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The Effect of Foreign Dividend Exemption on Profit Repatriation through Dividends, Royalties, and Interest: Evidence from Japan

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  • Makoto HASEGAWA
  • Michi KAKEBAYASHI

Abstract

Multinational corporations repatriate foreign profits through dividends, royalties, and interest paid by foreign affiliates to their parent firms. International tax rules concerning how to tax repatriated foreign earnings influence decisions on profit repatriation. In 2009, Japan introduced a foreign dividend exemption system (so-called territorial tax system) that exempted dividends received by Japanese firms from their foreign affiliates from home-country taxation. This paper examines the effects of this tax reform on profit repatriation through dividends, royalties, and interest. The enactment of the foreign dividend exemption system decreased the effective tax rate on foreign income repatriated through dividends on average by 6.8 percentage points in 2009. We find that in response to this tax rate reduction, Japanese-owned foreign affiliates increased dividend payments, but did not change either royalty or interest payments. As a result, these affiliates increased the total payments to their Japanese parents.

Suggested Citation

  • Makoto HASEGAWA & Michi KAKEBAYASHI, 2023. "The Effect of Foreign Dividend Exemption on Profit Repatriation through Dividends, Royalties, and Interest: Evidence from Japan," Discussion papers e-20-004-v2, Graduate School of Economics , Kyoto University.
    • Handle: RePEc:kue:epaper:e-20-004-v2
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    References listed on IDEAS

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    1. 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.
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    3. 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.
    4. Makoto Hasegawa, 2023. "Territorial Tax Reform and Profit Shifting by US and Japanese Multinationals," National Tax Journal, University of Chicago Press, vol. 76(4), pages 771-804.
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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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