Debt shifting in loss-making affiliates : an empirical study on parental debt in Norwegian multinationals
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- Master Thesis 
As the economy is becoming more globalised, debt shifting in multinational corporations has received increasing attention from policy makers, academics and the media. MNCs have an advantage of using differences in corporate tax systems across countries to ensure tax efficiency by minimising global tax payments. A neglected field in previous literature is the tax-motivated use of parental debt in loss-making affiliates. In this master thesis, we explores a new field within internal debt shifting. It has been observed that high-taxed parent companies provide debt to low-taxed loss-making affiliates. An explanation for this could be that there are tax related motives behind using parental debt in such a setting. A possible tax-minimising strategy for a MNC could be to undertake external debt at the parent level and reroute this as parental debt to its foreign affiliates. We examine the incentives for Norwegian MNCs to increase the parental debt-to-asset ratio, when the probability of the subsidiary running losses increases. In the event of losses, it is expected that the affiliate will default on its interest payments. The worldwide tax savings are then solely realised from the external debt tax shield at the parent level. To investigate the debt shifting strategy, we use the Survey of Outward Foreign Direct Investment, accompanied by the SIFON-registry, the Norwegian Corporate Accounts and other supplementary data. The results present a positive and significant relationship between the loss probability in affiliates and the parental debt-to-asset ratio, where longterm loans are mostly used to execute the strategy. The outcome of the empirical analysis suggests that Norwegian MNCs consider the loss probability ex-ante when deciding upon the use of rerouted external debt. This could be a caution to policy makers, as it suggests that anti-tax avoidance rules are relaxed for loss-making affiliates.