A new research paper from the NBER working paper series looks at debt-shifting within MNCs, and finds that – surprise! – tax rates matter a great deal more than previously thought (abstract):
Corporate Taxes and Internal Borrowing within Multinational Firms
Peter Egger, Christian Keuschnigg, Valeria Merlo, Georg Wamser
This paper develops a theoretical model of multinational firms with an internal capital market. Main reasons for the emergence of such a market are tax avoidance through debt shifting and the existence of institutional weaknesses and financial frictions across host countries. The model serves to derive hypotheses regarding the role of local versus foreign characteristics such as profit tax rates, lack of institutional quality, financial underdevelopment, and productivity for internal debt at the level of a given foreign affiliate. The paper assesses hypotheses in a panel data-set covering the universe of German multinational firms and their internal borrowing. Numerous novel insights are gained. For instance, the tax-sensitivity found in this paper is many times higher than previous research suggests. This accrues mainly to three things: the consideration of the boundedness of the internal debt ratio as a dependent variable in comparison to its treatment as an unbounded variable in most of the previous work; the coverage of all (small and large) multinationals here rather than a focus on large units in previous work; and the inclusion of endogenous characteristics in other countries multinationals are invested in (due to endogenous weights) while previous work did not consider such effects at all or assumed them to be exogenous. Moreover, local and foreign (at other locations of a given affiliate) market conditions matter more or less symmetrically and in the opposite direction. There is a nonlinear trade-off between institutional quality or financial development on the one hand and higher profit tax rates on the other hand, and the strength of this trade-off depends on the characteristics of one location relative to the other ones a multinational firm has affiliates (or the headquarters) in.
The paper's fairly comprehensive in looking at determinants, and although the data used is primarily German, its a fairly deep dataset covering both large and small MNCs.
But in case you’re missing the implications here: multinationals with foreign-based units will tend to borrow funds through units in low tax jurisdictions (utilising formal “external” capital markets) which are then used to fund investment for units in higher-tax jurisdictions (using an “internal” capital market within the MNC).
The low-tax based unit earns interest income from the "internal loan" which is taxed less, while the high-tax based unit can claim higher deductions based on the greater interest it paid on its loan.
It also helps if the lending unit is located in a place with a more developed “external” capital market, which implies cheaper cost of funds.
Just one more way multinational corporations “move” taxable income to the tax jurisdictions of their choice.
Peter Egger, Christian Keuschnigg, Valeria Merlo, Georg Wamser, "Corporate Taxes and Internal Borrowing within Multinational Firms", NBER Working Paper No. 18415, September 2012/p>