Firm responses to an interest barrier: empirical evidence

Abstract In this paper, we study the effects of an interest barrier (IB) that was introduced in Finland in 2014 to restrict the profit‐shifting opportunities of multinational enterprises (MNEs). We employ data from the Orbis database on Finnish, Swedish and Danish MNEs and a difference‐in‐differences methodology, where Swedish and Danish MNEs serve as a control group. We examine the effects of the IB on financial expenses, debt levels and overall economic activity of firms. We find that Finnish MNEs responded to the IB by decreasing their financial expenses. We also find that the most affected firms decreased their debt levels due to the reform. Our results also suggest that the financial expense response is followed by a change in the use of transfer pricing as a method to shift profits between tax jurisdictions. We do not find evidence of total output changes among treated firms, which suggests that the IB did not affect the real activity of the treated MNEs.