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 data base on Finnish, Swedish and Danish MNEs and a difference-in-differences methodology, where Swedis hand 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 shiftprofits 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.