|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.