Tax-aided financial services companies and the cost of capital

<p>Over the past two decades, the governments of several European countries have implemented special tax devices to attract the finance centres of multinational companies. This paper determines how the cost of capital for investments made by multinationals is affected by the tax regimes, bringing into play the Irish financial services company, the Belgian co-ordination centre, the Dutch finance company and the Luxemburg company coupled with a Swiss finance branch. It gives evidence that intermediation of a tax-aided services company in the financing scheme of a foreign subsidiary provides an important tax saving. However, the home and source countries\' tax regimes influence the hierarchy of the less heavily taxed treasury and finance centres. The methodology relies on the marginal effective tax rates theory and consists of an extension of Alworth's (1988) model to include treasury centres.</p>