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This paper presents a model of a multinational firm's optimal debt policy that incorporates international taxation factors. The model yields the prediction that a multinational firm's indebtedness in a country depends on a weighted average of national tax rates and differences between national and foreign tax rates. These differences matter because multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested using a novel firm-level dataset for European multinationals and their subsidiaries, combined with newly collected data on the international tax treatment of dividend and interest streams. Our empirical results show that corporate debt policy indeed not only reflects domestic corporate tax rates but also differences in international tax systems. These findings contribute to our understanding of how corporate debt policy is set in an international context.

International business enterprises. --- Business enterprises, International --- Corporations, International --- Global corporations --- International corporations --- MNEs (International business enterprises) --- Multinational corporations --- Multinational enterprises --- Transnational corporations --- Business enterprises --- Corporations --- Joint ventures --- Corporate Finance --- Money and Monetary Policy --- Taxation --- Taxation, Subsidies, and Revenue: General --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Personal Income and Other Nonbusiness Taxes and Subsidies --- Multinational Firms --- International Business --- Public finance & taxation --- Monetary economics --- Multinationals --- Credit --- Withholding tax --- Tax incentives --- Marginal effective tax rate --- Income tax --- International business enterprises --- Tax administration and procedure --- Estonia, Republic of