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Credit and Deferral as International Investment Incentives

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James R. Hines Jr.

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Abstract

The US government taxes the foreign income of American firms, using a system that grants credits for foreign taxes paid and permits tax deferral for unrepatriated income. This paper shows that the tax system encourages firms to restrict their equity stakes in new foreign investments, and to finance their new investments with considerable debt. These incentives are strongest for US investments in low-tax foreign countries, and exist even when transfer price regulation effectively limits the profit rates foreign subsidiaries can earn. The behavior of US multinationals in 1984 appears to reflect these tax incentives.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4191.

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Date of creation: Dec 1994
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Handle: RePEc:nbr:nberwo:4191

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Find related papers by JEL classification:
H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

References listed on IDEAS
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  1. Hans-Werner Sinn, 1990. "Taxation and the Birth of Foreign Subsidiaries," NBER Working Papers 3519, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Michael J. Boskin & William G. Gale, 1988. "New Results on the Effects of Tax Policy on the International Location of Investment," NBER Working Papers 1862, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Rosanne Altshuler & T. Scott Newlon, 1991. "The Effects of U.S. Tax Policy on the Income Repatriation Patterns of U.S. Multinational Corporations," NBER Working Papers 3925, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Joel B. Slemrod, 1990. "Tax Effects on Foreign Direct Investment in the United States: Evidence from a Cross-Country Comparison," NBER Chapters, in: Taxation in the Global Economy, pages 79-122 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  5. repec:fth:coluec:478 is not listed on IDEAS
  6. Alan J. Auerbach & James R. Hines Jr., 1988. "Investment Tax Incentives and Frequent Tax Reforms," NBER Working Papers 2492, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Berry, Charles H. & Bradford, David F. & Hines, James R. Jr., 1991. "Arm's Length Pricing: Some Economic Perspectives," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich.
  8. Hines, J.R. & Rice, E.M., 1990. "Fiscal Paradise: Foreign Tax Havens And American Business," Papers 56, Princeton, Woodrow Wilson School - Discussion Paper.
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  9. Altshuler, R. & Fulghieri, P., 1990. "Incentive Effects Of Foreign Tax Credits On Multinationals," Discussion Papers 1990_11, Columbia University, Department of Economics.
  10. Hines, J.R., 1990. "The Flight Paths Of Migratory Corporations," Papers 65, Princeton, Woodrow Wilson School - Discussion Paper.
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