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The impact of thin capitalization rules on subsidiary financing : evidence from Belgium

Dave Goyvaerts (UGent) and Annelies Roggeman (UGent)
(2020) ECONOMIST - NETHERLANDS. 168(1). p.23-51
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Abstract
In order to prevent excessive profit shifting using internal debt by multinational firms, several countries have introduced thin capitalization rules limiting the deductibility of interests on internal loans. While prior research has consistently found that firms affected by thin capitalization rules reduce their internal debt-to-equity ratio, the means through which this reduction is achieved are understudied. This paper employs a Comparative Interrupted Time Series methodology to identify the short-term effects of newly introduced thin capitalization rules on subsidiaries' financing preferences, using a new dataset of detailed firm-level accounting data. The results indicate a reduction in internal debt and an increase in equity for affected firms, both by an increase in paid-up capital and by an increase in retained earnings. These findings about the way firms react may help lawmakers to estimate impact of future tax regulations.
Keywords
Thin capitalization rules, Corporate taxation, Internal debt, Corporate financing decisions, Profit shifting, NOTIONAL INTEREST DEDUCTION, DEBT

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MLA
Goyvaerts, Dave, and Annelies Roggeman. “The Impact of Thin Capitalization Rules on Subsidiary Financing : Evidence from Belgium.” ECONOMIST - NETHERLANDS, vol. 168, no. 1, 2020, pp. 23–51, doi:10.1007/s10645-019-09353-x.
APA
Goyvaerts, D., & Roggeman, A. (2020). The impact of thin capitalization rules on subsidiary financing : evidence from Belgium. ECONOMIST - NETHERLANDS, 168(1), 23–51. https://doi.org/10.1007/s10645-019-09353-x
Chicago author-date
Goyvaerts, Dave, and Annelies Roggeman. 2020. “The Impact of Thin Capitalization Rules on Subsidiary Financing : Evidence from Belgium.” ECONOMIST - NETHERLANDS 168 (1): 23–51. https://doi.org/10.1007/s10645-019-09353-x.
Chicago author-date (all authors)
Goyvaerts, Dave, and Annelies Roggeman. 2020. “The Impact of Thin Capitalization Rules on Subsidiary Financing : Evidence from Belgium.” ECONOMIST - NETHERLANDS 168 (1): 23–51. doi:10.1007/s10645-019-09353-x.
Vancouver
1.
Goyvaerts D, Roggeman A. The impact of thin capitalization rules on subsidiary financing : evidence from Belgium. ECONOMIST - NETHERLANDS. 2020;168(1):23–51.
IEEE
[1]
D. Goyvaerts and A. Roggeman, “The impact of thin capitalization rules on subsidiary financing : evidence from Belgium,” ECONOMIST - NETHERLANDS, vol. 168, no. 1, pp. 23–51, 2020.
@article{8651248,
  abstract     = {{In order to prevent excessive profit shifting using internal debt by multinational firms, several countries have introduced thin capitalization rules limiting the deductibility of interests on internal loans. While prior research has consistently found that firms affected by thin capitalization rules reduce their internal debt-to-equity ratio, the means through which this reduction is achieved are understudied. This paper employs a Comparative Interrupted Time Series methodology to identify the short-term effects of newly introduced thin capitalization rules on subsidiaries' financing preferences, using a new dataset of detailed firm-level accounting data. The results indicate a reduction in internal debt and an increase in equity for affected firms, both by an increase in paid-up capital and by an increase in retained earnings. These findings about the way firms react may help lawmakers to estimate impact of future tax regulations.}},
  author       = {{Goyvaerts, Dave and Roggeman, Annelies}},
  issn         = {{0013-063X}},
  journal      = {{ECONOMIST - NETHERLANDS}},
  keywords     = {{Thin capitalization rules,Corporate taxation,Internal debt,Corporate financing decisions,Profit shifting,NOTIONAL INTEREST DEDUCTION,DEBT}},
  language     = {{eng}},
  number       = {{1}},
  pages        = {{23--51}},
  title        = {{The impact of thin capitalization rules on subsidiary financing : evidence from Belgium}},
  url          = {{http://dx.doi.org/10.1007/s10645-019-09353-x}},
  volume       = {{168}},
  year         = {{2020}},
}

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