Tax Rules and Capital Reallocation: Real Effects of Anti-Tax Avoidance Policies

• In Event: Innovation and Taxes

Abstract

Anti-tax avoidance policies aim to curb profit shifting by MNEs, yet their effects on capital costs and economic growth remain a critical question. This study examines the causal impacts of Earnings Stripping Rules (ESR)---an anti-avoidance measure adopted by over 45 jurisdictions between 2015 and 2023---that limit profit shifting through debt channels but increase the cost of debt-financed capital. Using a large panel dataset on global MNE operations and a staggered difference-in-difference design, I compare the real activities of MNEs affected by ESR with those of unaffected groups. I find that ESR effectively reduce profit shifting and tax avoidance but lower investments in affected subsidiaries. However, MNEs reallocate these investments to other subsidiaries, maintaining overall group-level investments. This reallocation, primarily within local subsidiaries, corrects prior capital misallocation and raises group-level tax revenue. These findings suggest that coordinated and well-targeted anti-tax avoidance rules can reduce tax avoidance without stifling overall investment.

Author

• Usama Jamal, CY Cergy University of Paris