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The Effect of Tax Havens on Host Country Welfare

Gresik, Thomas A.; Schindler, Dirk; Schjelderup, Guttorm
Working paper
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URI
http://hdl.handle.net/11250/282459
Date
2015-04-24
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  • Discussion papers (FOR) [531]
Abstract
Multinational corporations can shift income into low-tax countries through transfer

pricing and debt financing. While most developed countries use thin capitalization rules to limit

the extent to which a subsidiary can be financed with internal debt, a number of developing

countries do not. In this paper, we analyze the effect on FDI and host country welfare of thin

capitalization rules when multinationals can also shift income via transfer prices. We show that

while permissive thin capitalization limits may be needed in developing countries to attract FDI,

the amount of debt financing allowed by the permissive limits facilitates more aggressive

transfer pricing and results in lower host country welfare.
Publisher
FOR
Series
Discussion paper;19/15

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