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Repatriation Taxes, Repatriation Strategies and Multinational Financial Policy

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  • Rosanne Altshuler

    ()
    (Rutgers University, Department of Economics)

  • Harry Grubert

    ()
    (U.S. Treasury Department)

Abstract

Several investment-repatriation strategies are added to the standard model of a parent and its affiliate in which the affiliate is located in a low-tax country and is limited to two alternatives: repatriating taxable dividends to the parent or investing in its own real operations. In our model, the subsidiary can invest in passive assets which the parent can borrow against, making any direct taxable flow to the parent unnecessary. The low-tax subsidiary can also use its earnings to invest in a related high-tax affiliate which becomes the vehicle for tax-free repatriations. Alternatively, the low-tax affiliate can be capitalized by equity injections through an upper-tier sibling. This reduces the tax on repatriations from the low-tax subsidiary because taxes at home on foreign source income are based on a blend of the siblings' tax rates. We show analytically how the availability of these strategies can effect real investment in the low-tax subsidiary and throughout the worldwide corporation. We use firm level data for U.S. multinational corporations to test for the importance of these alternative strategies. The evidence is generally consistent with the theory, particularly the "triangular" strategies using related affiliates.

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Bibliographic Info

Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200009.

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Date of creation: 27 Jan 2002
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Handle: RePEc:rut:rutres:200009

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Keywords: dividend repatriation; financial policy; international taxation; investment policy; multinational;

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  1. 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.
  2. Alfons Weichenrieder, 1996. "Anti-tax-avoidance provisions and the size of foreign direct investment," International Tax and Public Finance, Springer, vol. 3(1), pages 67-81, January.
  3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  4. Rosanne Altshuler, 1995. "Do Repatriation Taxes Matter? Evidence from the Tax Returns of U.S. Multinationals," NBER Chapters, in: The Effects of Taxation on Multinational Corporations, pages 253-276 National Bureau of Economic Research, Inc.
  5. Sinn, H.W., 1990. "Taxation And The Birth Of Foreign Subsidiaries," Papers 66, Princeton, Woodrow Wilson School - Discussion Paper.
  6. James R. Hines Jr., 1992. "Credit and Deferral as International Investment Incentives," NBER Working Papers 4191, National Bureau of Economic Research, Inc.
  7. David G. Hartman, 1982. "Tax Policy and Foreign Direct Investment in the United States," NBER Working Papers 0967, National Bureau of Economic Research, Inc.
  8. Horst, Thomas, 1977. "American Taxation of Multinational Firms," American Economic Review, American Economic Association, vol. 67(3), pages 376-89, June.
  9. Rosanne Altshuler & Jack Mintz, 1996. "U.S. Interest Allocation Rules: Effects and Policy," Departmental Working Papers 199410, Rutgers University, Department of Economics.
  10. Altshuler, R. & Fulghieri, P., 1992. "Dynamic Effects of Foreign Tax Credits on Multinational Corporations," Discussion Papers 1992_26, Columbia University, Department of Economics.
  11. Harry Grubert, 2000. "Tax Planning by Companies and Tax Competition by Governments: Is There Evidence of Changes in Behavior?," NBER Chapters, in: International Taxation and Multinational Activity, pages 113-142 National Bureau of Economic Research, Inc.
  12. Grubert, Harry, 1998. "Taxes and the division of foreign operating income among royalties, interest, dividends and retained earnings," Journal of Public Economics, Elsevier, vol. 68(2), pages 269-290, May.
  13. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
  14. 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, vol. 37(4), pages 542-76.
  15. James R. Hines, Jr. & R. Glenn Hubbard, 1990. "Coming Home to America: Dividend Repatriations by U.S. Multinationals," NBER Working Papers 2931, National Bureau of Economic Research, Inc.
  16. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1.
  17. Hines, James R, Jr & Rice, Eric M, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 149-82, February.
  18. Mervyn A. King & Don Fullerton, 1983. "The Taxation of Income from Capital: A Comparative Study of the U.S., U.K., Sweden, and West Germany--The Theoretical Framework--," NBER Working Papers 1058, National Bureau of Economic Research, Inc.
  19. 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, vol. 51(1), pages 75-96, May.
  20. repec:fth:coluec:611 is not listed on IDEAS
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