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The effect of the tax reform act of 1986 on the location of assets in financial services firms

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  • Altshuler, Rosanne
  • Hubbard, R. Glenn

Abstract

This paper examines the effects of the Tax Reform Act of 1986 on the international location decisions of U.S. financial services firms. The Act included rule changes that made it substantially more difficult for U.S. firms to defer U.S. taxes on overseas financial services income held in low-tax jurisdictions. These same rule changes were not applied to other forms of income; in particular, income generated from active manufacturing operations was still eligible for deferral after the Act. We use information from the tax returns of U.S. corporations to examine how local taxes affect the allocation of assets held abroad. We find that, before the Act, the location of assets in financial subsidiaries was responsive to differences in host country tax rates across jurisdictions. However, after the Act, differences in host country tax rates no longer explain the distribution of assets held in financial services subsidiaries abroad. In contrast, we find that assets held in manufacturing subsidiaries have become more sensitive to variations in tax rates. Our results suggest that the tightening of the anti-deferral provisions applicable to financial services companies has been successful in neutralizing the effect of host country income taxes on investment location decisions.
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  • Altshuler, Rosanne & Hubbard, R. Glenn, 2003. "The effect of the tax reform act of 1986 on the location of assets in financial services firms," Journal of Public Economics, Elsevier, vol. 87(1), pages 109-127, January.
  • Handle: RePEc:eee:pubeco:v:87:y:2003:i:1:p:109-127
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    1. Devereux, Michael P & Hubbard, R Glenn, 2003. "Taxing Multinationals," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(4), pages 469-487, August.
    2. Rosanne Altshuler & T. Scott Newlon & Joel Slemrod, 1993. "The Effects of U.S. Tax Policy on the Income Repatriation Patterns of U. S . Multinational Corporations," NBER Chapters,in: Studies in International Taxation, pages 77-116 National Bureau of Economic Research, Inc.
    3. Gordon, Roger H. & Hines, James Jr, 2002. "International taxation," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 28, pages 1935-1995 Elsevier.
    4. Jason Cummins & R. Glenn Hubbard, 1995. "The Tax Sensitivity of Foreign Direct Investment: Evidence from Firm-Level Panel Data," NBER Chapters,in: The Effects of Taxation on Multinational Corporations, pages 123-152 National Bureau of Economic Research, Inc.
    5. Hines, James R. Jr., 1999. "The Case Against Deferral: A Deferential Reconsideration," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(3), pages 385-404, September.
    6. James R. Hines, Jr. & R. Glenn Hubbard & R. Glenn Hubbard, 1995. "Appendix to "Taxing Multinational Corporations"," NBER Chapters,in: Taxing Multinational Corporations, pages 103-106 National Bureau of Economic Research, Inc.
    7. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 149-182.
    8. Hines, James R. Jr., 1999. "Lessons From Behavioral Responses to International Taxation," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 305-322, June.
    9. Feldstein, Martin & Hines, James R. & Hubbard, R. Glenn (ed.), 1995. "Taxing Multinational Corporations," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226240947.
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    Cited by:

    1. Haufler, Andreas & Mardan, Mohammed & Schindler, Dirk, 2016. "Optimal Policies against Profit Shifting: The Role of Controlled-Foreign-Company Rules," Discussion Papers in Economics 27745, University of Munich, Department of Economics.
    2. Mardan, Mohammed & Haufler, Andreas & Schindler, Dirk, 2014. "An Economic Rationale for Controlled-Foreign-Corporation Rules," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100405, Verein für Socialpolitik / German Economic Association.
    3. Kari Seppo, 2015. "Corporate tax in an international environment – Problems and possible remedies," Nordic Tax Journal, De Gruyter Open, vol. 2015(1), pages 1-16, September.
    4. Egger, Peter H. & Wamser, Georg, 2015. "The impact of controlled foreign company legislation on real investments abroad. A multi-dimensional regression discontinuity design," Journal of Public Economics, Elsevier, vol. 129(C), pages 77-91.
    5. Michael P Devereux, 2007. "The Impact of Taxation on the Location of Capital, Firms and Profit: a Survey of Empirical Evidence," Working Papers 0702, Oxford University Centre for Business Taxation.
    6. Harendt, Christoph, 2018. "Tax influence on financial structures of M&As," ZEW Discussion Papers 18-004, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    7. Watanabe, Yuichi, 2010. "Tax differentials and inflow of foreign direct investments : evidence from foreign operations of U.S. multinational companies," IDE Discussion Papers 263, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    8. von Hagen, Dominik & Harendt, Christoph, 2017. "Impact of controlled foreign corporation rules on post-acquisition investment and profit shifting in targets," ZEW Discussion Papers 17-062, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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