Do countries corporate income tax policy affect foreign subsidiaries financing decisions?

Abstract

Most countries in the world allow for the deduction of interest payment from the computation of the tax base used for the application corporate income taxation. The same treatment is not afforded to dividends, thus introducing a debt bias with considerable consequences for the capital structure of firms and for their financing decision. In light of the role played by excessive leverage in the Great Financial Crisis, many – including the IMF and the European Commission - are advocating for an equal corporate tax treatment of equity and debt. To this aim, a few countries have introduced Allowances for Corporate Equity. The dissertation has as its objective the investigation of the effects that these different corporate income tax policies have on the financing decision of foreign subsidiaries.