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Trade Credit and Taxes

Listed author(s):
  • Mihir A. Desai

    (Harvard University and NBER)

  • C. Fritz Foley

    (Harvard University and NBER)

  • James R. Hines Jr.

    (University of Michigan and NBER)

This paper analyzes the extent to which firms use trade credit to reallocate capital in response to tax incentives. Tax-induced differences in pretax returns encourage the use of trade credit to reallocate capital from firms facing low tax rates to those facing high tax rates. Evidence from the worldwide operations of U.S. multinational firms indicates that affiliates in low-tax jurisdictions use trade credit to lend, whereas those in high-tax jurisdictions use trade credit to borrow: ten percent lower local tax rates are associated with net trade credit positions that are 1.4 percent higher as a fraction of sales. The use of trade credit to get capital out of lowtax, low-return environments is also illustrated by reactions of U.S. firms to the temporary repatriation tax holiday in 2005, when affiliates with positive net trade credit positions were significantly more likely than others to repatriate dividends to parent companies in the United States.

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File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers626-650/r631.pdf
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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 631.

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Length: 31 pages
Date of creation: May 2012
Handle: RePEc:mie:wpaper:631
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Web page: http://fordschool.umich.edu/rsie/
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