| dc.description.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. | nb_NO |
