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Repatriation taxes, repatriation strategies and multinational financial policy

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  • Altshuler, Rosanne
  • Grubert, Harry

Abstract

Several investment-repatriation strategies are added to the standard model of a parent and its affiliate in which the affiliate is located in a low-tax country and is limited to two alternatives: repatriating taxable dividends to the parent or investing in its own real operations. In our model, the subsidiary can invest in passive assets which the parent can borrow against, making any direct taxable flow to the parent unnecessary. The low-tax subsidiary can also use its earnings to invest in a related high-tax affiliate which becomes the vehicle for tax-free repatriations. Alternatively, the low-tax affiliate can be capitalized by equity injections through an upper-tier sibling. This reduces the tax on repatriations from the low-tax subsidiary because taxes at home on foreign source income are based on a blend of the siblings' tax rates. We show analytically how the availability of these strategies can effect real investment in the low-tax subsidiary and throughout the worldwide corporation. We use firm level data for U.S. multinational corporations to test for the importance of these alternative strategies. The evidence is generally consistent with the theory, particularly the "triangular" strategies using related affiliates.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 87 (2003)
Issue (Month): 1 (January)
Pages: 73-107

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Handle: RePEc:eee:pubeco:v:87:y:2003:i:1:p:73-107

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Web page: http://www.elsevier.com/locate/inca/505578

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References

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  1. Altshuler, R. & Newlon, T.S., 1991. "The Effects of US Tax Policy on the Income Repatriation Patterns of US Multinational Corporations," Discussion Papers 1991_60, Columbia University, Department of Economics.
  2. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1, May.
  3. Rosanne Altshuler & Jack Mintz, 1994. "U.S. Interest Allocation Rules: Effects and Policy," NBER Working Papers 4712, National Bureau of Economic Research, Inc.
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  6. repec:fth:coluec:611 is not listed on IDEAS
  7. Rosanne Altshuler & Paolo Fulghieri, 1996. "Dynamic Effects of Foreign Tax Credits on Multinational Corporations," Departmental Working Papers 199406, Rutgers University, Department of Economics.
  8. Rosanne Altshuler & T. Scott Newlon & William Randolph, 1996. "Do Repatriation Taxes Matter? Evidence from the Tax Returns of U.S. Multinationals," Departmental Working Papers 199405, Rutgers University, Department of Economics.
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  17. Grubert, Harry, 1998. "Taxes and the division of foreign operating income among royalties, interest, dividends and retained earnings," Journal of Public Economics, Elsevier, vol. 68(2), pages 269-290, May.
  18. Harry Grubert, 2000. "Tax Planning by Companies and Tax Competition by Governments: Is There Evidence of Changes in Behavior?," NBER Chapters, in: International Taxation and Multinational Activity, pages 113-142 National Bureau of Economic Research, Inc.
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