The recent increase in cross-border flows of foreign direct investment has sharpened the research focus on multinational taxation. This book examines how multinational corporations use indirect financing structures—organizing themselves into groups with several tiers of ownership—to reduce worldwide taxes. It spells out in detail how different tax policies affect corporations’ choice of financing structures, discussing the issues in both theoretical and empirical terms. Drawing on a unique data set (MiDi) on German multinationals provided by the Deutsche Bundesbank in Frankfurt, the book confi ... More

The recent increase in cross-border flows of foreign direct investment has sharpened the research focus on multinational taxation. This book examines how multinational corporations use indirect financing structures—organizing themselves into groups with several tiers of ownership—to reduce worldwide taxes. It spells out in detail how different tax policies affect corporations’ choice of financing structures, discussing the issues in both theoretical and empirical terms. Drawing on a unique data set (MiDi) on German multinationals provided by the Deutsche Bundesbank in Frankfurt, the book confirms the prevalence of indirect financing structures for both outbound and inbound German investment. It finds evidence of “treaty shopping” to avoid withholding taxes (using a third country with more favorable tax rates as a conduit through which to route investments) and of “debt shifting.” The book argues that increasing our knowledge of the tax reasons behind conduit investment will lead to a better understanding of how tax policy can affect macroeconomic flows of capital in the global economy. It reviews the trade-offs that governments face and discusses policy options, considering not only possible changes to corporate income tax policy but also the potential influence of international cooperation on countries’ domestic tax policy.