This paper examines the impact of the Tax Reform Act of 1986 (TRA) on international joint ventures by American firms. The evidence suggests that the TRA had a significant effect on the organizational form of U.S. business activity abroad. The TRA mandates the use of separate credits on income received from foreign corporations owned 50% or less by Americans. This limitation on worldwide averaging greatly reduces the attractiveness of joint ventures to American investors, particularly ventures in low-tax foreign countries. Aggregate data indicate that U.S. participation in international joint ventures fell sharply after 1986. The decline in U.S. joint venture activity is most pronounced in low-tax countries, which is consistent with the incentives created by the TRA. Moreover, joint ventures in low-tax countries use more debt and pay greater royalties to their U.S. parents after 1986, which reflects their incentives to economize on dividend payments
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5755.
Length: Date of creation: Sep 1996 Date of revision: Handle: RePEc:nbr:nberwo:5755
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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
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