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The Effect of Moving to a Territorial Tax System on Profit Repatriations: Evidence from Japan

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  • HASEGAWA Makoto
  • KIYOTA Kozo

Abstract

The design of international tax policies, including whether and how to tax corporate incomes earned in foreign countries, has received a great deal of attention from policymakers and economists. The United States taxes foreign source income upon repatriation under the worldwide tax system and has long discussed changing the current corporate tax system to a territorial tax system that exempts foreign income from home taxation. Japan had a worldwide tax system similar to that in the United States, but moved to a territorial tax system by introducing a foreign dividend exemption in April 2009. This paper examines the effect of dividend exemption on profit repatriations by Japanese multinationals. We find that while the dividend exemption system stimulated dividend payments by foreign affiliates on average, their responses to dividend exemption were heterogeneous. Foreign affiliates not paying dividends under the worldwide tax system did not start to do so as a result of the legislation. On the other hand, dividend exemption increased dividend repatriations by foreign affiliates that had paid dividends under the worldwide tax system. We also find that more profitable firms paid larger amounts of dividends under the worldwide tax system and increased dividend payments further in the first year of the new exemption system.

Suggested Citation

  • HASEGAWA Makoto & KIYOTA Kozo, 2013. "The Effect of Moving to a Territorial Tax System on Profit Repatriations: Evidence from Japan," Discussion papers 13047, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:13047
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    Cited by:

    1. Theresa M. Greaney & Kozo Kiyota, 2020. "Japan’s Outward FDI Potential," Working Papers 202005, University of Hawaii at Manoa, Department of Economics.
    2. Thiess Büttner & Carolin Holzmann, 2019. "Switching from Worldwide to Territorial Taxation: Empirical Evidence of FDI Effects," CESifo Working Paper Series 7462, CESifo.
    3. Dhammika Dharmapala, 2016. "The Economics of Corporate and Business Tax Reform," CESifo Working Paper Series 5864, CESifo.
    4. Dhammika Dharmapala, 2018. "The Consequences of the TCJA's International Provisions: Lessons from Existing Research," CESifo Working Paper Series 7249, CESifo.
    5. Dong, Qi Flora & Cao, Yiting & Zhao, Xin & Deshmukh, Ashutosh, 2019. "Responses of US multinational firms to a temporary repatriation tax holiday: A literature review and synthesis," Journal of Accounting Literature, Elsevier, vol. 43(C), pages 108-123.
    6. Dobbelaere, Sabien & Kiyota, Kozo, 2018. "Labor market imperfections, markups and productivity in multinationals and exporters," Labour Economics, Elsevier, vol. 53(C), pages 198-212.
    7. Tetsuya Shinkai & Takao Ohkawa & Makoto Okamura & Ryoma Kitamura, 2020. "Effects of Changes in Exchange Rate Volatility on Short-run Equilibrium in International Oligopoly," Discussion Paper Series 215, School of Economics, Kwansei Gakuin University.
    8. Sebastian Beer & Ruud de Mooij & Li Liu, 2020. "International Corporate Tax Avoidance: A Review Of The Channels, Magnitudes, And Blind Spots," Journal of Economic Surveys, Wiley Blackwell, vol. 34(3), pages 660-688, July.
    9. Agrawal, David R. & Mardan, Mohammed, 2019. "Will destination-based taxes be fully exploited when available? An application to the U.S. commodity tax system," Journal of Public Economics, Elsevier, vol. 169(C), pages 128-143.
    10. Xing, Jing, 2018. "Territorial tax system reform and multinationals' foreign cash holdings: New evidence from Japan," Journal of Corporate Finance, Elsevier, vol. 49(C), pages 252-282.
    11. Dominika Langenmayr & Li Liu, 2020. "Where Does Multinational Profit Go with Territorial Taxation? Evidence from the UK," CESifo Working Paper Series 8047, CESifo.
    12. Sebastien Bradley & Estelle Dauchy & Makoto Hasegawa, 2018. "Investor valuations of Japan’s adoption of a territorial tax regime: quantifying the direct and competitive effects of international tax reform," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(3), pages 581-630, June.
    13. Bridgman, Benjamin, 2014. "Do intangible assets explain high U.S. foreign direct investment returns?," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 159-171.
    14. Makoto HASEGAWA & Michi KAKEBAYASHI, 2020. "The Effect of Foreign Dividend Exemption on Profit Repatriation through Dividends, Royalties, and Interest: Evidence from Japan," Discussion papers e-20-004, Graduate School of Economics , Kyoto University.
    15. Muhammad Tahir & Haslindar Ibrahim & Abdul Hadi Zulkafli & Muhammad Mushtaq, 2020. "Influence of Exchange Rate Fluctuations and Credit Supply on Dividend Repatriation Policy of U.S. Multinational Corporations," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 267-290.
    16. Michael Overesch & Sabine Schenkelberg & Georg Wamser, 2018. "Do US Firms Pay Less Tax than their European Peers? On Firm Characteristics, Profit Shifting Opportunities, and Tax Legislation as Determinants of Tax Differentials," CESifo Working Paper Series 6960, CESifo.
    17. Greaney, Theresa M. & Kiyota, Kozo, 2020. "Japan's outward FDI potential," Journal of the Japanese and International Economies, Elsevier, vol. 57(C).
    18. Saskia Kohlhase & Jochen Pierk, 2020. "The effect of a worldwide tax system on tax management of foreign subsidiaries," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 51(8), pages 1312-1330, October.
    19. Peter Egger & Michael Stimmelmayr, 2017. "Taxation and the Multinational Firm," CESifo Working Paper Series 6384, CESifo.
    20. Makoto Hasegawa, 2019. "Territorial Tax Reform and Profit Shifting by US and Japanese Multinationals," KIER Working Papers 1016, Kyoto University, Institute of Economic Research.
    21. Holzmann, Carolin & Büttner, Thiess, 2018. "Switching to Territorial Taxation: FDI Effects for Host-Countries of Foreign Subsidiaries," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181555, Verein für Socialpolitik / German Economic Association.
    22. Ruud A. de Mooij & Ikuo Saito, 2014. "Japan’s Corporate Income Tax; Facts, Issues and Reform Options," IMF Working Papers 14/138, International Monetary Fund.

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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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