Template-Type: ReDIF-Paper 1.0
Author-Name:  Jarkko Harju
Author-Name-First: Jarkko
Author-Name-Last: Harju
Author-Email: jarkko.t.harju@tuni.fi
Author-Workplace-Name: Tampere University, Finnish Centre of Excellence in Tax Systems Research (FIT), VATT Institute for Economic Research and CESifo
Author-Name:  Ilpo Kauppinen
Author-Name-First: Ilpo
Author-Name-Last: Kauppinen
Author-Email: ilpo.kauppinen@vatt.fi
Author-Workplace-Name: VATT Institute for Economic Research and CESifo
Author-Name: Olli Ropponen
Author-Name-First: Olli
Author-Name-Last: Ropponen
Author-Email: olli.ropponen@etla.fi
Author-Workplace-Name: Etla Economic Research
Title: Firm Responses to an Interest Barrier: Empirical Evidence
Abstract: This paper studies the effects of an interest barrier (IB) that was introduced in Finland to restrict
the profit-shifting opportunities of multinational enterprises (MNEs). We employ Orbis database on
Finnish, Swedish and Danish MNEs and a difference-in-differences methodology, where Swedish and
Danish MNEs serve as a control group. We find that Finnish MNEs responded to IB by decreasing
their financial expenses. We also find that the most affected firms decreased their debt levels due
to the reform. Our results suggest that the financial expense response is followed by a change in
the use of transfer pricing as a method to shift profits between tax jurisdictions. We do not find
evidence of total output changes among treated firms, suggesting that the IB did not affect the real
activity of MNEs.
Length: 40 pages
Creation-Date:  2023-02
Publication-Status: Published in FIT Working Paper Series, Finnish Center of Excellence in Tax Systems Research
File-URL: https://verotutkimus.fi/verotutkimus/wp-content/uploads/2023/03/FIT-WP7-Firm-Responses-to-an-Interest-Barrier-160323.pdf
File-Format: Application/pdf
File-Function: Revised version, 2023
Publication-Status: Published in VATT Working Paper Series
File-URL: https://www.doria.fi/handle/10024/148927
File-Format: Application/pdf
File-Function: First version, 2017
Number: 7
Classification-JEL: H25, H26, G32
Keywords: Corporate income tax, Multinational firms, Capital structure, Profit shifting, Interest barrier
Handle: RePEc:fit:wpaper:7