U.S. Interest Allocation Rules: Effects and Policy
One of the important changes of the 1986 tax reform for U.S. multinationals is related to the allocation of interest expense. Prior to 1986, U.S. companies allocated domestic interest expense to the income of foreign affiliates on a non-consolidated basis according to the distribution of gross income or assets. After 1986, a U.S. multinational is required to allocate domestic interest expense on a consolidated basis according to the distribution of U.S. and foreign assets. We analyze the impact of the new interest allocation rules on the financial and investment decisions of U.S. multinationals using data from a survey of multinationals assembled by Price Waterhouse. We find that the allocation of interest expense increases the marginal cost of U.S. debt by about 38 percent for firms with excess foreign tax credits. Our empirical tests suggest that firms have altered the location of their borrowings in response to the new rules. We also find that the requirement to allocate interest expense has a significant impact on the effective tax rate faced by U.S. multinationals. For U.S. domestic investments, the interest allocation rules increase the U.S. effective rate from 17.6 percent to 21.9 percent. The rules also increase the effective tax rates on foreign investments made by U.S. firms.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||02 Oct 1996|
|Date of revision:|
|Contact details of provider:|| Postal: New Jersey Hall - 75 Hamilton Street, New Brunswick, NJ 08901-1248|
Phone: (732) 932-7363
Fax: (732) 932-7416
Web page: http://economics.rutgers.edu/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- Hines, J.R.J. & Hubbard, R.G., 1989.
"Coming Home To America - Devidend Repatriations By U.S. Multinationals,"
146, Princeton, Woodrow Wilson School - Public and International Affairs.
- James R. Hines, Jr. & R. Glenn Hubbard, 1990. "Coming Home To America: Dividend Repatriations By U.S. Multinationals," NBER Chapters, in: Taxation in the Global Economy, pages 161-208 National Bureau of Economic Research, Inc.
- James R. Hines, Jr. & R. Glenn Hubbard, 1989. "Coming Home to America: Dividend Repatriations by U.S. Multinationals," NBER Working Papers 2931, National Bureau of Economic Research, Inc.
- Alberto Giovannini & R. Glenn Hubbard & Joel Slemrod, 1993. "Studies in International Taxation," NBER Books, National Bureau of Economic Research, Inc, number giov93-1, September.
- Hines, James Jr., 1994.
"Credit and deferral as international investment incentives,"
Journal of Public Economics,
Elsevier, vol. 55(2), pages 323-347, October.
- James R. Hines Jr., 1992. "Credit and Deferral as International Investment Incentives," NBER Working Papers 4191, National Bureau of Economic Research, Inc.
- Goodspeed, Timothy & Frisch, Daniel, 1989. "U.S. tax policy and the overseas activities of U.S. multinational corporations: a quantitative assessment," MPRA Paper 39389, University Library of Munich, Germany.
- 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.
- Robin Boadway & Neil Bruce & Jack Mintz, 1984. "Taxation, Inflation, and the Effective Marginal Tax Rate on Capital in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 17(1), pages 62-79, February.
- Alan J. Auerbach, 1980.
"Wealth Maximization and the Cost of Capital,"
NBER Working Papers
0254, National Bureau of Economic Research, Inc.
- Kim, E Han, 1978. "A Mean-Variance Theory of Optimal Capital Structure and Corporate Debt Capacity," Journal of Finance, American Finance Association, vol. 33(1), pages 45-63, March.
- Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1, September.
- Roger H. Gordon, 1985. "Taxation of Corporate Capital Income: Tax Revenues Versus Tax Distortions," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 1-27.
- Lans Bovenberg & Krister Anderson & Kenji Aramaki & Sheetal K. Chand, 1990. "Tax Incentives and International Capital Flows: The Case of the United States and Japan," NBER Chapters, in: Taxation in the Global Economy, pages 283-328 National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:rut:rutres:199410. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.