Dividend Repatriation Research Articles

Linking investment opportunities, credit market development and dividend repatriation policy

This study aims to examine the impact of investment opportunities and the global financial crisis on dividend repatriation policy. Additionally, it investigates the interaction effect of credit market development on the association between investment opportunities and dividend repatriation policy. The current study uses secondary data concerning the foreign subsidiaries of US MNCs in 50 countries during the period 2005–2016. Dynamic panel generalised method of moments (GMM) estimator is applied to estimate the dynamic dividend repatriation models. The findings reveal that investment opportunities in the host country significantly negatively influence the dividend repatriation policy. However, credit market development in the host country significantly positively interacts the link between investment opportunities and dividend repatriation policy. This implies that credit market development reduces the negative impact of investment opportunities on the dividend repatriation policy. Further, the findings suggest that dividend repatriation by US MNCs increased significantly during the global financial crisis.

Corruption, national culture, law and dividend repatriation policy

This study aims to examine the effect of corruption, national culture, and rule of law on the dividend repatriation policy of foreign subsidiaries of US multinational corporations (MNCs) in 51 countries. The findings reveal that foreign subsidiaries of US MNCs repatriate lower dividends from host countries that have a higher rate of corruption. Additionally, findings suggest that foreign subsidiaries of US MNCs repatriate higher dividends from individualistic countries. Further, weak legal protection in the host country leads to higher dividend repatriation. Moreover, given an effective legal system in a host country, foreign subsidiaries of US MNCs with higher growth opportunities repatriate lower dividends. Finally, this study finds that foreign subsidiaries of US MNCs functioning in countries with a higher rate of corruption, individualistic culture, and the strict rule of law adjust faster towards optimal dividend repatriation policy. The findings are robust to alternative estimation methods and measures.

Influence of Exchange Rate Fluctuations and Credit Supply on Dividend Repatriation Policy of U.S. Multinational Corporations

Abstract This study aims to examine the effect of exchange rate fluctuations and credit supply on the dividend repatriation policy of foreign subsidiaries of U.S. multinational corporations (MNCs) around the world. The difference generalised method of moments (GMM) estimator was applied to estimate the dynamic dividend repatriation model. The results suggest that the appreciation of host-country currency against the USD leads to higher dividend repatriation by the foreign subsidiaries of U.S. MNCs. Moreover, results reveal that higher availability of private credit in the host country results in lower dividend repatriation by the U.S. MNCs’ foreign subsidiaries.

Territorial Tax System Reform and the Financial Behavior of Multinational Firms

We investigate whether the move from the worldwide tax system to the territorial tax system in Japan in 2009 affects the financial behavior of overseas affiliates of Japanese multinational companies. The reform substantially reduces the tax costs of profit repatriation in the form of dividends for Japanese overseas affiliates. We use this reform as a quasi-natural experiment to investigate whether and how the tax system affects multinationals’ cash holding and financing policies. Findings from our study sheds some light on possible outcomes of similar tax reforms in countries such as the United States. Based on a sample of Japanese overseas affiliates located in both Europe and Asia, we do not find a robust link between the tax costs of dividend repatriation and the cash-asset ratio for Japanese overseas affiliates before the territorial tax system reform. Moreover, we do not find that Japanese overseas affiliates reduced their cash-holdings since the territorial tax reform, no matter whether they are located in countries with high tax costs of repatriation or in countries with low tax costs of repatriation. We further conduct Difference-in-Differences analysis to compare Japanese overseas affiliates with similar US overseas affiliates located in the same host countries. The comparison between the Japanese and US overseas affiliates are reasonable as the tax system on foreign profits were similar in the two countries before Japan moved to the territorial tax system. We do not find significant difference in the cash-holding patterns and capital structures between Japanese and similar US overseas affiliates. While the territorial tax system reform did not change multinationals’ financial behavior during our sample period, the reform can enhance the competitiveness of Japanese firms in foreign countries by reducing their tax burden of repatriation.

Impact of repatriation taxes and earned/contributed capital mix on dividend repatriation policy: the moderating role of firm financial maturity

This study aims to examine the effect of repatriation taxes and earned/contributed capital mix on the dividend repatriation policy of the foreign subsidiaries of US multinational corporations (MNCs) worldwide. In addition, it investigates the moderating effect of firm financial maturity on the relationship between repatriation taxes and dividend repatriation policy. The present study uses secondary data to evaluate the impact of various explanatory variables on dividend repatriation policy over 2006-2016. The difference generalised method of moments (GMM) estimator is applied to estimate the dynamic dividend repatriation models. The results suggest a significant inverse relationship between repatriation taxes and dividend repatriation policy. Further, a significant positive effect of the earned/contributed capital mix on the dividend repatriation policy is identified. Moreover, results indicate that firm financial maturity does not play a statistically significant role in minimising the negative effect of the repatriation tax rate on dividend repatriation policy.

Impact of Repatriation Taxes and Earned/Contributed Capital Mix on Dividend Repatriation Policy: The Moderating Role of Firm Financial Maturity

This study aims to examine the effect of repatriation taxes and earned/contributed capital mix on the dividend repatriation policy of the foreign subsidiaries of US multinational corporations (MNCs) worldwide. In addition, it investigates the moderating effect of firm financial maturity on the relationship between repatriation taxes and dividend repatriation policy. The present study uses secondary data to evaluate the impact of various explanatory variables on dividend repatriation policy over 2006-2016. The difference generalised method of moments (GMM) estimator is applied to estimate the dynamic dividend repatriation models. The results suggest a significant inverse relationship between repatriation taxes and dividend repatriation policy. Further, a significant positive effect of the earned/contributed capital mix on the dividend repatriation policy is identified. Moreover, results indicate that firm financial maturity does not play a statistically significant role in minimising the negative effect of the repatriation tax rate on dividend repatriation policy.

The Consequences of the TCJA's International Provisions: Lessons from Existing Research

This paper discusses the potential consequences of the international tax provisions of the recent Tax Cut and Jobs Act (TCJA), drawing on existing research. The TCJA’s dividend exemption provision is expected to eliminate distortions to the amount and timing of dividend repatriations. However, the efficiency gains from increased repatriations – which are primarily expected to increase shareholder payout – are likely to be modest. The paper uses the observed behavior of firms during the repatriation tax holiday implemented in 2005 to infer the relative magnitudes of the burdens created by the repatriation tax under the old (pre-TCJA) regime and by the TCJA’s new “Global Intangible Low-Taxed Income” (GILTI) tax. It concludes that the TCJA increases the tax burden on US residence for many, and perhaps most, US MNCs. The paper also argues that the GILTI and “Foreign-Derived Intangible Income” (FDII) provisions are likely to create substantial distortions to the ownership of assets, both in the US and around the world. Overall, the scholarly evidence implies that the international provisions of the TCJA can reasonably be expected to create potentially large efficiency losses.

Optimal tax routing: network analysis of FDI diversion

The international corporate tax system is considered a network. Just like for transportation, “shortest” paths are computed, which minimize tax payments for multinational enterprises when they repatriate profits. We include corporate income tax rates, withholding taxes on dividends, double tax treaties, and double taxation relief methods. We find that treaty shopping leads to an average potential reduction of the tax burden on repatriated dividends of about 6% points. An indicator for centrality in the tax network identifies the UK, Luxembourg, and the Netherlands as the most important conduit countries. Low-tax havens do not have a crucial role in reducing dividend repatriation taxes. By contrast, tax haven financial centres do. In the regressions we find that the centrality measures are robustly significant explanatory variables for bilateral FDI stocks. This also holds for our treaty shopping indicator.

The Consequences of the TCJA's International Provisions: Lessons from Existing Research

This paper discusses the potential consequences of the international tax provisions of the recent Tax Cut and Jobs Act (TCJA), drawing on existing research. The TCJA’s dividend exemption provision is expected to eliminate distortions to the amount and timing of dividend repatriations. However, the efficiency gains from increased repatriations – which are primarily expected to increase shareholder payout – are likely to be modest. The paper uses the observed behavior of firms during the repatriation tax holiday implemented in 2005 to infer the relative magnitudes of the burdens created by the repatriation tax under the old (pre-TCJA) regime and by the TCJA’s new “Global Intangible Low-Taxed Income” (GILTI) tax. It concludes that the TCJA increases the tax burden on US residence for many, and perhaps most, US MNCs. The paper also argues that the GILTI and “Foreign-Derived Intangible Income” (FDII) provisions are likely to create substantial distortions to the ownership of assets, both in the US and around the world. Overall, the scholarly evidence implies that the international provisions of the TCJA can reasonably be expected to create potentially large efficiency losses.

The effect of moving to a territorial tax system on profit repatriation: Evidence from Japan

In an increasingly globalized world, the design of international tax systems in terms of the taxation of foreign corporate income has attracted much attention from policy makers and economists alike. In the past, Japan's worldwide tax system taxed foreign source income upon repatriation. However, to stimulate dividend repatriations from Japanese-owned foreign affiliates, the Japanese government introduced a foreign dividend exemption system in 2009 that exempted dividends remitted by Japanese-owned foreign affiliates to their parent firms from home-country taxation. This paper examines the effect of this dividend exemption system on profit repatriation by Japanese multinationals. We find that the response of Japanese-owned affiliates to the dividend exemption was heterogeneous. More particularly, foreign affiliates with a large stock of retained earnings were generally more responsive to the reform and significantly increased dividend payments to their parent firms in response to the enactment of the dividend exemption system. Dividend payments by these affiliates also became more sensitive to withholding tax rates on dividends levied by host countries under the new exemption system.

The Role of Transfer Prices in Profit-Shifting by U.S. Multinational Firms: Evidence from the 2004 Homeland Investment Act

Using unique transaction-level microdata, this paper documents profit-shifting behavior by U.S. multinational firms via the strategic transfer pricing of intra-firm trade. A simple model reveals how differences in tax rates, both the corporate tax rates across countries and the dividend repatriation tax rate over time, affect the worldwide profit-maximizing transfer-prices set by firms for intra-firm exports and imports. I test the predictions of the model in the context of the 2004 Homeland Investment Act (HIA), a one-time tax repatriation holiday which generated a discreet change in the incentives for U.S. firms to shift profits to low-tax jurisdictions. Matching individual trade transactions by firm, product, country, mode-of-transport, and month across arms-length and related-party transactions (following Bernard, Jensen, and Schott (2006) ) yields a measure of the transfer-price wedge at a point in time. A difference-in-difference strategy reveals that this wedge responds as predicted by the model: In the period following passage of the HIA, the export transfer price wedge increased in low-tax relative to high-tax countries, while the import transfer price wedge exhibited the opposite behavior. Consistent with the form of tax avoidance known as "round-tripping, the results imply $6 billion USD of under-reported U.S. exports, nearly $7 billion USD of over-reported U.S. imports, and roughly $2 billion USD in foregone U.S. corporate tax receipts.

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

In an increasingly globalized world, the design of international tax systems in terms of taxation on foreign corporate incomes has received much attention from policymakers and economists alike. In the past, Japan's worldwide tax system taxed foreign source income upon repatriation. However, to stimulate dividend repatriations from Japanese-owned foreign affiliates, Japan introduced a foreign dividend exemption in 2009 that exempts dividends remitted by Japanese-owned foreign affiliates to their parent firms from home taxation. This paper examines the effect of this dividend exemption on profit repatriations by Japanese multinationals. We find that the response of Japanese-owned affiliates to the dividend exemption was heterogeneous. More particularly, foreign affiliates with a large stock of retained earnings were generally more responsive to the reform and significantly increased dividend payments to their parent firms in response to the enactment of the dividend exemption system. Dividend payments by these affiliates also became more sensitive to withholding tax rates on dividends levied by host countries under the new exemption system.

Fixing the System: An Analysis of Alternative Proposals for the Reform of International Tax

We evaluate proposals for the reform of the U.S. system of taxing cross-border income including dividend exemption, full current inclusion, a Japanese type version of dividend exemption with an effective tax rate test subject to an exception for an active business, dividend exemption combined with a minimum tax, and repeal of check-the-box. We consider two versions of dividend exemption with a minimum tax: one in which the minimum tax is imposed on a country by country basis and another in which the minimum tax is based on overall foreign income. In addition we evaluate versions of minimum taxes that allow current deductions for tangible investment against the minimum tax base. To compare these schemes with current law, we reevaluate the efficiency cost of the dividend repatriation tax using evidence from the response to the 2005 repatriation tax holiday. We find that the burden of avoiding repatriations is higher than found in previous estimates, particularly for high tech profitable foreign businesses, and rises as deferrals accumulate. We simulate the effect of the various alternatives on effective tax rates for investment in high and low tax countries with inclusion of the importance of parent developed intangibles and their role in shifting income from the United States.Our analysis demonstrates that it is possible to make improvements to the system across many dimensions including the lockout effect, income shifting, the choice of location and complexity. The goals are not necessarily in conflict. Compared to the other schemes, we find the per country minimum tax with expensing for real investment has many advantages with respect to these margins. The per country minimum tax offsets (at least in part) the increased incentives for income shifting under pure dividend exemption and is better than full inclusion in tailoring companies’ effective tax rates to their competitive position abroad. No U.S. tax burden will fall on companies that earn just a normal return abroad. The minimum tax is basically a tax on large excess returns in low tax locations, cases in which the company probably has less intense foreign competition. The investment will still be made. Unlike the Japanese type dividend exemption alternative considered, there is no cliff in which the income is subject to the full home country rate if it fails the minimum effective tax rate and active business test. Under the minimum tax with no cliff the company has more of an incentive to lower foreign taxes and will often prefer paying the U.S. minimum tax to paying a higher foreign tax. Finally, the minimum tax with expensing is more effective in discouraging income shifting than repeal of check-the-box. In summary, the per country minimum tax with expensing combines the advantages of the extreme alternatives, dividend exemption and full inclusion, and reduces their shortcomings. Our comparison of the overall and per country minimum tax suggests that the overall version deserves serious consideration. While it is not as thorough as the per country minimum tax in targeting tax haven income, it is a substantial move in that direction and is much simpler.

Is U.S. Multinational Dividend Repatriation Policy Influenced by Reporting Incentives?

ABSTRACTThis study finds evidence that public-company reporting by U.S. multinational corporations (MNCs) creates disincentives to repatriate foreign earnings to the U.S. and contributes to the accumulation of cash abroad. MNCs operate under U.S. international tax laws and financial reporting rules and face two potential consequences when they repatriate foreign earnings: a cash payment for repatriation taxes and a reduction in reported accounting earnings. Using a confidential dataset of financial and operating characteristics of foreign affiliates of MNCs combined with public-company data, we examine how repatriation amounts vary across firms that face relatively strong reporting incentives to defer an accounting expense. Our results suggest that reporting incentives reduce repatriations by about 17 to 21 percent annually.Data Availability: Bureau of Economic Analysis (BEA) data were made available to the authors under a legal confidentiality arrangement; all non-BEA data are available from public sources.

Consequences of the New UK Tax Exemption System: Evidence from Micro-Level Data

Until 2009, the United Kingdom operated a system of worldwide taxation. Taxation of foreign income was deferred until repatriated as dividends, leaving UK-owned multinational firms the possibility of avoiding UK taxation by delaying dividend payments and keeping earnings abroad. In 2009, the UK switched to a system under which all foreign-earned income is exempted from taxation. This fundamental change had a number of straightforward implications for UK-owned multinational firms and particularly changed incentives to repatriate profits. This paper assesses the effects of the reform on the foreign affiliates of UK-owned multinational firms. We use data provided by Bureau van Dijk on 61,738 foreign affiliates located in one of 29 European countries to estimate the impact of the reform on the repatriation pattern and other outcomes of UK-owned affiliates. We use an identification approach that quasi-randomizes over the country of residence of the ultimate firm owners, allowing us to compare outcomes of treated UK-owned foreign affiliates to control non-UK-owned foreign affiliates. Our results suggest that the switch to tax exemption not only changed dividend repatriation behavior of firms but also the conditions under which foreign entities operate in general, for instance, with regard to investment behavior.

An empirical investigation of the effect of imputation credits on remittance of overseas dividends

Overseas dividend remittance is an important vehicle for multinational corporations (MNCs) to move funds among their global subsidiaries. Using firm-level data from 2001 to 2004 for Taiwan-based MNCs with subsidiaries in China, this paper provides empirical evidence on the effect of imputation credits on overseas dividend remittances. We find that imputation credits have a positive effect on increasing foreign dividend payouts, thereby reducing the efficiency loss induced by the tax cost for within-firm dividends of MNCs. We also document evidence that parent companies’ net fund flows from related-party transactions with their subsidiaries are negatively correlated with dividends repatriated from those affiliates, supporting the notion that transfer-pricing may be substituting for within-firm dividend remittance. Our results contribute to understanding the links between taxation and related-party transactions and subsidiary dividend repatriation decisions of MNCs.

Does Lowering Dividend Tax Rates Increase Dividends Repatriated? Evidence of Intrafirm Cross-Border Dividend Repatriation Policies by German Multinational Enterprises

This paper explores the effect dividend taxes exert on dividends repatriated from foreign affiliates to their German parent companies. The empirical analysis based on firm-level data from the Microdatabase Direct Investment provided by the Deutsche Bundesbank first signals the validity of the original Lintner model for cross-border intrafirm dividend payments of German affiliates abroad. Second, results imply that high dividend taxes indeed have a statistically significant negative effect on dividends repatriated. Our calculations suggest that a one-percentage-point decrease in the dividend tax rate would increase dividends repatriated by about 3.75%. Evaluated at the mean of positive dividend payments, a semielasticity of -1.71 is derived.

Is U.S. Multinational Dividend Repatriation Policy Influenced by Reporting Incentives?

This study finds evidence that public-company reporting by U.S. multinational corporations (MNCs) creates disincentives to repatriate foreign earnings to the U.S. and contributes to the accumulation of cash abroad. MNCs operate under U.S. international tax laws and financial reporting rules and face two potential consequences when they repatriate foreign earnings: a cash payment for repatriation taxes and a reduction in reported accounting earnings. Using a confidential dataset of financial and operating characteristics of foreign affiliates of MNCs combined with public-company data, we examine how repatriation amounts vary across firms that face relatively strong reporting incentives to defer an accounting expense. Our results suggest that reporting incentives reduce repatriations by about 17 to 21 percent annually.

Does Lowering Dividend Tax Rates Increase Dividends Repatriated?: Evidence of Intra-Firm Cross-Border Dividend Repatriation Policies by German Multinational Enterprises

This paper explores the impact dividend taxes exert on the dividends repatriated from foreign affiliates to their German parent company. Based on an augmented Lintner model of firms' dividend payout decisions, the paper focusses on cross-border intra-firm dividend payments of wholly-owned foreign affiliates in the manufacturing sector. Firm-level data from the Microdatabase Direct Investment (MiDi) of the Deutsche Bundesbank is used. Results firstly signal the validity of the original Lintner model for cross-border intra-firm dividend payments of German affiliates abroad, although the target payout ratio and the degree of dividend smoothing drops substantially once timeinvariant unobserved heterogeneity is controlled for. Secondly, results from an augmented Lintner model imply that increases in dividend taxes indeed have a statistically significant negative impact on the expected value of dividends repatriated: Evaluated at the overall mean dividend payment a one percentage point increase in the dividend tax rate would decrease dividends repatriated by about 3.5 percent. Evaluated at the mean of positive dividend payments a semi-elasticity of -1.6 is derived.

Does Lowering Dividend Tax Rates Increase Dividends Repatriated? Evidence of Intra-Firm Cross-Border Dividend Repatriation Policies by German Multinational Enterprises

This paper explores the impact dividend taxes exert on the dividends repatriated from foreign affiliates to their German parent company. Based on an augmented Lintner model of firms' dividend payout decisions, the paper focusses on cross-border intra-firm dividend payments of wholly-owned foreign affiliates in the manufacturing sector. Firm-level data from the Microdatabase Direct Investment (MiDi) of the Deutsche Bundesbank is used. Results firstly signal the validity of the original Lintner model for cross-border intra-firm dividend payments of German affiliates abroad, although the target payout ratio and the degree of dividend smoothing drops substantially once time invariant unobserved heterogeneity is controlled for. Secondly, results from an augmented Lintner model imply that increases in dividend taxes indeed have a statistically significant negative impact on the expected value of dividends repatriated: Evaluated at the overall mean dividend payment a one percentage point increase in the dividend tax rate would decrease dividends repatriated by about 3.5 percent. Evaluated at the mean of positive dividend payments a semi-elasticity of -1.6 is derived.