| dc.description.abstract | This thesis studies the development of CFC rules and assesses the effect that
CFC rules have on capital structure decisions of MNCs. CFC rules are an anti-taxavoidance
measure that aims to prevent profit shifting. If CFC rules are applied, income
of a foreign affiliate is added to the tax base of the parent and, therefore, taxed at the
tax rate of the parent’s country of residence.
First, we review the development of CFC regimes in Europe, the US, and
Canada (2000 - 2015). Second, we create a panel data set of European companies with
parents headquartered in Europe, the US, or Canada (2004 - 2015). This data set, which
contains financial and historical ownership data that is obtained from Amadeus and
Orbis databases, respectively, is further used in econometric analysis.
Our empirical analysis suggests that a parent country’s CFC rules have a
negative effect on an affiliate’s total debt-to-asset ratio and an increase in the strictness
of CFC rules is associated with a further decrease in leverage. These findings also hold
when we control for thin-capitalization rules and transfer pricing rules. Therefore, it
can be argued that CFC rules make internal lending as a profit shifting channel less
attractive for MNCs. Furthermore, the results suggest that also thin-capitalization rules
and transfer pricing rules are effective in limiting profit shifting activities by European
MNCs.
We find that since 2006, when the European Court of Justice issued a landmark
decision in the Cadbury-Schweppes (C-196/04) case, the negative effect of CFC rules
on an affiliate’s leverage has weakened. Nevertheless, we argue that the role of CFC
rules in corporate decision making should not be disregarded. | nb_NO |
