div 

Exc 

25% 

Ind 

Auto 

Nd 

Exc 

50% 
25% 

Ind 
Ind 

Auto 
Auto 

Nd 
Div 

Exc 
Exc 

No 

Dir 

AL 

Div 

Exc 

3 

3 

3 
2 

3 

4 

4 
3 

6 

2001 

TFD 

TFE 

2001 

D 

E 

D 
TIDE
28  
TIFD 

E 
TIFE 

E 

IID 

IIE 

D 
TIFD 

D 

E 
E 

E 

1999 
1996 

2002 

2004 
1993 
2000 
1992 
2006 
1962 

2011 

2006 

1988 
2007 
201230 
1989 

D 

D 

E 

1 

75% 

Ind 

AL 

Nd 

Exc 

E 

1.5 

50% 

Ind 

AL33 

Nd 

Exc 

I 
I 
I 
I 

All 
Foreign 
All 
All 

NI 
I 

All 
Foreign 

I 

I 

I 
I 

I 

I 

I 
I 

I 

I 

I 

Foreign 

Foreign 

All 
Foreign 

Foreign 

All 

All 
Non-EU 

All 

All 

Foreign 

22 General anti-abuse rules for non-EU companies. If indirect or direct shareholding is above 75%, reclassification as dividend 
in certain cases. 
23 Except for holdings, companies with a turnover below €5,164,569 are not subject to the rules. Repealed in 2008 and replaced 
by earnings stripping rule. 
24 The ratio of total debt to third parties to total equity should be over 3 for the rule to apply. 
25  There  is  a  general  rule  that  limits  interest  deductibility  to  the  value  of  equity  times  the  interest  rate  on  short-term  loans. 
However, it is possible to carry forward the interest expenses. 
26 Average net loans at start and end of period. 
27 Average fiscal equity at start and end of period. 
28 With at least 6 months maturity. 
29 Thin capitalization rule repealed from 2004. 
30 Before, general non-deductibility if interest rate exceeded 1.5 times the one of Central Bank, while foreign companies had to 
respect a debt to equity ratio of 7 to 3. 
31 US thin cap rules are presented for information only since we do not have any US-based affiliates in the sample. 
32 This ratio is a safe harbor provision. 
33 Fact and circumstances approach. The earning stripping rule also compares corporate income to interest paid to some non-
residents or to tax-exempt resident shareholders. The latter cannot be higher than 50% of the former. 

35 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
Table 2. Descriptive statistics and correlations 

This table provides summary statistics and correlations for the main regression variables. Panel A reports descriptive statistics 
for the affiliate level variables, panel B reports descriptive statistics for the aggregate firm level variables, and panel C reports 
the correlation  matrix for the  affiliate level variables. Total leverage is the ratio of total US foreign affiliate debt to affiliate 
assets. Internal leverage is the ratio of internal debt owed to the parent to affiliate equity. Internal debt share is the ratio of 
internal  debt  owed  to  the  parent  to  total  affiliate  debt.  Country  tax  rate  is  the  median  tax  rate  in  the  affiliate  host  country 
estimated annually using affiliate-level tax burdens. Thin cap restriction is a dummy variable that equals 1 if a country has a 
thin capitalization rule and zero otherwise. Total leverage restriction is a dummy variable that equals 1 if a country imposes a 
quantitative restriction on the ratio of total debt to assets and zero otherwise. Internal leverage restriction is a dummy variable 
that equals 1 if a country imposes a quantitative restriction on the ratio of internal debt to the sum of internal debt and internal 
equity.  Total  leverage  ratio  is  the  maximum  ratio  of  total  debt  to  assets.  Internal  leverage  ratio  is  the  maximum  ratio  of 
internal  debt  to  sum  of  internal  debt  and  internal  equity.  Arm’s  length  is  application  of  remedy  following  arm’s  length 
considerations. Net PPE/assets is the ratio of net property, plant and equipment to assets in the affiliate. EBITDA/assets is the 
ratio of earnings before interest, depreciation and amortization to assets. Log of sales is the logarithm of sales. Creditor rights 
is an index of creditor rights  from Djankov, McLiesh and Shleifer (2007). Political risk is the annual index of political risk 
from  the  International  Country  Risk  Guide.  Rate  of  inflation  is  the  annual  percentage  in  the  consumer  price  index  from  the 
World Development Indicators. Growth options is the compound annual growth rate of total affiliate sales at the industry and 
country level. Tobin’s q is the ratio of the market value of the overall firm’s equity plus debt to total assets. Industry-adjusted 
Tobin’s q is Tobin’s q minus the firm’s industry mean Tobin’s q. Aggregate debt is the ratio of total debt to total assets of the 
consolidated multinational firm estimated using Compustat data. Aggregate interest expense is the ratio of interest expenses to 
total assets of the consolidated multinational firm. Aggregate interest expense to debt is the ratio of interest expenses to total 
debt  of  the  consolidated  multinational  firm.  Aggregate  thin  cap  restriction  is  the  ratio  of  the  sum  of  the  assets  of  foreign 
affiliates  subject  to  a  thin  cap  restriction  to  the  total  assets  of  the  consolidated  multinational  firm.  Aggregate  total  leverage 
restriction is the ratio of the sum of the assets of foreign affiliates subject to a total leverage restriction to the total assets of the 
consolidated multinational firm. Aggregate internal leverage restriction is the ratio of the sum of the assets of foreign affiliates 
subject  to  an  internal  leverage  restriction  to  the  total  assets  of  the  consolidated  multinational  firm.  Note  that  all  medians 
represent the average of the five median observations for the five benchmark years. 

Panel A. Descriptive statistics of main regression variables in affiliate level regressions 
Variable 
Total leverage 
Internal leverage 
Internal debt share 
Country tax rate 
Thin cap restriction 
Total leverage restriction 
Internal leverage restriction 
Total leverage ratio 
Internal leverage ratio 
Arm’s length 
Net PPE/assets 
EBITDA/assets 
Log of sales 
Creditor rights 
Political risk 
Rate of inflation 
Growth options 

Median 
0.502 
0.000 
0.003 
0.314 
1.000 
0.000 
0.000 
1.000 
1.000 
0.000 
0.115 
0.101 
10.247 
2.000 
0.810 
0.018 
0.078 

N 
54,269 
52,092 
51,524 
54,273 
54,273 
54,273 
54,273 
54,273 
54,273 
54,273 
54,273 
54,273 
54,273 
54,273 
54,273 
54,273 
54,273 

Mean 
0.552 
0.154 
0.084 
0.299 
0.581 
0.252 
0.328 
0.904 
0.895 
0.236 
0.202 
0.122 
9.884 
2.199 
0.792 
0.121 
0.103 

Std. dev. 
0.420 
1.884 
0.352 
0.110 
0.493 
0.434 
0.470 
0.178 
0.157 
0.424 
0.230 
0.231 
2.735 
1.265 
0.095 
0.963 
0.203 

Panel B. Descriptive statistics of main regression variables in aggregate firm level regressions 
Variable 
Tobin’s q 
Industry-adjusted Tobin’s q 
Aggregate debt 
Aggregate interest expense 
Aggregate interest expense to debt 

Median 
1.015 
-0.253 
0.232 
0.017 
0.055 

Mean 
1.349 
-0.236 
0.253 
0.023 
0.111 

N 
4,558 
4,558 
4,558 
9,705 
9,705 

Std. dev. 
1.257 
1.222 
0.190 
0.022 
0.199 

36 
 
 
 
Aggregate thin cap restriction 
Aggregate total leverage restriction 
Aggregate internal leverage restriction 
Net PPE/assets 
EBITDA/assets 
Log of sales 
Creditor rights 
Political risk 
Rate of inflation 
Growth options 

9,705 
9,705 
9,705 
9,705 
9,705 
9,705 
9,705 
9,705 
9,705 
9,705 

0.156 
0.062 
0.091 
0.267 
0.126 
13.115 
2.279 
0.807 
0.088 
0.089 

0.097 
0.010 
0.042 
0.231 
0.115 
13.042 
2.254 
0.812 
0.023 
0.074 

0.186 
0.113 
0.139 
0.187 
0.124 
1.861 
1.010 
0.066 
0.534 
0.114 

37 
 
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38 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 3. The introduction of thin capitalization rules and borrowing 

This table provides  mean  values of the  Total leverage and Internal leverage variables before and after the  introduction of  a 
restriction on total leverage (in Panel A) and on internal leverage (in Panel B). Total leverage is the ratio of total US foreign 
affiliate debt to affiliate assets. Internal leverage is the ratio of internal debt owed to the parent to affiliate equity. *, **, *** 
indicate that ex post mean value of a variable is statistically significantly different from the ex ante mean value at the 10%, 5% 
and 1% levels, respectively. 

Internal leverage 

After 

Before 

After 

Panel A. Restrictions on total leverage 
Number of observations 
Before 
294 
569 
258 
202 
2063 
175 
326 
1430 

Country 
Argentina 
Australia 
Chile 
Denmark 
Netherlands 
New Zealand 
South Korea 
United Kingdom 
Average 

526 
632 
128 
335 
832 
266 
228 
5984 

Panel B. Restrictions on internal leverage 

Number of observations 
After 
Before 
     569 
1308 
     688 
1071 
     611 
2654 
     1606 
536 
     607 
1801 
     142 
262 
     479 
1061 

Australia 
Belgium 
Germany 
Italy 
Japan 
Portugal 
Spain 
Average 

Total leverage 
Before 
0.539 
0.635 
0.500 
0.660 
0.557 
0.567 
0.524 
0.624 
0.582 

Total leverage 
Before 

0.636 
0.607 
0.595 
0.620 
0.689 
0.628 
0.605 
0.624 

0.523 
0.495*** 
0.449** 
0.573** 
0.503*** 
0.525 
0.436*** 
0.552*** 
0.537 

After 
0.578*** 
0.561*** 
0.560** 
0.543*** 
0.640*** 
0.580 
0.532*** 
0.578 

0.105 
0.201 
0.104 
0.077 
0.064 
0.136 
0.049 
0.142 
0.106 

After 

0.098 
0.061*** 
0.039** 
0.035** 
0.031*** 
0.095* 
0.037 
0.063*** 
0.061 

Internal leverage 

Before 
0.201 
0.075 
0.063 
0.060 
0.127 
0.080 
0.066 
0.090 

After 
0.086*** 
0.045*** 
0.056 
0.025*** 
0.075*** 
0.042** 
0.029*** 
0.057 

39 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 4. Thin capitalization restrictions on total debt and total borrowing by US affiliates 

The dependent variable is Total leverage which is the ratio of total US foreign affiliate debt to affiliate assets.  Country tax rate 
is the median tax rate in the affiliate host country estimated annually using affiliate-level tax burdens. Thin cap restriction is a 
dummy  variable  that  equals  1  if  a  country  has  a  thin  capitalization  rule  and  zero  otherwise.  Total  leverage  restriction  is  a 
dummy  variable  that  equals  1  if  a  country  imposes  a  quantitative  restriction  on  the  ratio  of  total  debt  to  assets  and  zero 
otherwise.  Total  leverage  ratio  is  the  maximum  allowable  ratio  of  total  debt  to  assets.  Net  PPE/assets  is  the  ratio  of  net 
property, plant and equipment to assets in the affiliate. EBITDA/assets is the ratio of earnings before interest, depreciation and 
amortization  to  assets.  Log  of  sales  is  the  logarithm  of  sales.  Creditor  rights  is  an  index  of  creditor  rights  from  Djankov, 
McLiesh  and  Shleifer  (2007).  Political  risk  is  the  annual  index  of  political  risk  from  the  International  Country  Risk  Guide. 
Rate of inflation is the annual percentage in the consumer price index from the World Development Indicators. Growth options 
is  the  compound  annual  growth  rate  of  total  affiliate  sales  at  the  industry  and  country  level.  Regressions  include  parent, 
industry and year fixed effects, and standard errors correct for clustering across observations in country/industry cells. *, **, 
and *** denote significance at the 10%, 5%, and 1% levels, respectively. 

VARIABLES 
Country tax rate 

Thin cap restriction 

Country tax rate ×  
     Thin cap restriction 
Total leverage restriction 

Country tax rate ×  
    Total leverage restriction 
Total leverage ratio 

Country tax rate ×  
    Total leverage ratio 
Net PPE/assets 

EBITDA/assets 

Log of sales 

Creditor rights 

Political risk 

Rate of inflation 

Growth options 

(1) 
0.197*** 
(0.0353) 

(2) 
0.223*** 
(0.0324) 
-0.0214*** 
(0.00747) 

(3) 
0.217*** 
(0.0347) 
-0.0272 
(0.0214) 
0.0183 
(0.0744) 

(4) 
0.187*** 
(0.0322) 

(5) 
0.174*** 
(0.0325) 

(6) 
0.193*** 
(0.0339) 

(7) 
0.493*** 
(0.166) 

-0.0186***  -0.0445** 
(0.0195) 
(0.00691) 
0.0978 
(0.0661) 

0.0307* 
(0.0184) 

0.119** 
(0.0555) 
-0.313* 
(0.169) 
0.0329** 
(0.0138) 
-0.470*** 
(0.0222) 
0.620*** 
(0.218) 

0.0331** 
(0.0138) 
-0.470*** 
(0.0221) 
0.637*** 
(0.219) 

0.0331** 
(0.0138) 
-0.470*** 
(0.0221) 
0.638*** 
(0.218) 

0.0329** 
(0.0138) 
-0.469*** 
(0.0221) 
0.616*** 
(0.220) 

0.0333** 
(0.0138) 
-0.470*** 
(0.0221) 
0.623*** 
(0.219) 

0.0328** 
(0.0138) 
-0.470*** 
(0.0221) 
0.620*** 
(0.219) 

0.0333** 
(0.0138) 
-0.470*** 
(0.0221) 
0.622*** 
(0.219) 
0.0084***  0.0089***  0.0090***  0.0107***  0.0099***  0.0105***  0.0101*** 
(0.00346) 
(0.00322) 
(0.00305) 
-0.186*** 
-0.189*** 
-0.200*** 
(0.0339) 
(0.0346) 
(0.0356) 
-0.346*** 
-0.359*** 
-0.376*** 
(0.0988) 
(0.0967) 
(0.0970) 
0.00312 
0.00561 
0.00331 
(0.0133) 
(0.0137) 
(0.0147) 

(0.00329) 
-0.173*** 
(0.0322) 
-0.434*** 
(0.0980) 
0.00220 
(0.0121) 

(0.00356) 
-0.195*** 
(0.0351) 
-0.363*** 
(0.0978) 
0.00328 
(0.0142) 

(0.00317) 
-0.178*** 
(0.0340) 
-0.346*** 
(0.0970) 
0.00640 
(0.0130) 

(0.00315) 
-0.171*** 
(0.0336) 
-0.426*** 
(0.0999) 
0.00242 
(0.0120) 

Observations 
R-squared 
Number of parents 

54,269 
0.097 
3,943 

54,269 
0.097 
3,943 

54,269 
0.097 
3,943 

54,269 
0.097 
3,943 

54,269 
0.097 
3,943 

54,269 
0.097 
3,943 

54,269 
0.097 
3,943 

40 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 5. Thin capitalization restrictions on internal debt and borrowing from the parent relative to equity 

The dependent variable is Internal leverage which is the ratio of internal debt owed to the parent to affiliate equity.  Country 
tax  rate  is  the  median  tax  rate  in  the  affiliate  host  country  estimated  annually  using  affiliate-level  tax  burdens.  Thin  cap 
restriction is a dummy variable that equals 1 if a country has a thin capitalization rule and zero otherwise. Internal leverage 
restriction is a dummy variable that equals 1 if a country imposes a quantitative restriction on the ratio of internal debt to the 
sum  of  internal  debt  and  internal  equity.  Internal  leverage  ratio  is  the  maximum  allowable  ratio  of  internal  debt  to  sum  of 
internal  debt  and  internal  equity.  Net  PPE/assets  is  the  ratio  of  net  property,  plant  and  equipment  to  assets  in  the  affiliate. 
EBITDA/assets is the ratio of earnings before interest, depreciation and amortization to assets. Log of sales is the logarithm of 
sales.  Creditor  rights  is  an  index  of  creditor  rights  from  Djankov,  McLiesh  and  Shleifer  (2007).  Political  risk  is  the  annual 
index of political risk from the International Country Risk Guide. Rate of inflation is the annual percentage in the consumer 
price index from the World Development Indicators. Growth options is the compound annual growth rate of total affiliate sales 
at the industry, and country level. Regressions include parent, industry, and year fixed effects, and standard errors correct for 
clustering  across  observations  in  country/industry  cells.  *,  **,  and  ***  denote  significance  at  the  10%,  5%,  and  1%  levels, 
respectively. 

VARIABLES 
Country tax rate 

Thin cap restriction 

Country tax rate ×  
   Thin cap restriction 
Internal leverage restriction 

Country tax rate ×  
    Internal leverage restriction 
Internal leverage ratio 

Country tax rate ×  
    Internal leverage ratio 
Net PPE/assets 

EBITDA/assets 

Log of sales 

Creditor rights 

Political risk 

Rate of inflation 

Growth options 

(1) 
0.368*** 
(0.0981) 

(2) 
0.468*** 
(0.0942) 
-0.0800*** 
(0.0180) 

(3) 
0.468*** 
(0.111) 
-0.0806 
(0.0611) 
0.00182 
(0.186) 

(4) 
0.479*** 
(0.103) 

(5) 
0.480*** 
(0.108) 

(6) 
0.465*** 
(0.102) 

(7) 
0.229 
(0.559) 

-0.0629*** 
(0.0224) 

-0.0602 
(0.0682) 
-0.00793 
(0.198) 

0.196***  0.115 
(0.0603) 

(0.184) 

-0.0761 
(0.0502) 

-0.0777 
(0.0503) 

-0.0743 
(0.0503) 

-0.0743 
(0.0503) 

   0.246 
  (0.589) 
-0.0780 
-0.0761 
-0.0751 
(0.0502) 
(0.0503) 
(0.0501) 
0.0971***  0.0943***  0.0943***  0.0963***  0.0963***  0.0952***  0.0953*** 
(0.0355) 
(0.0355) 
(0.0355) 
1.926*** 
1.919*** 
1.871*** 
(0.501) 
(0.500) 
(0.496) 
-0.00233 
0.00001 
0.00619 
(0.0087) 
(0.0083) 
(0.0079) 
-0.130 
-0.135 
-0.179 
(0.119) 
(0.118) 
(0.117) 
-2.556*** 
-2.529*** 
-2.301*** 
(0.762) 
(0.758) 
(0.750) 
-0.0445 
-0.0446 
-0.0337 
(0.0365) 
(0.0366) 
(0.0389) 

(0.0355) 
1.952*** 
(0.501) 
0.00820 
(0.0075) 
-0.0763 
(0.113) 
-2.516*** 
(0.758) 
-0.0377 
(0.0309) 

(0.0355) 
1.952*** 
(0.502) 
0.00819 
(0.0073) 
-0.0765 
(0.111) 
-2.517*** 
(0.754) 
-0.0377 
(0.0309) 

(0.0355) 
1.919*** 
(0.500) 
0.00000 
(0.0084) 
-0.135 
(0.118) 
-2.530*** 
(0.760) 
-0.0445 
(0.0367) 

(0.0355) 
1.925*** 
(0.501) 
-0.00183 
(0.0085) 
-0.132 
(0.119) 
-2.537*** 
(0.758) 
-0.0453 
(0.0365) 

Observations 
R-squared 
Number of parents 

52,092 
0.003 
3,868 

52,092 
0.003 
3,868 

52,092 
0.003 
3,868 

52,092 
0.003 
3,868 

52,092 
0.003 
3,868 

52,092 
0.003 
3,868 

52,092 
0.003 
3,868 

41 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 6. Thin capitalization restrictions on the share of internal debt and borrowing from the parent 

The dependent variable is the Internal debt share which is the ratio of internal debt owed to the parent to total affiliate debt. 
Country tax rate is the median tax rate in the affiliate host country estimated annually using affiliate-level tax burdens. Thin 
cap  restriction  is  a  dummy  variable  that  equals  1  if  a  country  has  a  thin  capitalization  rule  and  zero  otherwise.  Internal 
leverage restriction is a dummy variable that equals 1 if a country imposes a quantitative restriction on the ratio of internal debt 
to the sum of internal debt and internal equity. Internal leverage ratio is the maximum ratio of internal debt to sum of internal 
debt  and  internal  equity.  Net  PPE/assets  is  the  ratio  of  net  property,  plant  and  equipment  to  assets  in  the  affiliate. 
EBITDA/assets is the ratio of earnings before interest, depreciation and amortization to assets. Log of sales is the logarithm of 
sales.  Creditor  rights  is  an  index  of  creditor  rights  from  Djankov,  McLiesh  and  Shleifer  (2007).  Political  risk  is  the  annual 
index of political risk from the International Country Risk Guide. Rate of inflation is the annual percentage in the consumer 
price index from the World Development Indicators. Growth options is the compound annual growth rate of total affiliate sales 
at the industry, and country level. Regressions include parent, industry, and year fixed effects, and standard errors correct for 
clustering  across  observations  in  country/industry  cells.  *,  **,  and  ***  denote  significance  at  the  10%,  5%,  and  1%  levels, 
respectively. 

VARIABLES 
Country tax rate 

Thin cap restriction 

Country tax rate ×  
    Thin cap restriction 
Internal leverage restriction 

Country tax rate ×  
    Internal leverage restriction 
Internal leverage ratio 

Country tax rate × 
    Internal leverage ratio 
Net PPE/assets 

EBITDA/assets 

Log of sales 

Creditor rights 

Political risk 

Rate of inflation 

Growth options 

(1) 
0.117*** 
(0.0330) 

(2) 
0.130*** 
(0.0339) 
-0.0103* 
(0.00616) 

(3) 
0.104*** 
(0.0307) 
-0.0348** 
(0.0177) 
0.0786 
(0.0538) 

(4) 
0.131*** 
(0.0339) 

(5) 
0.130*** 
(0.0348) 

(6) 
0.136*** 
(0.0338) 

(7) 
0.195 
(0.165) 

-0.00781 
(0.00733) 

-0.0102 
(0.0211) 
0.00686 
(0.0604) 

0.107*** 
(0.0129) 
-0.121*** 
(0.00882) 
-0.262** 
(0.115) 
0.00302 
(0.00280) 
-0.162*** 
(0.0336) 
0.300** 
(0.120) 
-0.00666 
(0.00818) 

0.107*** 
(0.0130) 
-0.121*** 
(0.00881) 
-0.251** 
(0.117) 
0.00327 
(0.00274) 
-0.149*** 
(0.0307) 
0.272** 
(0.119) 
-0.00722 
(0.00755) 

0.107*** 
(0.0129) 
-0.121*** 
(0.00882) 
-0.255** 
(0.116) 
0.00357 
(0.00271) 
-0.140*** 
(0.0298) 
0.308** 
(0.120) 
-0.00624 
(0.00769) 

0.107*** 
(0.0130) 
-0.121*** 
(0.00882) 
-0.255** 
(0.114) 
0.00226 
(0.00282) 
-0.157*** 
(0.0336) 
0.272** 
(0.120) 
-0.00804 
(0.00803) 

0.107*** 
(0.0130) 
-0.121*** 
(0.00881) 
-0.256** 
(0.114) 
0.00228 
(0.00282) 
-0.157*** 
(0.0335) 
0.273** 
(0.120) 
-0.00809 
(0.00806) 

0.0374* 
(0.0202) 

0.107*** 
(0.0130) 
-0.121*** 
(0.00882) 
-0.251** 
(0.115) 
0.00148 
(0.00290) 
-0.153*** 
(0.0342) 
0.255** 
(0.119) 
-0.00891 
(0.00781) 

0.0576** 
(0.0249) 
-0.0615* 
(0.0337) 
0.107*** 
(0.0130) 
-0.121*** 
(0.00881) 
-0.251** 
(0.115) 
0.00161 
(0.00294) 
-0.154*** 
(0.0340) 
0.259** 
(0.120) 
-0.00909 
(0.00785) 

Observations 
R-squared 
Number of parents 

51,524 
0.026 
3,871 

51,524 
0.026 
3,871 

51,524 
0.026 
3,871 

51,524 
0.026 
3,871 

51,524 
0.026 
3,871 

51,524 
0.026 
3,871 

51,524 
0.026 
3,871 

42 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 7. Internal leverage restrictions and the total debt and total borrowing by US affiliates 

The dependent variable is Total leverage which is the ratio of total US foreign affiliate debt to affiliate assets.  Country tax rate 
is  the  median  tax  rate  in  the  affiliate  host  country  estimated  annually  using  affiliate-level  tax  burdens.  Internal  leverage 
restriction is a dummy variable that equals 1 if a country imposes a quantitative restriction on the ratio of internal debt to the 
sum of internal debt and internal equity. Internal leverage ratio is the maximum ratio of internal debt to sum of internal debt 
and internal equity. Net PPE/assets is the ratio of net property, plant and equipment to assets in the affiliate. EBITDA/assets is 
the ratio of earnings before interest, depreciation and amortization to assets.  Log of sales is the logarithm of sales.  Creditor 
rights is an index of creditor rights from Djankov, McLiesh and Shleifer (2007). Political risk is the annual index of political 
risk from the International Country Risk Guide. Rate of inflation is the annual percentage in the consumer price index from the 
World Development Indicators. Growth options is the compound annual growth rate of total affiliate sales at the industry and 
country  level.  Regressions  include  parent,  industry  and  year  fixed  effects,  and  standard  errors  correct  for  clustering  across 
observations in country/industry cells. *, **, and *** denote significance at the 10%, 5%, and 1% levels, respectively. 

VARIABLES 
Country tax rate 

Internal leverage restriction 

Country tax rate × Internal leverage restriction 

Internal leverage ratio 

Country tax rate × Internal leverage ratio 

Net PPE/assets 

EBITDA/assets 

Log of sales 

Creditor rights 

Political risk 

Rate of inflation 

Growth options 

Observations 
R-squared 
Number of parents 

(1) 
0.211*** 
(0.0345) 
-0.0082*** 
(0.0009) 

0.0328** 
(0.0138) 
-0.469*** 
(0.0221) 
0.622*** 
(0.220) 
0.00762*** 
(0.00290) 
-0.194*** 
(0.0344) 
-0.406*** 
(0.0995) 
0.00188 
(0.0143) 

54,269 
0.097 
3,943 

(2) 
0.224*** 
(0.0360) 
0.0331 
(0.0330) 
-0.119 
(0.104) 

0.0324** 
(0.0138) 
-0.469*** 
(0.0221) 
0.624*** 
(0.219) 
0.00726*** 
(0.00279) 
-0.194*** 
(0.0343) 
-0.424*** 
(0.100) 
0.00285 
(0.0141) 

54,269 
0.097 
3,943 

(3) 
0.194*** 
(0.0341) 

(4) 
0.178 
(0.322) 

0.00463** 
(0.0026) 

0.0329** 
(0.0137) 
-0.469*** 
(0.0221) 
0.615*** 
(0.220) 
0.00863*** 
(0.00275) 
-0.201*** 
(0.0350) 
-0.370*** 
(0.0955) 
0.00359 
(0.0149) 

54,269 
0.097 
3,943 

-0.0104 
(0.0988) 
0.0175 
(0.331) 
0.0329** 
(0.0138) 
-0.469*** 
(0.0221) 
0.615*** 
(0.220) 
0.00859*** 
(0.00254) 
-0.201*** 
(0.0349) 
-0.372*** 
(0.0969) 
0.00364 
(0.0149) 

54,269 
0.097 
3,943 

43 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 8. The application of thin capitalization rules and US affiliate financing 

The dependent variable in columns (1) to (3) is Total leverage, which is the total debt to assets ratio of the US foreign affiliate, 
the dependent variable in columns (4) and (5) is Internal leverage, which is the ratio of internal debt to total equity of the US 
foreign affiliate, and the dependent variable in columns (6) and (7) is Internal debt share, which is the ratio of internal debt 
owed to its parent to total debt of the US foreign affiliate. Country tax rate is the median tax rate in the affiliate host country 
estimated annually using affiliate-level tax burdens. Thin cap restriction is a dummy variable that equals 1 if a country has a 
thin capitalization rule and zero otherwise. Total leverage restriction is a dummy variable that equals 1 if a country imposes a 
quantitative restriction on the ratio of total debt to assets and zero otherwise. Internal leverage restriction is a dummy variable 
that equals 1 if a country imposes a quantitative restriction on the ratio of internal debt to the sum of internal debt and internal 
equity. Arm’s length is a dummy variable if a country applies a remedy following arm’s length considerations. Net PPE/assets 
is the ratio of net property, plant and equipment to assets in the affiliate. EBITDA/assets is the ratio of earnings before interest, 
depreciation and amortization to assets. Log of sales is the logarithm of sales. Creditor rights is an index of creditor rights from 
Djankov, McLiesh and Shleifer (2007). Political risk is the annual index of political risk from the International Country Risk 
Guide. Rate of inflation is the annual percentage in the consumer price index from the World Development Indicators. Growth 
options is the compound annual growth rate of total affiliate sales at the industry and country level. Regressions include parent, 
industry and year fixed effects, and standard errors correct for clustering across observations in country/industry cells. *, **, 
and *** denote significance at the 10%, 5%, and 1% levels, respectively. 

VARIABLES 

Country tax rate 

Thin cap restriction 

Total leverage restriction 

Internal leverage restriction 

Thin cap restriction ×  
    Arm’s length 
Total leverage restriction ×  
    Arm’s length 
Internal leverage restriction ×  
    Arm’s length 
Net PPE/assets 

EBITDA/assets 

Log of sales 

Creditor rights 

Political risk 

Rate of inflation 

Growth options 

(1) 
Total 
leverage 
0.224*** 
(0.0320) 
-0.0276*** 
(0.00856) 

0.0169** 
(0.00847) 

(2) 
Total 
leverage 
0.183*** 
(0.0319) 

(3) 
Total 
leverage 
0.217*** 
(0.0348) 

(5) 
Internal 
leverage 
0.481*** 
(0.104) 

(4) 
Internal 
leverage 
0.463*** 
(0.0948) 
-0.0781*** 
(0.0202) 

(7) 
Internal 
debt share 
0.129*** 
(0.0336) 

(6) 
Internal 
debt share 
0.128*** 
(0.0336) 
-0.00903 
(0.00717) 

-0.0229*** 
(0.00786) 

0.0109 
(0.00964) 

-0.0200** 
(0.0103) 

-0.0575** 
(0.0282) 

-0.00312 
(0.0106) 

-0.00298 
(0.0277) 

-0.00369 
(0.00801) 

0.0354** 
(0.0139) 
-0.487*** 
(0.0215) 
0.488** 
(0.207) 

0.0357** 
(0.0138) 
-0.487*** 
(0.0215) 
0.469** 
(0.208) 

0.00727**  0.0105*** 
(0.00326) 
(0.00331) 
-0.183*** 
-0.164*** 
(0.0340) 
(0.0315) 
-0.339*** 
-0.432*** 
(0.0957) 
(0.0982) 
0.00552 
0.00696 
(0.0130) 
(0.0112) 

0.0244* 
(0.0145) 
0.0353** 
(0.0139) 
-0.487*** 
(0.0215) 
0.474** 
(0.208) 
0.00584* 
(0.00297) 
-0.178*** 
(0.0336) 
-0.403*** 
(0.0994) 
0.00216 
(0.0135) 

-0.0167 
(0.0343) 
-0.0768 
(0.0502) 
0.114*** 
(0.0372) 
1.923*** 
(0.495) 
0.00192 
(0.00896) 
-0.129 
(0.117) 
-2.427*** 
(0.754) 
-0.0394 
(0.0350) 

-0.0121 
(0.0112) 
0.107*** 
(0.0130) 
-0.129*** 
(0.00926) 
-0.294** 
(0.115) 
0.00332 
(0.00296) 
-0.155*** 
(0.0328) 
0.312*** 
(0.120) 
-0.00743 
(0.00769) 

0.108*** 
(0.0130) 
-0.129*** 
(0.00924) 
-0.287** 
(0.118) 
0.00384 
(0.00269) 
-0.144*** 
(0.0302) 
0.307*** 
(0.119) 
-0.00702 
(0.00725) 

-0.0751 
(0.0504) 
0.112*** 
(0.0373) 
1.958*** 
(0.497) 
0.00911 
(0.00817) 
-0.0665 
(0.111) 
-2.421*** 
(0.751) 
-0.0330 
(0.0305) 

Observations 
R-squared 
Number of parents 

54,262 
0.099 
3,941 

54,262 
0.098 
3,941 

54,262 
0.098 
3,941 

52,092 
0.003 
3,868 

52,092 
0.003 
3,868 

51,524 
0.027 
3,871 

51,524 
0.027 
3,871 

44 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 9. The short-term impact of changes in thin capitalization rules on US affiliate financing 

All  variables  are  in  one-period  changes  between  benchmark  years.  The  dependent  variable  in  the  regressions  reported  in 
columns (1) to (3) is the one-period change in total debt to assets ratio of the US foreign affiliate. The dependent variable in the 
regressions  reported  in  columns  (4)  and  (5)  is  the  one-period  change  in  the  ratio  of  internal  debt  to  total  equity  of  the  US 
foreign affiliate. The dependent variable in the regressions reported in columns (6) and (7) is the one-period change in the ratio 
of internal debt owed to its parent to total debt of the US foreign affiliate. Country tax rate is the median tax rate in the affiliate 
host country estimated annually using affiliate-level tax burdens. Thin cap restriction is a dummy variable that equals 1 if a 
country  has  a  thin  capitalization  rule  and  zero  otherwise.  Total  leverage  restriction  is  a  dummy  variable  that  equals  1  if  a 
country imposes a quantitative restriction on the ratio of total debt to assets and zero otherwise. Internal leverage restriction is 
a dummy variable that equals 1 if a country imposes a quantitative restriction on the ratio of internal debt to the sum of internal 
debt  and  internal  equity.  Net  PPE/assets  is  the  ratio  of  net  property,  plant  and  equipment  to  assets  in  the  affiliate. 
EBITDA/assets is the ratio of earnings before interest, depreciation and amortization to assets. Log of sales is the logarithm of 
sales.  Creditor  rights  is  an  index  of  creditor  rights  from  Djankov,  McLiesh  and  Shleifer  (2007).  Political  risk  is  the  annual 
index of political risk from the International Country Risk Guide. Rate of inflation is the annual percentage in the consumer 
price index from the World Development Indicators. Growth options is the compound annual growth rate of total affiliate sales 
at the industry and country level. Regressions include parent, industry and year  fixed effects, and standard errors correct for 
clustering  across  observations  in  country/industry  cells.  *,  **,  and  ***  denote  significance  at  the  10%,  5%,  and  1%  levels, 
respectively. 

VARIABLES 

Δ Country tax rate 

Δ Thin cap restriction 

Δ Total leverage restriction 

Δ Internal leverage restriction 

Δ Net PPE/assets 

Δ EBITDA/assets 

Δ Log of sales 

Δ Creditor rights 

Δ Political risk 

Δ Rate of inflation 

Δ Growth options 

Observations 
R-squared 
Number of parents 

(1) 
Change in 
total 
leverage 
0.167** 
(0.0672) 
-0.0113* 
(0.00630) 

0.160*** 
(0.0333) 
-0.339*** 
(0.0237) 
1.165*** 
(0.296) 
0.0133 
(0.0141) 
-0.0638 
(0.0670) 
-0.388*** 
(0.105) 
0.0119 
(0.0116) 

(2) 
Change in 
total 
leverage 
0.175** 
(0.0674) 

(3) 
Change in 
total 
leverage 
0.171** 
(0.0675) 

-0.0248** 
(0.0108) 

0.159*** 
(0.0333) 
-0.339*** 
(0.0238) 
1.169*** 
(0.296) 
0.0135 
(0.0142) 
-0.0612 
(0.0660) 
-0.391*** 
(0.105) 
0.0164 
(0.0121) 

0.0048 
(0.0082) 
0.159*** 
(0.0334) 
-0.339*** 
(0.0237) 
1.158*** 
(0.296) 
0.0110 
(0.0142) 
-0.0542 
(0.0665) 
-0.398*** 
(0.105) 
0.0104 
(0.0128) 

15,202 
0.061 
1,634 

15,202 
0.061 
1,634 

15,202 
0.061 
1,634 

(4) 
Change in 
internal 
leverage 
0.0262 
(0.397) 
-0.0452** 
(0.0231) 

(5) 
Change in 
internal 
leverage 
-0.247 
(0.382) 

(6) 
Change in 
internal debt 
share 
-0.000937 
(0.0646) 
-0.00162 
(0.00942) 

(7) 
Change in 
internal 
debt share 
0.0209 
(0.0623) 

-0.117** 
(0.0573) 
0.0479 
(0.165) 
-0.0773 
(0.0974) 
2.472* 
(1.400) 
-0.0251 
(0.0744) 
0.417 
(0.421) 
-0.119 
(1.177) 
-0.00108 
(0.0927) 

14,518 
0.002 
1,607 

-0.00395 
(0.0106) 
0.184*** 
(0.0344) 
-0.126*** 
(0.0159) 
0.710*** 
(0.235) 
0.0014 
(0.0133) 
0.0445 
(0.0869) 
0.045 
(0.145) 
-0.0138 
(0.0136) 

0.184*** 
(0.0346) 
-0.123*** 
(0.0161) 
0.731*** 
(0.237) 
0.0093 
(0.0133) 
0.0603 
(0.0891) 
0.182 
(0.151) 
-0.0135 
(0.0132) 

14,366 
0.015 
1,606 

14,366 
0.014 
1,606 

0.0569 
(0.165) 
-0.0907 
(0.0969) 
2.442* 
(1.374) 
-0.0292 
(0.0760) 
0.525 
(0.435) 
-0.269 
(1.193) 
-0.000860 
(0.0968) 

14,518 
0.002 
1,607 

45 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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46 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 1. US affiliates’ debt ratios and corporate taxation 

This figure displays mean values across time over US affiliate total leverage (equal to the ratio of total US foreign affiliate debt 
to affiliate assets), internal leverage (equal to the ratio of internal debt owed to the parent to affiliate equity), internal debt share 
(equal to the ratio of internal debt owed to the parent to total affiliate debt, and country-level corporate tax rate (equal to the 
median tax rate in the affiliate host country estimated annually using affiliate-level tax burdens) per cohort (for the years 1982, 
1989, 1994, 1999, 2004).   

0.7 

0.6 

0.5 

0.4 

0.3 

0.2 

0.1 

0 

Total leverage 

Internal leverage 

Internal debt share 

Country tax rate 

1982 

1989 

1994 

1999 

2004 

47 
 
 
 
 
 
 
 
 
 
 
 
TTAXATION PAPERS 

Taxation  Papers  can  be  accessed  and  downloaded  free  of  charge  at  the  following  address: 
http://ec.europa.eu/taxation_customs/taxation/gen_info/economic_analysis/tax_papers/index_en.htm 

The following papers have been issued. 

Taxation Paper No 41 (2014): Behavioural Economics and Taxation. Written by Till Olaf Weber, Jonas 
Fooken and Benedikt Herrmann. 

Taxation  Paper  No  40  (2013):  A  Review  and  Evaluation  of  Methodologies  to  Calculate  Tax 
Compliance  Costs.  Written  by  The  Consortium  consisting  of  Ramboll  Management  Consulting,  The 
Evaluation Partnership and Europe Economic Research 

Taxation  Paper  No  39  (2013):  Recent  Reforms  of  Tax  Systems  in  the  EU:  Good  and  Bad  News. 
Written  by  Gaëlle  Garnier,  Aleksandra  Gburzynska,  Endre  György,  Milena  Mathé,  Doris  Prammer,  
Savino Ruà, Agnieszka Skonieczna. 

Taxation Paper No 38 (2013): Tax reforms in EU Member States: Tax policy challenges for economic 
growth  and  fiscal  sustainability,  2013  Report.  Written  by  Directorate-General  for  Taxation  and 
Customs Union and Directorate-General for Economic and Financial Affairs, European Commission 

Taxation  Paper  No  37  (2013):  Tax  Reforms  and  Capital  Structure  of  Banks.  Written  by  Thomas 
Hemmelgarn and Daniel Teichmann 

Taxation  Paper  No  36  (2013):  Study  on  the  impacts  of  fiscal  devaluation.  Written  by  a  consortium 
under the leader CPB 

Taxation Paper No 35 (2013): The marginal cost of public funds in the EU: the case of labour versus 
green taxes Written by Salvador Barrios, Jonathan Pycroft and Bert Saveyn 

Taxation Paper No 34 (2012): Tax reforms in EU Member States: Tax policy challenges for economic 
growth and fiscal sustainability. Written by Directorate-General for Taxation and Customs Union and 
Directorate-General for Economic and Financial Affairs, European Commission. 

Taxation  Paper  No  33  (2012):  The  Debt-Equity  Tax  Bias:  consequences  and  solutions.  Written  by 
Serena Fatica, Thomas Hemmelgarn and Gaëtan Nicodème 

Taxation Paper No 32 (2012): Regressivity of environmental taxation: myth or reality? Written by Katri 
Kosonen 

Taxation  Paper  No  31  (2012):  Review  of  Current  Practices  for  Taxation  of  Financial  Instruments, 
Profits and Remuneration of the Financial Sector. Written by PWC 

Taxation  Paper  No  30  (2012):  Tax  Elasticities  of  Financial  Instruments,  Profits  and  Remuneration. 
Written by Copenhagen Economics. 

Taxation Paper No 29 (2011): Quality of Taxation and the Crisis: Tax shifts from a growth perspective. 
Written by Doris Prammer. 

Taxation Paper No 28 (2011): Tax reforms in EU Member States. Written by European Commission 

Taxation Paper No 27 (2011): The Role of Housing Tax Provisions in the 2008 Financial Crisis. Written 
by Thomas Hemmelgarn, Gaetan Nicodeme, and Ernesto Zangari 

Taxation Paper No 26 (2010): Financing Bologna Students' Mobility. Written by Marcel Gérard. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxation Paper No 25 (2010): Financial Sector Taxation. Written by European Commission. 

Taxation Paper No 24 (2010): Tax Policy after the Crisis --- Monitoring Tax Revenues and Tax Reforms 
in EU Member States --- 2010 Report. Written by European Commission. 

Taxation  Paper  No  23  (2010):  Innovative  Financing  at  a  Global  Level.  Written  by  European 
Commission. 

Taxation Paper No 22 (2010): Company Car Taxation. Written by Copenhagen Economics. 

Taxation  Paper  No  21  (2010):  Taxation  and  the  Quality  of  Institutions:  Asymmetric  Effects  on  FDI. 
Written by Serena Fatica. 

Taxation  Paper  No  20  (2010):  The  2008  Financial  Crisis  and  Taxation  Policy.  Written  by  Thomas 
Hemmelgarn and Gaëtan Nicodème. 

Taxation Paper No 19 (2009): The role of fiscal instruments in environmental policy.' Written by Katri 
Kosonen and Gaëtan Nicodème. 

Taxation  Paper  No  18  (2009):  Tax  Co-ordination  in  Europe:  Assessing  the  First  Years  of  the  EU-
Savings Taxation Directive. Written by Thomas Hemmelgarn and Gaëtan Nicodème. 

Taxation Paper No 17 (2009): Alternative Systems of Business Tax in Europe: An applied analysis of 
ACE and CBIT Reforms. Written by Ruud A. de Mooij and Michael P. Devereux.    

Taxation Paper No 16 (2009): International Taxation and multinational firm location decisions. Written 
by Salvador Barrios, Harry Huizinga, Luc Laeven and Gaëtan Nicodème. 

Taxation  Paper  No  15  (2009):  Corporate  income  tax  and  economic  distortions.  Written  by  Gaëtan 
Nicodème. 

Taxation  Paper  No  14  (2009):  Corporate  tax  rates  in  an  enlarged  European  Union.  Written  by 
Christina Elschner and Werner Vanborren. 

Taxation Paper No 13 (2008):  Study on reduced VAT applied  to goods and services in the Member 
States of the European Union. Final report written by Copenhagen Economics. 

Taxation  Paper  No  12  (2008):  The  corporate  income  tax  rate-revenue  paradox:  evidence  in  the  EU. 
Written by Joanna Piotrowska and Werner Vanborren. 

Taxation Paper No 11 (2007): Corporate tax policy and incorporation in the EU. Written by Ruud A. de 
Mooij and Gaëtan Nicodème. 

Taxation Paper No 10 (2007): A history of the 'Tax Package': The principles and issues underlying the 
Community approach. Written by Philippe Cattoir. 

Taxation Paper No 9 (2006): The Delineation and Apportionment of an EU Consolidated Tax Base for 
Multi-jurisdictional  Corporate  Income  Taxation:  a  Review  of  Issues  and  Options.  Written  by  Ana 
Agúndez-García. 

Taxation  Paper  No  8  (2005):  Formulary  Apportionment  and  Group  Taxation  in  the  European  Union: 
Insights from the United States and Canada. Written by Joann Martens Weiner. 

Taxation Paper No 7 (2005): Measuring the effective levels of company taxation in the new member 
States : A quantitative analysis. Written by Martin Finkenzeller and Christoph Spengel.   

Taxation  Paper  No  6  (2005):  Corporate  income  tax  and  the  taxation  of  income  from  capital.  Some 
evidence  from  the  past  reforms  and  the  present  debate  on  corporate  income  taxation  in  Belgium. 
Written by Christian Valenduc.  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
Taxation  Paper  No  5  (2005):  An  implicit  tax  rate  for  non-financial  corporations:  Definition  and 
comparison with other tax indicators. Written by Claudius Schmidt-Faber. 

Taxation Paper No 4 (2005): Examination of the macroeconomic implicit tax rate on labour derived by 
the European Commission. Written by Peter Heijmans and Paolo Acciari. 

Taxation Paper No 3 (2005): European Commission Staff Working Paper. 

Taxation Paper No 2 (2004): VAT indicators. Written by Alexandre Mathis. 

Taxation  Paper  No  1  (2004):  Tax-based  EU  own  resources:  an  assessment.  Written  by  Philippe 
Cattoir.