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Balance Sheets, Multinational Financial Policy, and the Cost of Capital at Home and Abroad

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  • Rosanne Altshuler
  • Harry Grubert

Abstract

We use data from the balance sheets of controlled foreign corporations,(CFCs) to study the real and financial behavior of U.S. multinational corporations. Previous literature on repatriations has mostly been restricted to the choice between dividend distributions to the parent and further real investment in the CFC. The balance sheet data allows us to study a broader range of financial flows between CFCs and parents. Our theoretical work considers models that depart from the previous work in several important ways. We drop the standard arbitrage condition in which the after-tax return to equity and debt is equalized on the margin and instead impose a worldwide financial constraint consistent with a rising cost of debt finance. In our model, parents can borrow against financial assets held abroad and may allocate debt across locations to achieve the lowest cost of capital at home and abroad. We also consider the implications of models in which CFCs can invest in CFCs in other foreign countries. We explain how low-tax CFCs can repatriate tax-free by investing in high-tax CFCs that are repatriating income to parent corporations. Our theoretical results confirm that financial assets, including the equity or debt of other CFCs, are attractive alternatives to repatriation and investment in real assets. We show that if the parent can borrow against its CFC's financial assets it can achieve the equivalent of a dividend repatriation. Our regression results confirm the importance of tax considerations in explaining CFC holdings of financial assets. Low-tax CFCs invest in financial assets in order to avoid U.S. taxes on repatriations. CFCs in high-tax locations are much more highly leveraged than low-tax CFCs.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5810.

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Date of creation: Oct 1996
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Handle: RePEc:nbr:nberwo:5810

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  1. Rosanne Altshuler & Jack Mintz, 1995. "U.S. interest-allocation rules: Effects and policy," International Tax and Public Finance, Springer, Springer, vol. 2(1), pages 7-35, February.
  2. 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.
  3. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, Elsevier, vol. 26(1), pages 107-121, February.
  4. Alfons Weichenrieder, 1996. "Anti-tax-avoidance provisions and the size of foreign direct investment," International Tax and Public Finance, Springer, Springer, vol. 3(1), pages 67-81, January.
  5. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1.
  6. Rosanne Altshuler & T. Scott Newlon & William Randolph, 1996. "Do Repatriation Taxes Matter? Evidence from the Tax Returns of U.S. Multinationals," Departmental Working Papers, Rutgers University, Department of Economics 199405, Rutgers University, Department of Economics.
  7. Hines, J.R. & Rice, E.M., 1990. "Fiscal Paradise: Foreign Tax Havens And American Business," Papers, Princeton, Woodrow Wilson School - Discussion Paper 56, Princeton, Woodrow Wilson School - Discussion Paper.
  8. David F. Bradford & Hugh J. Ault, 1990. "Taxing International Income: An Analysis of the U.S. System and Its Economic Premises," NBER Working Papers 3056, National Bureau of Economic Research, Inc.
  9. James R. Hines, Jr. & R. Glenn Hubbard, 1990. "Coming Home To America: Dividend Repatriations By U.S. Multinationals," NBER Chapters, in: Taxation in the Global Economy, pages 161-208 National Bureau of Economic Research, Inc.
  10. James R. Hines Jr., 1992. "Credit and Deferral as International Investment Incentives," NBER Working Papers 4191, National Bureau of Economic Research, Inc.
  11. Hans-Werner Sinn, 1990. "Taxation and the Birth of Foreign Subsidiaries," NBER Working Papers 3519, National Bureau of Economic Research, Inc.
  12. Kenneth A. Froot & James R. Hines, Jr., 1994. "Interest Allocation Rules, Financing Patterns, and the Operations of U.S. Multinationals," NBER Working Papers 4924, National Bureau of Economic Research, Inc.
  13. Leechor, Chad & Mintz, Jack, 1993. "On the taxation of multinational corporate investment when the deferral method is used by the capital exporting country," Journal of Public Economics, Elsevier, Elsevier, vol. 51(1), pages 75-96, May.
  14. Roger H. Gordon & James R. Hines Jr., 2002. "International Taxation," NBER Working Papers 8854, National Bureau of Economic Research, Inc.
  15. Horst, Thomas, 1977. "American Taxation of Multinational Firms," American Economic Review, American Economic Association, American Economic Association, vol. 67(3), pages 376-89, June.
  16. Sinn, Hans-Werner, 1984. "Die Bedeutung des Accelerated Cost Recovery System fur den internationalen Kapitalverkehr. (The Significance of the Accelerated Cost Recovery System for International Capital Movements. With English s," Kyklos, Wiley Blackwell, Wiley Blackwell, vol. 37(4), pages 542-76.
  17. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
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  1. You Can Pry our 12.5% Rate from our Cold, Dead Fingers
    by Ron Davies in The Irish Economy on 2010-11-15 12:41:17
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Cited by:
  1. Rosanne Altshuler & Jason Cummins, 1998. "Tax Policy and the Dynamic Demand for Domestic and Foreign Capital by Multinational Corporations," Departmental Working Papers, Rutgers University, Department of Economics 199808, Rutgers University, Department of Economics.
  2. Rosanne Altshuler, 2000. "Recent Developments in the Debate on Deferral," Departmental Working Papers, Rutgers University, Department of Economics 200013, Rutgers University, Department of Economics.
  3. Richard Chisik & Ronald B. Davies, 2010. "Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence," Working Papers, Ryerson University, Department of Economics 020, Ryerson University, Department of Economics.
  4. Davies, Ronald B., 2003. "Tax Treaties, Renegotiations, and Foreign Direct Investment," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, Queensland University of Technology (QUT), School of Economics and Finance, vol. 33(2), pages 251-273, September.

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