Firms’ Financial Choices and Thin Capitalization Rules under Corporate Tax Competition

Thin capitalization rules have become an important element in the corporate tax systems of developed countries. This paper sets up a model where national and multinational firms choose tax-efficient financial structures and countries compete for multinational firms through statutory tax rates and thin capitalization rules that limit the tax-deductibility of internal debt flows. In a symmetric tax competition equilibrium each country chooses inefficiently low tax rates and inefficiently lax thin capitalization rules. We show that a coordinated tightening of thin capitalization rules benefits both countries, even though it intensifies competition via tax rates. When countries differ in size, the smaller country not only chooses the lower tax rate but also the more lenient thin capitalization rule.thin capitalization, capital structure, tax competition

When Are Capitalization Exceptions Justified?

It is a widely accepted general principle that a taxpayer should capitalize an expenditure that produces a benefit lasting beyond the current tax period. Yet rules putting this principle into practice are among the most controversial in all of federal income taxation. Many argue that a retreat from the general principle is warranted when designing capitalization rules, and even those who argue that capitalization rules ought to be sweeping usually conclude that exceptions are necessary or desirable. For instance, most commentators accept uncritically that expenses incurred to procure certain intangible capital should be expensed, as under current law, without exploring whether expensing of intangibles costs is inevitable, although some have considered the implications of excepting intangibles costs from capitalization. Although the arguments with respect to exceptions to capitalization for tangible assets have received more attention, no consensus view has emerged regarding whether many of the exceptions are desirable as a matter of policy. This Article is a systematic analysis of the arguments in favor of departing from the normative or first-best capitalization rule

Increasing territorial capitalization by incorporation of small enterprises into clusters

Modernization of the Russian national economy depends on small businesses and their involvement in capitalization of the territorial potential. This article discusses methods, models, and mechanisms of territorial capitalization based on incorporation of small business enterprises into clusters along with medium- and large businesses. We propose an optimization model for assessing the efficiency of such clusters: our research has shown that this model can be applied for decision-making in regional strategic planning. Methodologically, this study relies on the theories of industrial development and economic growth, the industrial cluster theory, and the works of Russian and international researchers on mechanisms of management of territorial potential, their establishment and implementation. Capitalization of the region's resource potential manifests itself in the form of static and dynamic effects. We developed models of interaction between small and other businesses and structures within a cluster oriented towards territorial capitalization. We demonstrated that incorporation of a university into a cluster structure increases the innovative capacity of all cluster members. This research may be further expanded to study the mechanisms of involving small businesses operating in peripheral areas into clusters

COMPARING LAND VALUES AND CAPITALIZATION OF CASH RENTS FOR CROPLAND AND PASTURE IN GEORGIA

Nonagricultural factors impact land values to cause a divergence of discounted cash rents for agricultural land and land values. Focus is given to the portion of land values attributable to discounted cash rents. Unique characteristics for cropland and pasture lead to differences in capitalization rates. Nonagricultural factors are greatest for pasture. Keywords: land values, cash rents, capitalization, discounted cash rents, cropland, pastureland values, cash rents, capitalization, discounted cash rents, cropland, pasture, Land Economics/Use,

German inbound investment, corporate tax planning, and thin-capitalization rules: a difference-in-differences approach

This paper investigates tax planning behavior by means of inter-company finance and the effectiveness of fighting back via thin-capitalization rules. A simple theoretical model, which considers the financing decision of a multinational company, is used to obtain empirical implications. The empirical analysis, based on German inbound investment data from 1996 until 2004, supports a significant impact of tax rate differences on the use of intra-company debt. The effectiveness of the German thin-capitalization rule is tested by using legal amendments as natural experiments. The results suggest that the German thin-capitalization rule induces significantly lower intra-firm debt-levels of inbound investments. Hence, tax planning via intra-firm finance is effectively limited. --Corporate Income Tax,Multinationals,Thin-Capitalization Rule,Difference-in-Differences,Firm-Level Data

The capitalization of taxes in bond prices: Evidence from the market for Government of Canada bonds

This paper provides estimates of the extent to which corporate and personal income taxes are capitalized in bond prices. The methodology yields estimates of the degree of tax capitalization, rather than an implied tax rate. This makes it straightforward to identify the marginal investor and test for changes in tax capitalization. The empirical approach also makes it unnecessary to jointly estimate the degree of tax capitalization and the entire yield curve. Corporate taxes are found to have been fully capitalized in pre-tax Government of Canada bond yields during the period 1986-1993. Since 1994, taxes have not been capitalized in yields. These results are consistent with the existence of a marginal investor, but the identity of the marginal investor changed from a financial sector firm to a non-taxed entity in the early 1990s.tax capitalization; bond yields

Investor Rationality: Evidence from UK Property Capitalization Rates

Recent analyses have suggested the irrationality of investors in Australian and U.S. office properties. More specifically, investors have failed to raise capitalization rates sufficiently at rental cyclical peaks to account for the obvious mean reversion in real rents and thus have significantly overvalued properties. In this paper we analyze the determination of UK office and retail capitalization rates and provide evidence that these rates reflect rational expectations of mean reversion in future real cash flows. Moreover, these rates are linked to capitalization rates (dividend/price ratio) and expected dividend earnings growth as expected.

Interjurisdictional Capitalization of a New Metro Line on Housing Values

Many governments continue constructing new subway lines with the goal of reducing congestion and pollution in large cities. Besides the potential global effects on reducing negative externalities in the city, there are some local positive effects in terms of lower commuting time and distance for residents living close to the subway stations. These benets of the public transport services should capitalize totally or partially on housing prices. Most of the empirical work has estimated the effects on housing prices after the public transit infrastructure is operating and implicitly assumed homogeneous capitalization across jurisdictions. However, due to differences on local public goods provision and residents' characteristics across jurisdictions, two identical housing units located at the same distance to the nearest metro station but in different local markets would not necessarily have the same degree of capitalization. Using parametric and non-parametric methods and transaction data for Santiago, Chile, we estimate the anticipated capitalization of a new metro line across counties in the city. The results show signicant anticipated effects, between 3.6% and 5.3%, and also large interjurisdictional differences in capitalization degrees, ranging between -6% and 40%.Metro, Capitalization, Housing Prices

The capitalization of taxes in bond prices: Evidence from the market for Government of Canada bonds

This paper provides estimates of the extent to which corporate and personal income taxes are capitalized in bond prices. The methodology yields estimates of the degree of tax capitalization, rather than an implied tax rate. This makes it straightforward to identify the marginal investor and test for changes in tax capitalization. The empirical approach also makes it unnecessary to jointly estimate the degree of tax capitalization and the entire yield curve. Corporate taxes are found to have been fully capitalized in pre-tax Government of Canada bond yields during the period 1986-1993. Since 1994, taxes have not been capitalized in yields. These results are consistent with the existence of a marginal investor, but the identity of the marginal investor changed from a financial sector firm to a non-taxed entity in the early 1990s.Tax capitalization; Bond yields.

The impact of thin-capitalization rules on multinationals' financing and investment decisions

This paper analyzes the effectiveness of thin-capitalization rules in preventing debt finance by intercompany loans and explores their consequences for corporate decisions. A theoretical discussion emphasizes that limitations of the deduction of interest owed to foreign affiliates would not only affect multinationals' capital structure choice but also investment. An empirical investigation exploits a large firm-level panel dataset of multinationals in order to analyze the impact of thin-capitalization rules on capital structure choice and investment in the OECD and some further European countries in the time period between 1996 and 2004. The results indicate that thin-capitalization rules are effective in curbing tax planning via intercompany loans. However, investment is found to be adversely affected. --Corporate Income Tax,Multinationals,Leverage,Thin-Capitalization Rules,Firm-Level Data