@phdthesis{8695614,
  abstract     = {{Due to international tax competition between countries in an attempt to attract foreign direct investments,
multinational enterprises are able to reduce their group-level effective tax rate by optimizing their group structure
and shifting profits between jurisdictions. According to the OECD (2017), this causes an annual loss in international
government tax revenue between 100 and 240 billion USD.
Multinational enterprises resort to a number of different tax planning techniques to achieve this goal. One of the
simplest and most common techniques available in international tax planning is the use of third party and related
party debt. Since interest paid by firms is generally considered to be a tax deductible expense, firms may be able to
reduce their effective tax rate by financing their activities using debt, rather than equity. This effect can be enhanced
by multinational enterprises by strategically locating their third-party and intragroup debt in countries with a high
statutory corporate tax rate, allowing them to shift profits and reduce their group-level effective tax rate. To curtail
this practice, most EU and OECD member countries have added rules restricting the deductibility of interest to their
corporate tax code. In this dissertation, we empirically examine the impact of these interest deductibility limitations
on affected firms using detailed firm-level accounting data.
In the first and second studies, we investigate the impact of the thin capitalization rules introduced in Belgium in 2012.
These rules limit the deductibility of interest paid on related-party debt exceeding a 5-to-1 internal debt-to-equity
ratio. 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. The first study provides
more details on the way firms react to newly introduced thin capitalization rules by using a Comparative Interrupted
Time Series methodology to identify the short-term effects of the new rules on affected firms’ financing preferences.
The results indicate a reduction in internal debt and an increase in equity for affected firms, achieved through an
increase in both paid-up capital and retained earnings. The impact of the measure on government tax revenue appears
to be limited. These findings about the way firms react may help lawmakers to estimate the impact of, and predict
firms’ responses to, future tax regulations.
In the second study, we look for heterogeneity within the group of affected firms. We hypothesize that firms with a
high pre-tax profit are more likely to quickly adapt to new thin capitalization rules. These hypotheses are tested using
a difference-in-differences methodology on detailed accounting data of affected Belgian firms. We observe that highprofit firms are more likely to increase their equity and reduce their internal debt, thereby optimizing their capital
structure in response to the new thin capitalization rules, than low-profit firms. The results of this analysis could help
lawmakers predict the outcome of future anti-tax avoidance regulations, and determine which firms are most likely
to bear the burden of new tax regulations.
Despite their success at reducing affected firms’ debt-to-equity ratio, this type of thin capitalization rule is not without
shortcomings. To address the drawbacks of thin capitalization rules, lawmakers have developed alternative ways to 
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limit debt-based profit shifting. The most important of these approaches is included in the OECD’s Base Erosion and
Profit Shifting (BEPS) project, which aims to curtail aggressive tax planning through international harmonization of
anti-tax avoidance rules. A best practice approach to limit interest deductibility is described in Action 4 of this
ambitious project (OECD, 2015).
These so-called earnings stripping rules aim to reduce international profit shifting by disallowing the tax deductibility
of interest exceeding a certain percentage of a firm’s earnings before interest, taxes, depreciation and amortization
(EBITDA). In the third study, we develop a new theoretical model to predict firms’ responses to the introduction of
earnings stripping rules, and hypothesize a reduction in their net finance expense and increases in their EBITDA and
corporate tax liabilities. These hypotheses are tested empirically using a firm-level dataset of German, Italian and
Spanish firms. The results indicate that firms affected by earnings stripping rules reduce their net finance expense,
while they appear to be less likely to manipulate their EBITDA. The effect on tax liabilities appears to be limited, and
seems to depend on the country-specific implementation.}},
  author       = {{Goyvaerts, Dave}},
  language     = {{eng}},
  pages        = {{xix, 130}},
  publisher    = {{Universiteit Gent. Faculteit Economie en Bedrijfskunde}},
  school       = {{Ghent University}},
  title        = {{The impact of thin capitalization rules}},
  year         = {{2021}},
}