Capital Structure and International Debt Shifting in Europe. Harry Huizinga * Tilburg University and CEPR

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1 Caal Srucur an Inrnaonal Db Shfng n Euro Harry Huznga * Tlburg Unvrsy an CEPR Luc Lavn * Inrnaonal Monary Fun an CEPR an Gaëan Ncoèm * Euroan Commsson an Solvay Busnss School (ULB) Arl 006 Absrac: Ths ar rsns a mol ha rlas a mulnaonal frm s omal b olcy o axaon an o non-ax facors such as h sr o rvn bankrucy. Th mol yls h rcons ha a mulnaonal s nbnss n a counry ns on naonal ax ras an ffrncs bn naonal an forgn ax ras. Ths ffrncs mar as mulnaonals hav an ncnv o shf b o hgh-ax counrs. Th rcons of h mol ar s h h a of a broa Euroan aa s combnng frm-lvl aa an nformaon on h nrnaonal ax ramn of vn an nrs srams. Th smaon rsuls nca ha corora b olcy rflcs naonal corora ax ras an nrnaonal corora ax ra ffrncs bu no non-rsn vn hholng axs. Ky ors: corora axaon, fnancal srucur, b shfng JEL classfcaon: F3, G3, H5 * Th fnngs, nrraons, an conclusons xrss n hs ar ar nrly hos of h auhors. Thy shoul no b arbu o h Euroan Commsson or h Worl Bank.

2 . Inroucon In mos Euroan counrs, nrs xnss ar ucbl for corora ax uross hl vns hav o b a ou of n-of-ax corora ncom. Mos Euroan ax sysms hus favor b fnanc ovr quy fnanc, bu o ffrn grs gvn h srson n o corora ax ras. In rmnng hr fnancal srucur, urly omsc frms only hav o al h h omsc ax sysm. In Euro h largs frms, hovr, ar ycally mulnaonal frms ha ora n many or all Euroan counrs. Mulnaonal frms fac h mor comlca choc of rmnng hr ovrall nbnss an h allocaon of hr bs o h arn frm or o subsars orang n any numbr of counrs. Euroan mulnaonals hav o al h h ffrn ax sysms n ach of hr counrs of oraon. Hnc, h fnancal srucur of a mulnaonal frm can b xc o b affc by h ax sysms of all h counrs hr oras. In an nrnaonal sng, h ax coss of b an quy fnanc n on h combn ax sysms of h subsary an arn counrs of h mulnaonal frm. Dvns, as nca, hav o b a ou of h subsary s ncom afr subsary-counry corora ax an n aon may b subjc o a non-rsn vn hholng ax n h subsary counry. In h arn counry, h vn ncom may agan b subjc o corora ncom ax. If so, oubl ax rlf may or may no b rov for h rvously a corora ncom an non-rsn hholng ax. Th ax coss of quy fnanc hus rflc ax ras as ll as h oubl-ax rlf convnon us by h arn counry. Ths ar collcs al nformaon on all of hs ascs of h nrnaonal ax sysm. A frm s fnancal olcs ar affc by ax as ll as non-ax consraons. A nonax consraon s ha nbnss of h ovrall mulnaonal frm shoul no b oo hgh o k h robably of cosly bankrucy lo. In conras, an avanag of b fnanc s ha rucs h fr cash-flo hn h frm an hnc can ac as a sclnng vc for ohrs ovrsnng managrs. Th sclnng rors of b fnanc can xlan gnrally osv b lvls a ach of a mulnaonal s nvual sablshmns (.., s

3 arn comany an s forgn subsars). Ths varous consraons gv rs o an omal ovrall caal srucur for h ovrall mulnaonal frm for non-ax rasons. Ths ar frs rsns a mol of h omal ovrall caal srucur of h mulnaonal frm rflcng ax an non-ax facors. Gnrally, h ax avanags of b fnanc la h frm o choos a hghr lvrag han oul b srabl for urly non-ax rasons. A h sam m, a chang n ax olcy omally causs h frm o rbalanc s caal srucur n all h counrs hr oras. Scfcally, srongr ncnvs for b fnanc n on counry ncourag b fnanc n ha counry bu a h sam m scourag b fnanc n ohr counrs o k h ovrall nbnss of h mulnaonal n chck. Th mol yls ha h omal b o asss rao a any sablshmn of h mulnaonal s osvly rla o h naonal ax ra an o ffrncs bn h naonal an forgn ax ras. Th rlvan ax ras n hs rgar ar h ffcv ax ras ha ak no accoun any oubl axaon an oubl axaon rlf. Inrnaonal ax ra ffrncs mar, as hy rmn h ncnvs o shf b nrnaonally hn a mulnaonal frm. Nx, h ar rsns som vnc on h mac of axaon on frm nbnss for a saml of 3 Euroan counrs ovr h ro. For san-alon omsc frms, sma ha a rcn ncras n h ovrall ax ra (rflcng corora ncom axs an non-rsn vn hholng axs) ncrass h rao of labls o asss by For mulnaonal frms, h lvrag rao s foun o b mor snsv o axaon on accoun of nrnaonal b shfng. As an xaml, can consr a mulnaonal h o qual-sz sablshmns n o sara counrs. A rcn ovrall ax ncras n on counry s foun o ncras h lvrag rao n ha counry by 0.007, hl h lvrag rao n h ohr counry crass by A sl of h ovrall ax ra no corora ax ras an non-rsn vn hholng axs rvals ha h lar o no hav a sgnfcan mac on h lvrag raos of a mulnaonal frm. Ths suggss ha mulnaonal frms can frqunly avo blaral hholng axs hrough rangular arbrag nvolvng a conu comany n a hr counry. 3

4 Svral auhors consr h rlaonsh bn frm lvrag an axaon h U.S. aa. Among hs, MacK-Mason (990) an Goron an L (00) nfy a ax ffc by xlong h ffrn ffcv axaon fac by rvously loss-makng frms an frms of ffrn szs, rscvly. Graham (000) calculas h valu of h ax bnfs of b fnanc for h U.S. cas. Sus ha us cross-counry aa hav h avanag ha hy allo for nrnaonal varaon n ax ras. Examls ar Rajan an Zngals (995) an Booh, Avazan, Dmrgüc-Kun an Maksmovc (00). Th lar s of auhors fns a ak ffc on lvrag for a ax varabl ha masurs h ax shl of b fnanc. Nx, hr s a s of ars ha consr h b fnanc of mulnaonals h hr arn comans or subsars n h U.S.. Nbrry an Dhalal (00) fn ha h b ssuanc locaon of U.S. mulnaonals s affc by hs frms jurscon-scfc axloss carry-forars an bnng forgn ax cr lmaons on h valu of b ax shls. Dsa, Foly an Hns (004) fn ha boh h nrnal an xrnal fnancng of ouar U.S. FDI s snsv o forgn ax ras. Mlls an Nbrry (004) analogously fn ha non-u.s. mulnaonals from counrs h rlavly lo ax ras us rlavly nnsv b fnanc of hr forgn conroll cororaons n h U.S.. Jog an Tang (00) consr h lvrag of frms n Canaa ha may or may no b ar of U.S.-bas or Canaan-bas mulnaonals. Th b-o-asss raos of Canaan cororaons hou forgn afflas ar foun o b mor snsv o Canaan ax ras han h b-o-asss raos of U.S. conroll cororaons loca n Canaa. Usng aa for h EU, Moor an Ruan (005) fnally xamn h lvrag of 8,500 forgn subsars. Thy fn ha lvrag raos of hs subsars ar snsv o h local corora ax ra, unlss h arn counry oras a forgn ax cr sysm. Ths ar nss h aroachs of h lar o ars by consrng ho boh mulnaonal frm srucur an h nrnaonal ax sysm affc lvrag n Euro. Hnc, ak no accoun hhr a frm s a arn or a subsary of a mulnaonal frm or nsa a san-alon omsc frm. A h sam m, accoun for h ax sysms of all h counrs hr h mulnaonal 4

5 oras. I s h ovrall nrnaonal ax sysm ha rmns h ax ncnvs for a mulnaonal o loca b n any on counry. In h rmanr, scon scrbs h nrnaonal ax ramn of h b an quy fnanc of mulnaonal frms. Scon 3 rsns h mol. Scon 4 scusss h comany-lvl aa. Scon 5 rsns h mrcal rsuls. Scon 6 conclus.. Th nrnaonal ax sysm Ths scon scrbs h man faurs of h corora ncom ax sysm alcabl o a mulnaonal frm h subsars n on or mor forgn counrs. To fx as, l us consr a mulnaonal frm ha oras a forgn subsary n counry an has h arn frm n counry. Th ucbly of nrs from corora ncom mls ha hr s no corora axaon of nrs o xrnal b holrs. Dvns a by h subsary o h arn frm n conras ar gnrally subjc o corora axaon n a las on counry. Th subsary s ncom n couny s frs subjc o h corora ncom ax n hs counry. Tabl (), column (a) ncas h sauory corora ax ra on corora rof for a saml of 33 Euroan counrs n 004. Ths ax ras nclu rgonal an local axs as ll as scfc surchargs. Ths nformaon has bn collc from h IBFD an varous bss of naonal mnsrs of fnanc. Th subsary ays ou s afr-ax corora ncom as a vn o h arn comany. Th subsary counry may lvy non-rsn a hholng ax on hs ougong vn ncom. Blaral vn hholng axs n Euro for 004 ar rsn n Tabl (). Ths ras ar zro n h majory of cass, bu som counrs manan non-nglgbl non-rsn vn hholng ax ras. Th I s rasonabl o assum ha mulnaonals o no ak no accoun h axaon of vn, nrs an caal gans a h nvsor lvl. Frs, moran nsuonal nvsors such as nson funs may no b subjc o axaon of h nvsor lvl. Scon, rva nvsors gnrally ar subjc o such axaon, bu h nrnaonally srs onrsh of h shars of a mulnaonal frm maks ffcul for hs frms o ak axaon a h rsonal lvl no accoun hn cng on hr fnancng. 5

6 combn corora an hholng ax ra n h subsary counry s sn o b ( )( ) or + -. Th arn counry subsqunly may or may no us s rgh o ax h ncom gnra abroa. In cas h arn counry oras a rroral or sourc-bas ax sysm, ffcvly xms forgn-sourc ncom from axaon. Th ffcv margnal ax on ncom ror n counry, no τ, n hs nsanc quals combn corora an hholng ax + - n counry. Alrnavly, h arn counry oras a orl or rsnc-bas ax sysm. In hs nsanc, h arn counry subjcs ncom ror n counry o axaon, bu gnrally rovs a forgn ax cr for axs alray a n counry o ruc h onal for oubl axaon. Th OECD mol ray, hch summarzs rcommn racc, n fac gvs counrs an oon bn an xmon an a forgn ax cr as h only o ays o rlv oubl axaon (s OECD, 997). Th forgn ax cr rucs omsc axs on forgn sourc ncom on-for-on h h axs alray a abroa. Th forgn ax cr can b nrc n h sns ha als o boh h vn hholng ax an h unrlyng subsary counry corora ncom ax. Alrnavly, h forgn ax cr s rc an als only o h hholng ax. In hr cas, forgn ax crs n racc ar lm o rvn h omsc ax lably on forgn sourc ncom from bcomng ngav. In h nrc cr rgm, h mulnaonal ll ffcvly ay no aonal ax n h arn counry, f h arn ax ra s lss han +. Th mulnaonal hn has unus forgn ax crs an s sa o b n an xcss cr oson. Alrnavly, xcs +. In ha nsanc, h frm ays ax n h arn counry a a ra qual o h ffrnc bn an +. Th ffcv, combn ax ra on h vn ncom, τ, hn quals h arn counry ax ra,. To summarz, h h nrc No ha for h arn frm hav ha h ffcv ax ra on corora ncom quals h sauory ra, or τ =. 6

7 cr sysm h ffcv ra on ncom gnra n counry, τ, s gvn by max [, + ]. In cas of a rc forgn ax cr, h mulnaonal analogously ays no aonal ax n h arn counry, f h arn ax ra s lss han. In h mor common cas hr xcs, h frm nsa ays ax n h arn counry a a ra qual o ( )( ). Th ffcv, o-counry ax ra, τ, h h rc cr sysm s no gvn by + ( )max[, ]. A f counrs h orl axaon o no rov forgn ax crs, bu nsa allo forgn axs o b uc from h mulnaonal s axabl ncom. Unr hs ucon mho, forgn axs ar ssnally sn as a ax-ucbl cos of sng busnss a ar h ohr busnss coss. In h scnaro, h ffcv ra of axaon on vns, τ, s gvn by ( )( )( ). Columns (b) an (c) of Tabl () rov nformaon on h oubl axaon ruls al o ncomng vn. Svral counrs ar sn o scrmna bn nrnaonal ax ray arnrs an non-ray counrs. Fnlan, for nsanc, xms vn ncom from ray arnrs, an rovs a rc forgn ax cr for vn hholng axs a n non-ray couns. To kno ha oubl ax rlf als scfcally, s ncssary o kno hhr a blaral ax ray xss. Tabl (3) ncas h a bnary varabl hhr any o counrs ha conclu a ax-ray by Ovrall, h xmon sysm s sn o b h mos common mho of oubl ax rlf, follo by forgn ax crs. Inrc forgn ax crs ar agan mor common han rc forgn ax crs. As xconal cass, h Chck Rublc s sn o aly h ucon mho o forgn vns from non-ray counrs, hl Russa rovs no oubl ax rlf a all o such ncom. So far hav assum ha a arn comany fnancs a forgn subsary hrough quy rahr han nrnal b. Aar from any ffrncs n ax ramn, nrnal b an 3 Mos of h 33 counrs n our saml ha such ras h ach ohr. Hovr, h ray nork of som counrs n arcular som of h n EU mmbr sas an som non-eu counrs ar far from coml. In conras, Blgum, Dnmark, Fnlan, Franc, Grmany, Noray, Polan, Sn an h Un Kngom hav a oubl-ax ray n forc h all ohr counrs. No ha h abl s no xacly symmrc bcaus h nry no forc may slghly ffr n ach of h o ray arnrs. 7

8 nrnal quy ar largly quvaln. Ths mans ha h choc bn hs o mos of nrnal fnancng moranly ns on h ax sysm. Inrs on nrnal b s gnrally ucbl from axabl corora ncom n h subsary counry. Such nrs ncom hus scas corora ncom ax n h subsary counry. Th subsary counry hovr may mos a non-rsn nrs hholng ax on h ougong nrnal nrs aymn. Th arn counry n urn may ax hs nrs an a h sam m rov oubl ax rlf for hholng axs. Of nrs s h axaon of vns rlav o nrs on nrnal b. Scfcally, l ϕ b h ffcv ra of axaon on cross-borr vns mnus h ffcv ra of ax on nrs. S h anx for als on ho o masur ϕ. 3. Th mol Th mol consrs a mulnaonal ha gnrally oras n n counrs. Th mulnaonal s omcl n counry, hl has forgn subsars n on or mor counrs h asss A.. Th subsary s fnanc h b L, hch for no ak o b xrnal b, an quy E. Hnc, h balanc sh ny of a subsary mls A = L + E. Th arn frm fully ons ach subsary s quy E. In aon, h arn frm ons ous asss A. Th arn frm n urn can b fnanc hrough hr b L or quy E. n + Thus, h balanc sh ny for h arn can b sa as A E = L + E. L λ b h rao of b o asss for ach sablshmn of h mulnaonal -.. L = λ. Analogously, l f A λ b h b o asss rao for h nr frm,.. n L = λ f = n. A = Alrnavly, can r λ as h ass-gh avrag of h sablshmn-scfc b f raos n λ as = λ ρ, hr A ρ = n ar h asss of sablshmn as a shar of h A = 8

9 frm s oal asss. Throughou, ll assum ha h asss A of subsary an h arn frm s ous asss A gvn. 4 In cng s fnancal srucur, h mulnaonal frm aks axaon as ll as nonax facors no accoun. To sar h h lar, h mulnaonal rcognzs ha hghr lvrag ncrass h chanc of bankrucy. W ll assum ha h arn frm rovs cr guarans for h bs of all s subsars. Ths mls ha h chanc of bankrucy of h ovrall mulnaonal frm ns on h frm- lvrag rao λ. Scfcally, f ll assum ha xc bankrucy coss, C f, of h frm ar quarac n h ovrall lvrag rao λ an rooronal o h frm s ovrall ous asss as follos 5 f C f γ = ( λ ) n f ( = A ) () Nx, s rcognz ha lvrag may brng bnfs n ha sclns local managrs an algns hr ncnvs mor closly o hos of h frm. Hgh lvrag a a subsary may, for nsanc, srv o rvn local managrs from ovrsnng on rks for hmslvs o rvn jur bankrucy of h subsary. On h ohr han, hgh lvrag may hav h savanag of makng local managrs oo rsk-avrs o h on hr hy o no mak arora local nvsmn csons. In hr cas, h ncnv ffcs of lvrag ar assum o sm from h local lvrag rao λ for sablshmn. 6 On h bass of hs ncnv consraons alon, l λ * b h omal lvrag rao a ach of h mulnaonal s sablshmns. Dvaons of h lvrag rao a any sablshmn from h lvl λ * ar assum o mly ncnv-rla coss o h frm. Ths coss ar assum o b 4 In rsons o a chang n E, h arn frm hus ll chang hr L or E rahr han A. 5 Bankrucy coss ar ncurr by loss-makng frms an hnc ar assum no o b ucbl from axabl corora ncom. 6 Hghr local lvrag may b savanagous f ncrass h robably of losss ha canno b cr agans rofs ma lshr n h frm. Losss ha ar no crabl r fnon ruc h afr-corora-ax ncom of h frm on-for-on. For hs rason, assum ha h coss assoca h hghr lvrag a h sablshmn lvl ar no ucbl from axabl corora ncom. 9

10 quarac n λ an no hy ar rooronal o h ous asss follos: A a sablshmn as C µ * µ * = ( λ - λ ) A λ A =,, n () No ha hs cos funcons ar scal o qual zro f h b raos λ ar zro, hch mls ha C can b of hr sgn. Nx, l V l an V u b h valus of h lvr an comlly unlvr mulnaonal frm, rscvly. Th o ar ffrn on accoun of h ax bnfs of b fnanc an of h (n) non-ax coss assoca h b fnanc. Scfcally, V L an V u ar rla as follos V L = V u + n = n τ L C C (3) f = hr τ agan s h ra of axaon of vn ncom rlav o nrs ncom n local akng no accoun h ovrall nrnaonal ax sysm. Th mulnaonal frm s objcv s o maxmz s ovrall frm valu V L n h lvrag sa. Is nsrumns ar h b lvls L a ach sablshmn. 7 Th frs orr conons.r.. L rn n rms of lvrag raos - ar gvn by * τ γλ f µ ( λ λ ) = 0 =,, n (4) follos: Th frs orr conons jonly allo us o solv for h omal valu of λ as 7 Th frm rcognzs all subsary an arn frm balanc sh ns, hch mans ha h E ar co-rmn. 0

11 n = + β ( τ τ j ) ρ j =,,n (5) j * λ β 0 λ + βτ µ hr β 0 = ( ), γ + µ γ β =, an β = ( ). γ + µ µ ( γ + µ ) * In xrsson (5), h rm β 0 λ s h omal lvrag rao a all sablshmns on h bass of all non-ax consraons, or quvalnly f all hτ s ar qual o zro. Th * rm β 0λ can b sn o balanc h xc coss of bankrucy (h a valu of λ abov zro) agans h coss of vang from h omal valu of h lvrag rao on h bass of ncnv consraons. Exrsson (5) furhr conans o ax-rla rms. Frs, h rm β τ rflcs h mac of axaon on h omal lvrag rao ha oul oban for a urly omsc frm loca n counry. For hs rason, hs rm s ubb h omsc n ffc of axaon on lvrag. Scon, h rm β ( τ τ j ) ρ j rflcs h mac of j nrnaonal ax ra ffrncs on h omal lvrag n counry on accoun of nrnaonal b shfng. Inrsngly, hs rm gh h nrnaonal ax ffrncs * λ τ τ j by h ass shars j ρ. Ths rflcs ha h cos funcon C mls ha s rlavly anlss o shf (absolu) b no or ou of counry j, f h asss n hs counry ar rlavly larg. Ths scon ffc of axaon on lvrag n counry s nam h nrnaonal or b-shfng ffc. No ha lvrag λ n counry s ngavly rla o τ j on accoun of h b-shfng ffc. Th horcal quaon (5) gvs rs o h follong rgrsson quaon λ + n = α + β τ + β ( τ τ j ) ρ j ε =,,n (6) j

12 hr α s a counry-scfc fx ffc an ε s an rror rm. In h bnchmark cas, h saml ll conss of obsrvaons for all subsars o h xcluson of arn frms. 8 In racc, a rang of frm-lvl an counry-lvl conrol varabls s nclu n h smaon. Afr obanng mrcal smas of β an β, can solv for h cos funcon aramrs γ an µ n () an () by mloyng h follong xrssons µ = β + β an β γ = ( β ( β + β ) ) 4. Th aa Th aa on mulnaonal frms ar akn from h Amaus aabas coml by Burau Van Djk. 9 Ths aabas rovs accounng aa on rva an ublcly on Euroan frms as ll as on hr onrsh rlaonshs. Ths onrsh aa allo us o mach Euroan frms h hr omsc subsars an subsars loca n ohr Euroan frms. A frm s fn o b a subsary, f a las 50 rcn of h shars ar on by anohr sngl frm. A mulnaonal frm has a las on forgn subsary. Mulnaonal frms n o rov consola an unconsola accounng samns. Consola samns rflc h acvs hn h arn comans hmslvs an of all omsc an forgn subsars. Sara, non-consola samns n conras rflc h acvs rcly hn h arn frm an n ach of s subsars. Th aa blo on arn frms an subsars ar bas on non-consola samns. Informaon on h numbr of arn comans an subsars - omsc an forgn n our aa s s rov n Panl A of Tabl 4. Th oal numbr of arn comans s 38,736, hl h oal numbr of subsars s 90,599. No ha Amaus only 8 In hs nsanc, h counry fx ffc n ar can srv o rflc so-call hn caalzaon ruls ha may lm h ax bnfs (n rms of nrs ucbly) assoca h subsary nbnss. 9 Th aabas s cra by collcng sanarz aa rcv from 50 vnors across Euro. Th local sourc for hs aa s gnrally h offc of h Rgsrar of Comans.

13 rovs nformaon on subsars loca n on of h Euroan counrs ls n h abl. Franc, San an h Un Kngom ach ar hom o a las 4,000 arn comans n h aa s. Each subsary has a hom counry an a hos counry (for omsc subsars hom an hos counrs ar h sam). For ach counry, h abl lss h numbr of subsars by hom counry an by hom counry. Th abl rvals ha, for nsanc, Grmany an h Nhrlans ar h hom counry o rlavly many subsars. Hnc, hr ar rlavly many subsars h a arn frm n on of hs counrs. Croaa, h Czch Rublc an Romana nsa ar h hos counry o rlavly many subsars. Panl B of Tabl 4 rovs nformaon on fnancal lvrag an alcabl ax ras. Frs, fnancal lvrag s fn as h rao of oal labls o oal asss. Ajus fnancal lvrag, nsa, s h rao of oal labls mnus accouns rcvabl mnus cash o oal asss mnus accouns ayabl mnus cash. Ths ajusmns rflc ha accouns ayabl ar labls ha rflc currn oraons rahr han ffors o omz h frm s caal srucur. Smlarly, h subsracon of cash rflcs ha cash may b on han o ay off xsng bs. By fnon, ajus fnancal lvrag s qual o or lss han fnancal lvrag. Th avrag arn comany fnancal lvrag of 0.6 n xcs h avrag ajus fnancal lvrag for som comans of Avrag fnancal lvrag rangs from 0.36 for Russa an Slovna o 0.80 for Romana. Inrsngly, subsars by hos counry hav avrag fnancal lvrag an ajus fnancal lvrag of 0.6 an 0.49, rscvly xacly qual o h avrags for arn frms. Hnc, hr s no nncy for subsars o b hr mor or lss lvrag han arn frms. Nx, h ffcv ax ra for subsars by hos counry s sn o b hghs for Grmany a 0.49, an los for Esona a 0.4. As scuss bfor, h ffcv ax rflcs h axaon of vns n h hos counry slf as ll as h ax ramn of hs ncom n any forgn arn counry. Th ax ncnv o shf b for subsars by hos counry s h ass-gh ffrnc of h ffcv ax ra n h hos counry an h ffcv ax ras alcabl o ohr sablshmns of h sam mulnaonal frm. A osv valu of hs varabl ncas ha mulnaonals on avrag hav an ncnv o shf b ou of a arcular hos counry. By 3

14 hs masur, subsars hos n Grmany hav h largs ncnv o shf b aay, hl subsars loca n Hungary hav h largs ncnv o arac b. Panl C of Tabl 4 rovs summary sascs of our lvrag an ax varabls as ll as of conrol varabls nclu n h subsqun smaon. Th conrol varabls ar svral frm-lvl varabls rv from h frm s balanc sh or ncom samn as ll as som counry varabls. Among h frm-lvl varabls, angbly s fn as h rao of fx asss o oal asss. Ths varabl caurs ha may b rlavly asy o borro agans fx asss. Nx, log of sals s h logarhm of sals. Ths s a scalng varabl o rflc ha largr frms may hav asr accss o cr. Nx, rofably s h rao of arnngs bfor nrs, axs, rcaon an amorzaon o oal asss. Profably may affc lvrag n svral ays. Profabl frms may b rcv o b rlavly rsklss, hch oul facla hr accss o cr. On h ohr han, rofabl frms may us hr rofs o ay on hr bs or alrnavly o fnanc nvsmns hrough ran arnngs. In hr ay, hgh rofably may la o a lo lvrag. Among h counry varabls, cror rghs s an annual nx of cror rghs n a counry. Wll roc cror rghs ar xc o ncourag lvrag. Nx, olcal rsk s an annual nx of olcal rsks. Hgh olcal rsks may ncourag borrong from local crors, as hs s a ay o ruc a mulnaonal s valu a rsk n a counry. Inflaon s h annual rcnag chang n h consumr rc nx. Hgh nflaon ncrass h valu of h ax ucbly of nrs o h xn ha nflaon las o hghr nomnal nrs ras. A h sam m, an nflaonary nvronmn may also la o a hghr rsk rmum as ar of h nomnal nrs ra, hch scourags b fnanc. Fnally, h groh ooruns varabl masurs h man annual groh ra of sals n an nusry n a arcular counry. Groh ooruns sgnal fuur rofably an ossbly an ably o borro. 5. Emrcal rsuls Tabl 5 rrsns rgrssons along h lns of (6). Th saml consss of all Euroan subsars n Amaus. For ach obsrvaon, an ffcv ax ra an a b 4

15 shfng ncnv varabl can b consruc. All rgrssons n h abl nclus arn, nusry an yar fx ffcs. Rgrsson () nclus h ffcv ax ra o h xcluson of h b shfng ncnv varabl. Th rnn coffcn s sma o b 0.59 an hghly sgnfcan. Th angbly varabl has a ngav coffcn, hl log of sals nrs osvly. Profably obans a ngav coffcn, hch suggss ha h ovrall ffc of hghr rofably s o ruc lvrag. No ha h 7,355 subsars n h saml ar assoca h a oal of 5,566 arn comans. Yarly obsrvaons of h sam subsary ar coun saraly. Rgrsson () nclus h b shfng ncnv varabl. Th sma coffcn for hs varabl s osv an sascally sgnfcan, hch confrms ha lvrag a any subsary of a mulnaonal rflcs h ovrall nrnaonal ax sysm fac by h mulnaonal. Nx, rgrsson (3) nclus a s of aonal, counry-lvl conrols. Th cror rghs varabl nrs h rgrsson osvly an sgnfcanly. Th olcal rsk varabl s qually osvly an sgnfcanly rla o lvrag. As nca, hs may rflc ha olcal rsks la a mulnaonal o ncras local borrong n orr o ruc s on caal a rsk. Nx, nflaon has a ngav an sgnfcan mac on lvrag. Ths coul rflc ha n an nflaonary nvronmn hr s mor uncrany abou h x os ral nrs ra o b a on nomnal b nomna n h local currncy. Fnally, h groh ooruns varabl nrs h rgrsson osvly an sgnfcanly. Hgh groh a h nusry an counry lvl may facla b fnanc of h affc subsars. Fnally, n rgrsson (4) ajus fnancal lvrag s akn o b h nn varabl. In ohr rscs, rgrsson (4) mmcks rgrsson (3). Th ffcv ax ra an b shfng ncnv varabls connu o oban osv an sgnfcan coffcns, alb somha largr han bfor. Hnc h ajusmn of fnancal lvrag for accouns ayabl an cash has ll mac on h sma mac of axaon on lvrag. In rgrsson (4), hovr, h olcal rsk an groh ooruns varabls cas o b oban sgnfcan coffcns. Th sma coffcns of rgrsson (3) can srv o valua h sz of h ffc of axaon on lvrag. Frs, h sma sz of β ncas h full ffc of axaon on h 5

16 lvrag of omsc, san-alon frms (vn hough such frms hav no bn nclu n our saml). Scfcally, h omsc ffc of an ncras n h ffcv ax ra by 0.0 on lvrag s Clarly nough, a ax rform lang o an ncras of τ by 0. (or n rcn) ll ncras lvrag by roughly 0.0 (or rcn). Ths ffc s conomcally rahr small. Nx, h sma sz of β a 0.6 suggs an also somha small nrnaonal or b-shfng ffc of axaon on lvrag. As an xaml, can ak a hyohcal mulnaonal frm ha has a sngl forgn subsary h asss of qual sz o hos of h arn frm. In hs nsanc, an ncras of h ffcv ax ra by 0.0 n h subsary counry has a osv nrnaonal ffc on lvrag n h subsary counry of (or half of ). Th sum ffc of an ncras of h ffcv ax ra by 0.0 on subsary lvrag s no calcula o b In conras, an ncras n h ffcv ax n h arn counry of 0.0 has a ngav nrnaonal ffc on lvrag n h subsary of Nx, Tabl 6 rsns som robusnss chcks akng rgrsson (3) n Tabl 5 as a sarng on. In rgrsson, corrc sanar rrors for clusrng across counry-nusry obsrvaons. Th sma coffcns for h o ax varabls ar vrually unchang from hos of h bnchmark rgrsson. Rgrsson () n urn lms h saml o subsars n h manufacurng scor. In hs rgrsson, h sma szs of β an β ar somha smallr, an much largr, rscvly. Th rlavly larg sz of β may rflc ha manufacurng frms ar rlavly ransarn. Hnc, for hs frms may b rlavly asy o borro n on counry agans h asss loca n ohr counrs o xlan ha lvrag n on counry s rlavly snsv o nrnaonal ax ra ffrncs. Nx, rgrsson 3 lms h saml o forgn subsars. Ths rucs h saml sz o 3,96 subsars rahr han 49,48 n rgrsson (3) n Tabl 5. Rlav o h bnchmark rgrsson, h valu of β s somha largr a 0.3. In rgrsson (4) only nclu subsars of mulnaonals,.. of frms ha hav a las on forgn subsary. Th sma sz of β an β ar vry smlar o h bnchmark rsuls. Fnally, n rgrsson 5 sl h o ax varabls no ars ha xclu an ar scfcally u o non-rsn vn hholng axs. Th frs 6

17 ar s oban by sng all hholng axs o zro. Th scon ar s oban as h ffrnc bn h rgular ax ra varabls an h ax varabls xclung hholng axs. Inrsngly, only h ax varabls xclusv of hholng axs ar sma h osv an sgnfcan coffcns. Ths suggss ha hholng axs ar no sn as ar of h ffcv ax burn, ossbly bcaus hy can b avo by rangular arbrag nvolvng a conu comany n a ax havn. 6. Conclusons Ths ar has consr h snsvy of h caal srucur of Euroan frms o axaon. Gnrally hs caal srucur ns on h naonal or nrnaonal srucur of h frm an on h ax sysms of all h counrs hr a frm oras. On h bass of a larg saml of Euroan frms ovr h ro, fn ha a frm s lvrag ns on naonal ax ras as ll as nrnaonal ax ra ffrncs. Whl sascally vry sgnfcan, h sz of h ax ffc on lvrag s rahr small. Th local ax ffc on local lvrag s largr for a mulnaonal frm han for a san-alon omsc frm on accoun of h nrnaonal b shfng. Corora ax ras rahr han non-rsn vn hholng ax ras aar o mar for lvrag, as h lar may b asy o avo for mulnaonal frms by usng conu comans n hr counrs. 7

18 Rfrncs Alshulr, Rosann an Harry Grubr, 00, Raraon axs, raraon srags an mulnaonal fnancal olcy, Journal of Publc Economcs 87, Alshulr, Rosann an Jack M. Mn, 995, U.S. nrs-allocaon ruls: ffcs an olcy, Inrnaonal Tax an Publc Fnanc, Booh, Laurnc, Varouj Avazan, Asl Dmrgüç-Kun, Vojslav Maksmovc, 00, Caal srucurs n vlong counrs, Journal of Fnanc 54, Braly, M., G. Jarrll, an E.H. Km, 984, On h xsnc of an omal caal srucur: hory an vnc, Journal of Fnanc 39, Chohry, Bhagan an Joshua D. Coval, 998, Inrnal fnancng of mulnaonal subsars: Db vs. quy, Journal of Corora Fnanc 4, Collns, J.H. an D.A. Shacklfor, 99, Forgn ax cr lmaons an rfrr sock ssuancs, Journal of Accounng Rsarch 30, Dns, Cécl, Harry Huznga an Gaëan Ncoèm, 005, Forgn onrsh n Euro: rmnans an axaon consquncs, n Th Inrnaonalsaon of Ass Onrsh n Euro, H. Huznga an L. Jonung ors, Cambrg Unvrsy Prss. Dsa, Mhr A., C. Frz Foly an Jams R. Hns Jr., 003, A mulnaonal rscv on caal srucur choc an nrnal caal marks, NBER WP 975. Fama, Eugn F. an Knnh R. Frnch, 998, Taxs, fnancng csons, an frm valu, Journal of Fnanc 53, Froo, Knnh A an Jams R. Hns, 995, Inrs allocaon ruls, fnancng arns, an h oraon of U.S. mulnaonals n Marn Flsn, Jams R. Hns an R. Glnn Hubbar, s., Th ffcs on mulnaonal cororaons, Unvrsy of Chcago Prss, Chcago, Goron, Rogr H. an Young L, 00, Do axs affc corora b olcy? Evnc from U.S. corora ax rurn aa, Journal of Publc Economcs 8, Graham, John R., 996, Db an h margnal ax ra, Journal of Fnancal Economcs 4, Graham, John R., M.L. Lmmon an J.S. Schallhm, 998, Db, lass, axs, an h nogny of corora ax saus, Journal of Fnanc 53, 3-6. Graham, John R., 999, Do rsonal axs affc corora fnancng csons?, Journal of Publc Economcs 73, Graham, John R., 000, Ho bg ar h ax bnfs of b, Journal of Fnanc 55, Grubr, Harry, 998, Taxs an h vson of forgn orang ncom among royals, nrs, vns an ran arnngs, Journal of Publc Economcs 68,

19 Hns, Jams. R. an R. G. Hubbar, 990, Comng hom o Amrca: vn raraons by U.S. mulnaonals, n Assaf Razn an Jol Slmro, s., Taxaon an h Global Economy, Unvrsy of Chcago, Chcago, Hor, Jams E. an Lmma W. Snb, 990, Inrnaonal caal mark qulbrum, Journal of Fnanc 45, La Pora, Rafal, Flornco Loz-D-Slans, Ar Shlfr an Robr W. Vshny, 997, Lgal rmnans of xrnal fnanc, Journal of Fnanc 997, Job, Vjay an Janmn Tang, 00, Tax rforms, b shfng an ax rvnus: mulnaonal cororaons n Canaa, Inrnaonal Tax an Fnanc 8, 5-5. MacK-Mason, Jffry K, 990, Do axs affc corora fnancng csons?, Journal of Fnanc 45, Mllr, Mron H., 977, Db an axs, Journal of Fnanc 3, Mlls, Lllan F. an Kay J. Nbrry, 004, Do forgn mulnaonals ax ncnvs nflunc hr U.S. ncom rorng an b olcy?, Naonal Tax Journal 57, Moor, Parag J. an Francs P. Ruan, 005, Taxaon an h fnancal srucur of forgn rc nvsmn, IIIS Dscusson Par 88. Nbrry, Kay J. an Dan S. Dhalal, 00, Cross-jursconal ncom shfng by U.S. mulnaonals: vnc from nrnaonal bon offrngs, Journal of Accounng Rsarch 39, Organzaon for Economc Cooraon an Dvlomn, 997, Mol ax convnon on ncom an on caal, Pars. Rajan, Raghuram G. an Lug Zngals, 995, Wha o kno abou caal srucur? Som vnc from nrnaonal aa, Journal of Fnanc 50, Tman, Shran an Robro Wssls, 988, Th rmnans of caal srucur choc, Journal of Fnanc 43, -9. 9

20 Tabl Corora axaon an oubl-ax rlf sysms for vn rcv n slc Euroan counrs (004). Sourc : Inrnaonal Burau for Fscal Documnaon. Cas of full onrsh (004) Sauory corora ax ra Inclung local axs an surchargs (%) Tramn of forgn vns from Tray arnrs Taxaon of vn ncom Tramn of forgn vns from non-ray counrs (a) (b) (c) Ausra 34 Exmon Exmon Blgum % xmon 95% xmon Bulgara 9.5 Inrc cr Drc cr Croaa 0 Exmon Exmon Cyrus 5 Exmon Exmon Czch r. 8 Inrc cr Ducon Dnmark 30 Exmon Exmon Esona 6 0 Inrc cr Inrc cr Fnlan 9 Exmon Drc cr Franc % xmon 95% xmon Grmany % xmon 95% xmon Grc 35 Inrc cr Inrc cr Hungary Exmon Exmon Iclan 8 Exmon Exmon Irlan.5 4 Inrc cr Inrc cr Ialy % Exmon 95% Exmon Lava 5 Exmon Exmon Lhuana 5 Exmon Exmon Luxmbourg Exmon Exmon Mala 35 Inrc cr Inrc cr Nhrlans 34.5 Exmon Exmon Noray 8 Inrc cr Inrc cr 0 Zro rcn on ran arnngs. A srbuon ax of 6% s al on srbu rof. Inclung a 3% socal surcharg an a scal 3.3% surcharg for larg comans. Inclung solary surcharg of 5.5% an an avrag (ucbl) ra ax of 6.8%. 3 Inclung a ucbl local busnss ax. 4 Th ra s 5% for non-rang acvs. 5 Inclung mloymn surcharg an local axs. 0

21 Cas of full onrsh (004) Sauory corora ax ra Inclung local axs an surchargs (%) Tramn of forgn vns from Tray arnrs Taxaon of vn ncom Tramn of forgn vns from non-ray counrs (a) (b) (c) Polan 9 Inrc cr 6 Drc Cr Porugal 7.5 Drc cr 7 Drc cr Romana 5 Inrc cr Inrc cr Russa 4 Drc cr No rlf Slovak r. 9 Exmon Exmon Slovna 5 Exmon Exmon San 35 Exmon Inrc cr Sn 8 Exmon Exmon Szrlan.74 8 Exmon Exmon Turky 33 Inrc cr Drc cr U.K. 30 Inrc cr Inrc cr 6 Inrc ax cr f holng 75% for o yars an ray, as ll as n h cass hr h EU Parn-subsary rcv hols. 7 Exmon f EU Parn-Subsary rcv als (bu forgn hholng ax s no crabl). 8 Inclung canonal an local axs n Zurch.

22 Tabl Blaral hholng ax on vn aymns bn forgn subsary an arn (full onrsh) on s January OE BE BG HR CY CZ DK EE FI FR DE GR HU IC IE IT LV LT LU MT NL NO PL PT RO RU SK SI ES SE CH TR GB Ausra X Blgum 0 X Bulgara 0 0 X Croaa X Cyrus X Czch R X Dnmark X Esona X Fnlan X Franc X Grmany X Grc X Hungary X Iclan X Irlan X Ialy Lava X Lhuana X Luxmbourg X Mala X Nhrlans Noray X Polan X Porugal Romana X Russa X Slovak R X Slovna X San Sn X Szrlan X 35 5 Turky X Un Kngom X Sourc: Inrnaonal Burau for Fscal Documnaon. Nos : (a) Th Parn-Subsary rcv s bnng bn EU Mmbr Sas an rovs xmon from hholng ax hn holng s a las 5%. I s al by all n Mmbr Sas from May 004. (b) Irlan: comans loca n EU or ray counrs ar xm from hholng ax rov ha hy ar no unr h conrol of rsons no rsn n such counrs. (c) Esona: gnral xmon from hholng ax f holng n forgn comany s a las 0%. () Ialy: f h rcn can rov a ax s a n s counry on h vn, h Ialan auhors can rov a rfun qual o h ax clam lm o 4/9 of h Ialan Whholng ax. () Lhuana: gnral xmon from hholng ax f holng n forgn comany s a las 0%. (f) Luxmbourg: xmon from hholng ax for EU an ray arnrs f holng n forgn comany s a las 0%. (g) Sn: No hholng ax f hr s normal corora axaon n h forgn counry an f h shars ar hol on busnss-rla rasons.

23 Tabl 3 Exsnc of a blaral ax ray on January s OE BE BG HR CY CZ DK EE FI FR DE GR HU IC IE IT LV LT LU MT NL NO PL PT RO RU SK SI ES SE CH TR GB OE X BE X BG X HR 0 X CY 0 X CZ X 0 0 DK X EE X FI 0 X FR X DE X GR 0 X HU 0 X IC X IE 0 0 X 0 0 IT 0 X 0 LV X LT X LU X 0 MT X NL 0 X NO X PL X PT X 0 0 RO X RU X 0 SK 0 X SI X 0 ES X SE X CH X 0 TR X GB X Sourc: IBFD, Varous Mnsrs bss. 3

24 Tabl 4 Dscrv Sascs for Subsars of Euroan Mulnaonals Panl A lss h numbr of arn comans an subsars (by hom an hos counry) n h saml. Panl B rsns h saml avrags of fnancal lvrag an ax varabls. Panl C rsns h summary sascs for h fnancal lvrag, ax, an ohr varabls for subsars only. Fnancal lvrag s h rao of oal labls o oal asss. Ajus fnancal lvrag s h rao of oal labls mnus accouns ayabls mnus cash o oal asss mnus accouns ayabls mnus cash. Effcv margnal ax ra (τ) s h sauory ax ra on vn ncom gnra n h subsary counry, akng hholng axs an h ax sysm for forgn sourc ncom no accoun. Tax ncnv o shf b s h sum of nrnaonal ax ffrncs bn subsary counrs gh by subsary ass shars, akng hholng axs an h nrnaonal ax sysm no accoun. Tangbly s h rao of subsary fx asss o subsary oal asss. Log of sals s h logarhm of subsary sals. Profably s h rao of subsary arnngs bfor nrs, axs, rcaon an amorzaon o subsary oal asss. Cror rghs s h annual nx of cr rghs n h counry from Djankov al. (005). Polcal rsk s h annual (Dcmbr) nx of olcal rsk from Inrnaonal Counry Rsk Gu. W nvr h scal from 0-00 h hghr scors ncang grar rsk. Inflaon s h annual rcnag chang n CPI of h subsary s hos counry from Worl Dvlomn Incaors. Groh ooruns s h man of h annual groh ra of subsary sals n a subsary s counry an nusry. Saml consss of arn comans an subsars of Euroan frms n Amaus. Panl A: Numbr of arn comans an subsars Numbr of arn comans: Numbr of subsars: Counry by hom counry by hom counry by hos counry Ausra Blgum Bulgara Croaa Cyrus 0 0 Czch R Dnmark Esona Fnlan Franc Grmany Grc Hungary Iclan Irlan

25 Ialy Lava Lhuana Luxmbourg Nhrlans Noray Polan Porugal Romana 5 33 Russa Slovak R 46 7 Slovna San Sn Szrlan UK Toal

26 Panl B: Fnancal lvrag an margnal ax ras Fnancal lvrag Ajus fnancal lvrag Effcv margnal ax ra Tax ncnv o shf b Parn comans: Subsars: Parn comans: Subsars: Subsars: Subsars: Counry by hom counry by hos counry by hom counry by hos counry by hos counry by hos counry Ausra Blgum Bulgara Croaa Cyrus Czch R Dnmark Esona Fnlan Franc Grmany Grc Hungary Iclan Irlan Ialy Lava Lhuana Luxmbourg Nhrlans Noray Polan Porugal Romana Russa Slovak R

27 Slovna San Sn Szrlan UK Toal Panl C: Summary sascs of lvrag, ax, an conrol varabls Varabl No. of obsrvaons Avrag Sanar Dvaon Mnmum Maxmum Fnancal lvrag Ajus fnancal lvrag Effcv margnal ax ra Tax ncnv o shf b Tangbly Log of sals Profably Cr or rghs Polcal Rsk Inflaon Groh ooruns

28 Tabl 5 Th Imac of Domsc an Inrnaonal Taxs on h Fnancal Lvrag of Subsars of Mulnaonal Frms Th nn varabl n columns () o (4) s h rao of subsary oal labls o subsary oal asss. Th nn varabl n column (4) s h rao of oal labls mnus accouns ayabls mnus cash o oal asss mnus accouns ayabls mnus cash. Effcv margnal ax ra (τ) s h sauory ax ra on vn ncom gnra n h subsary counry, akng hholng axs an h ax sysm for forgn sourc ncom no accoun. Tax ncnv o shf b s h sum of nrnaonal ax ffrncs bn subsary counrs gh by subsary ass shars, akng hholng axs an h nrnaonal ax sysm no accoun. Tangbly s h rao of subsary fx asss o subsary oal asss. Log of sals s h logarhm of subsary sals. Profably s h rao of subsary arnngs bfor nrs, axs, rcaon an amorzaon o subsary oal asss. Cror rghs s h annual nx of cr rghs n h counry from Djankov al. (005). Polcal rsk s h annual (Dcmbr) nx of olcal rsk from Inrnaonal Counry Rsk Gu. W nvr h scal from 0-00 h hghr scors ncang grar rsk. Inflaon s h annual rcnag chang n CPI of h subsary s hos counry from Worl Dvlomn Incaors. Groh ooruns s h man of h annual groh ra of subsary sals n a subsary s counry an nusry. Saml consss of subsars of Euroan comans n Amaus. All rgrssons ar sma usng OLS an nclu arn, nusry, an yar fx ffcs. W ror Wh (980) s hroskascyconssn sanar rrors bn bracks. * nos sgnfcanc a 0%; ** sgnfcanc a 5%; an *** sgnfcanc a %. () () (3) (4) Fnancal lvrag Fnancal lvrag Fnancal lvrag Ajus fnancal lvrag Effcv margnal ax ra 0.59*** 0.99*** 0.*** 0.38*** (0.07) (0.030) (0.03) (0.04) Tax ncnv o shf b 0.7*** 0.6*** 0.68*** (0.040) (0.04) (0.057) Tangbly -0.30*** -0.3*** -0.0*** 0.05*** (0.005) (0.006) (0.006) (0.008) Log of sals 0.0*** 0.03*** 0.03*** 0.0*** (0.00) (0.00) (0.00) (0.00) Profably -0.06** ** * -0.08* (0.05) (0.07) (0.03) (0.04) Cror rghs 0.006*** 0.09*** (0.00) (0.00) Polcal rsk 0.00*** (0.000) (0.000) Inflaon -0.00*** -0.00*** (0.000) (0.000) Groh ooruns 0.0*** 0.0 (0.008) (0.009) 8

29 Parn, nusry, an yar fx ffcs Y Y Y Y No. of subsars No. of arn comans R-squar

30 Tabl 6 Th Imac of Taxs on h Fnancal Lvrag of Subsars of Mulnaonal Frms: Robusnss Chcks Th nn varabl s h rao of subsary oal labls o subsary oal asss. Effcv margnal ax ra (τ) s h sauory ax ra on vn ncom gnra n h subsary counry, akng hholng axs an h ax sysm for forgn sourc ncom no accoun. Tax ncnv o shf b s h sum of nrnaonal ax ffrncs bn subsary counrs gh by subsary ass shars, akng hholng axs an h nrnaonal ax sysm no accoun. In column (), corrc sanar rrors corrc for clusrng across counry-nusry obsrvaons. In column (), only nclu subsars orang n h manufacurng nusrs. In column (3), only nclu h subs of forgn subsars. In column (4), only nclu subsars of mulnaonal comans. In column (5), sl boh ax varabls n on comonn ha os no n on hholng axs an anohr comonn ha ns on hholng axs. Tangbly s h rao of subsary fx asss o subsary oal asss. Log of sals s h logarhm of subsary sals. Profably s h rao of subsary arnngs bfor nrs, axs, rcaon an amorzaon o subsary oal asss. Cror rghs s h annual nx of cr rghs n h counry from Djankov al. (005). Polcal rsk s h annual (Dcmbr) nx of olcal rsk from Inrnaonal Counry Rsk Gu. W nvr h scal from 0-00 h hghr scors ncang grar rsk. Inflaon s h annual rcnag chang n CPI of h subsary s hos counry from Worl Dvlomn Incaors. Groh ooruns s h man of h annual groh ra of subsary sals n a subsary s counry an nusry. Saml consss of subsars of Euroan comans n Amaus. All rgrssons ar sma usng OLS an nclu arn, nusry, an yar fx ffcs. W ror Wh (980) s hroskascyconssn sanar rrors bn bracks. * nos sgnfcanc a 0%; ** sgnfcanc a 5%; an *** sgnfcanc a %. () () (3) (4) (5) Clusrng Manufacurng Forgn Mulnaonals Effcv margnal ax ra 0.*** 0.80*** 0.3*** 0.34*** (0.05) (0.045) (0.043) (0.039) Tax ncnv o shf b 0.6* 0.8*** 0.3*** 0.06** (0.059) (0.064) (0.053) (0.047) Effcv margnal ax ra xcl. hholng axs 0.4*** (0.03) Tax ncnv o shf b xcl. hholng axs 0.9*** (0.043) Effcv margnal ax ra u o hholng axs 0.94 (0.36) Tax ncnv o shf b u o hholng axs -0.0 (0.80) Tangbly -0.0*** *** -0.6*** -0.5*** -0.9*** (0.04) (0.00) (0.009) (0.007) (0.006) Log of sals 0.03*** 0.09*** 0.08*** 0.00*** 0.03*** (0.00) (0.00) (0.00) (0.00) (0.00) Profably ** -0.3*** -0.44*** * 30

31 (0.030) (0.03) (0.05) (0.036) (0.03) Cror rghs 0.006** 0.009*** 0.06*** 0.007*** 0.006*** (0.003) (0.00) (0.00) (0.00) (0.00) Polcal rsk 0.00* 0.00*** 0.00** 0.00*** 0.00*** (0.000) (0.000) (0.000) (0.000) (0.000) Inflaon -0.00** -0.00*** -0.00*** -0.00*** -0.00*** (0.000) (0.000) (0.000) (0.000) (0.000) Groh ooruns 0.0*** *** 0.09*** 0.0*** (0.006) (0.00) (0.009) (0.008) (0.008) Parn, nusry, an yar fx ffcs Y Y Y Y Y Obsrvaons Numbr of arn R-squar

32 Anx. Th axaon of vns rlav o nrs on nrnal b. Inrs on nrnal b s gnrally ucbl from axabl corora ncom n h subsary counry. Th subsary counry, hovr, may mos a non-rsn nrs hholng ax on h ougong nrnal nrs aymn. L hs nrs hholng ax b no. Informaon on blaral nrs hholng axs for 004 n Euro s rsn n Tabl A. Th nrnal nrs s rcv by h arn frm an n h arn counry may or may no b subjc o corora ncom axaon subjc an subsqun oubl-ax rlf. Agan, hr hr ar hr ossbls: h arn counry may aly an xmon, a cr or a ucon o h forgn nrs ncom. Tabl A rovs nformaon on h oubl axaon ruls alcabl o ncomng nrs from ray an nonray sgnaory counrs, rscvly. Forgn sourc nrs bnfs from a ax cr n mos counrs. Ths s arcularly h cas for nrs aymns orgnang from ax ray arnr counrs h Cyrus bng an xcon o hs. L σ no h ffcv nrnaonal axaon of nrnal nrs ncom. In cas of an xmon of forgn nrs ncom, smly hav =. In cas of a forgn ax cr, hav σ = max [, ]. Fnally, n cas of a ucon hav σ = + -. L ϕ b h axaon of vns rlav o nrs on nrnal b so ha ϕ = τ - σ. Clarly, ϕ ns on h ossbly ffrn oubl ax rlf rov by h arn counry for boh forgn vn an forgn nrs ncom. Exrssons for σ ϕ n h varous ossbl cass ar rov n Tabl (A3). All h xrssons n h abl can b of hr sgn, f allo for non-zro hholng axs on nrs. 3

33 Anx. Aggrgaon of a mulnaonal s xrnal b ovr sablshmns hn a counry. Ths anx shos ha h nrnaonal arn xrnal b allocaon a h counry lvl s unaffc by hhr h mulnaonal has asss A j a sablshmns j =,,k n counry or only asss a a sngl sablshmn n counry. In h lar cas, l xrnal b L = = k j A A j b h omal xrnal b alloca o counry. Ths yls coss qual o A A A L C * * λ µ λ µ =. In h absnc of aggrgaon, can omally alloca L j o sablshmn j h. In h saggrga cas, h frm allocas xrnal b so as o mnmz oal coss assoca h xrnal b coss as follos = = k j L L j + = = = k j j j j j k j L L A A L L * * ) ( λ λ µ λ µ Th frs orr conon h rsc o L j s 0 ) ( * = + λ λ µ j j A L, hch shos ha omally L j s rooronal o A j so ha j j A L A L =. No oal shfng coss n counry ar gvn by j j j k j A A L ) ( * * λ µ λ µ = = j k j A A L ) ( * * λ µ λ µ = = A A A L * * λ µ λ µ = C hch monsras ha coss of xrnal b n counry ar no affc by h aggrgaon of sablshmns n counry. 33

34 Tabl A Doubl-ax rlf sysms for nrs aymns rcv n slc Euroan counrs (004). Sourc : Inrnaonal Burau for Fscal Documnaon. Cas of full onrsh (004) Tramn of forgn nrs aymns from Tramn of forgn nrs aymns from Tray arnrs non-ray counrs Ausra Cr Cr Blgum Cr Cr 5/85 h Bulgara Cr Cr Croaa Cr Cr Cyrus 50% xmon 50% xmon Czch r. Cr Ducon Dnmark Cr Cr Esona Cr Ducon Fnlan Cr Cr Franc Cr Ducon Grmany Cr Cr Grc Cr Cr Hungary Cr Cr Iclan Cr Cr Irlan Cr Cr Ialy Cr Cr Lava Cr Cr Lhuana Cr Cr Luxmbourg Cr Cr Mala Cr Cr Nhrlans Cr Cr Noray Cr Cr Polan Cr Cr Porugal Cr Cr Romana Cr Cr Russa Cr Cr Slovak r. Cr No rlf Slovna Cr Cr San Cr Cr Sn Cr Cr Szrlan Cr Ducon Turky Cr Cr U.K. Cr Cr 34

35 Tabl A Blaral hholng ax on nrs aymns bn forgn subsary an arn (full onrsh) on s January OE BE BG HR CY CZ DK EE FI FR DE GR HU IC IE IT LV LT LU MT NL NO PL PT RO RU SK SI ES SE CH TR GB Ausra X Blgum 0 X Bulgara 0 0 X Croaa X Cyrus X Czch R X Dnmark X Esona X Fnlan X Franc X Grmany X Grc X Hungary X Iclan X Irlan X Ialy X Lava X Lhuana X Luxmbourg X Mala X Nhrlans X Noray X Polan X Porugal X Romana X Russa X Slovak R X Slovna X San X Sn X Szrlan X 0 0 Turky X 0 Un Kngom X Sourc: Inrnaonal Burau for Fscal Documnaon. Nos : (a) Inrs an royals rcv als n h EU from s January 004 an s bnng. I ruls ha hr s no axaon f holng 5%. ransonal ros hav bn gran o Grc an Porugal (boh nrs an royals: 0% ax max f holng 5% unl 008, 5% ax max f holng 5% unl 0 nclu), Czch r, Polan an San (royals only, 0% ax max f holng 5% unl 00 nclu), Slovak r (no lms on royals unl 006), Lava an Lhuana (boh nrs an royals: 0% ax max f holng 5% unl 008, 5% ax max f holng 5% unl 00). (b) Irlan: Inrs a o a 75% non-rsn arn s m o b a vn. (c ) San: Inrs gnrally xm from ax n San rov h rc bnfcary s a rsn n anohr EU Mmbr Sa. () Szrlan: no hholng ax on ornary loans, 35% on bons an oss. ()Turky: xmon for govrnmn bons an bnurs, as ll as loans oban from forgn comans an nsuons. 35

36 Tabl A3 Exrssons for or h rlav axaon of quy an nrnal b of subsars. ϕ Tramn of - Db - - Equy - Exmon Cr Ducon Exmon + ], max[ + ] [ + + Inrc cr [ ] +, max [ ] [ ], max, max + [ ] ] [, max + + Drc cr + ], max[ ) ( ], )max[ ( + [ ], max ], max[ ) ( + ] [ + Ducon ( )( )( ) ( )( )( ) ], max[ ] [ ) )( )( ( + 36