Repatriation Taxes and Foreign Cash Holdings: The Impact of Anticipated Tax Policy

We examine whether anticipation of Congress enacting a reduction in repatriation taxes affects the amount of cash U.S. multinational corporations (MNCs) hold overseas. Prior papers have focused on which U.S. MNCs repatriated foreign cash and how they deployed these funds following the repatriation tax holiday in 2004. We build on this literature and examine whether MNCs were willing to incur the costs of holding excess cash in response to anticipated but uncertain tax legislation. We find that U.S. MNCs most likely to benefit from this anticipated (yet not enacted) legislation began accumulating significant cash holdings once Congress initially proposed and began deliberating a second repatriation tax holiday. Further tests reveal that this cash accumulation was accompanied by two complementary activities designed to maximize expected tax benefits: tax-motivated income shifting and increases in permanently reinvested foreign earnings. The documentation of such preemptive behavior by corporations contributes to the literature on how firms respond to tax-induced incentives, provides a new explanation for the dramatic growth in cash holdings by U.S. MNCs over the last decade, and raises important questions about the long-run consequences of enacting temporary tax regulation.