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Trade Credit and Taxes

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  • Mihir A. Desai
  • C. Fritz Foley
  • James R. Hines Jr.

Abstract

This paper analyzes the extent to which firms use trade credit to reallocate capital in response to tax incentives. Tax-induced differences in pretax returns encourage the use of trade credit to reallocate capital from firms facing low tax rates to those facing high tax rates. Evidence from the worldwide operations of U.S. multinational firms indicates that affiliates in low-tax jurisdictions use trade credit to lend, whereas those in high-tax jurisdictions use trade credit to borrow: ten percent lower local tax rates are associated with net trade credit positions that are 1.4 percent higher as a fraction of sales. The use of trade credit to get capital out of low-tax, low-return environments is also illustrated by reactions of U.S. firms to the temporary repatriation tax holiday in 2005, when affiliates with positive net trade credit positions were significantly more likely than others to repatriate dividends to parent companies in the United States.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18107.

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Date of creation: May 2012
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Handle: RePEc:nbr:nberwo:18107

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Cited by:
  1. Gary Tobin & Keith Walsh, 2013. "What Makes a Country a Tax Haven? An Assessment of International Standards Shows Why Ireland Is Not a Tax Haven," The Economic and Social Review, Economic and Social Studies, Economic and Social Studies, vol. 44(3), pages 401–424.

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