Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271827 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 10183
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Escape clauses, where small firms are exempt from particular tax rules, is a crucial feature of a number of corporate tax schemes, but creates incentives to avoid taxation by manipulating the measures that determine inclusion. We evaluate the impact of thin capitalization rules, which commonly feature such escape clauses across the world, by exploiting the introduction of these rules in Norway in 2014. Combining difference-in-differences, regression discontinuity and bunching estimates, we show that what appears to be a strong response in the capital structure among exposed firms primarily reflect within-group reallocation of debt to avoid exposure to the rules. We observe sharp bunching among both new and existing subsidiaries at both thresholds for rule inclusion, and find that internal corporate group debt is offloaded to these bunching subsidiaries in order to avoid additional tax costs. As a result, significant and large effects on firm-level capital structure in response to the thin capitalization rules is driven by reshuffling of capital within corporate groups with little real effects. Re-estimating the difference-in-difference specification at the corporate group level confirms this finding, questioning the extent to which thin capitalization rules affect the real economy due to the presence of escape clauses.
Subjects: 
thin capitalization rules
capital structure
escape clauses
difference-in-differences
bunching
JEL: 
H25
H26
G30
Document Type: 
Working Paper
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