How Can Firms Choose Their Leverage? Tax Planning for Implementing Tax Induced Debt Finance
31 Pages Posted: 28 Oct 2008 Last revised: 25 Nov 2008
Date Written: September 2008
This paper identifies tax planning strategies necessary to implement tax induced debt finance and tests empirically if German multinationals use such tax planning strategies. This check allows to verify, whether the empirically well documented increase of the leverage with corporate tax rates is due to multinationals' corporate financial policy (tax planning) or possibly to other factors.
I argue that the leverage of multinationals' subsidiaries in high tax countries mainly increases because of the lack of retained earnings there and not because multinationals prefer debt for tax considerations.
I also point to the importance of finance holdings in combination with fiscal unions to implement tax induced debt finance. Such finance holdings carry significant amounts of debt finance and a high corporate tax rate increases the probability of multinationals establishing a finance holding.
Keywords: Tax Accounting, Business Taxation, Tax Planning, Leverage, Corporate Finance, Empirical
JEL Classification: G32, H25, M41, F23
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