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This Page Intentionally Left Blank Dividend Repatriations unlike equity financing, debt financing allows the possibility of repatriating principal without triggering even when foreign “earnings and profits” are positive. see Scholes (in press). Auerbach, Alan James M. The effects Martin Feldstein. (Chicago: University Chicago Press). and Mark and business global planning James R. Hines, Jr./R. Glenn will comment dividends reported like the results here, few qualifications are already expressed major experimental design regret, not control for expected capital structure differences across also does consider withholding taxes, although addition, the model takes as exogenous factors are clearly endogenous, although the authors are well aware this as well. Although the result that dividends are higher where there is credit is sensible (and is consistent earlier argument present value sense credits can carried forward and used to future), it also partially induced only means effect repatriation, necessary condition for generating excess foreign would be to pay considers two dependent variables: dividends total assets dividends plus Subpart F income divided total assets. claim that the results are similar across the two dependent variable specifications, suggesting Subpart F income responds similarly dividend income the independent variables in the model. seems inconsistent was shown Indeed, on closer inspection, there is no inconsistency: Subpart seem to behave similarly dividend income. the estimated the foreign credit dummy drops income is included in the dependent variable despite the fact income is less than this makes sense: Subpart income is desirable the the tax rate hence the less likely it is excess foreign tax credits are present. Similarly, the coefficient on the cost variable declines is consistent the earlier finding that Subpart income is the preferred repatriation method when rates are lower abroad. conclude, Hines and Hubbard are to be greatly commended work. They provided the best analysis multinational area that deserves to should stimulate though on taxes affect the increasingly global economy. presence of investment tax carryforwards affects the marginal tax rate since the is tied directly to the Each dollar the other hand, the profits from sales also give “foreign-source income.” order here. First, withholding tax rates differ among the repatriation and this can affect the optional capital structure. As to also reveals that deficit foreign firms account for a disproportionate share Subpart F income (58 assets). This with what but what striking is that such income is foreign tax credit This points a possible investing in Subpart F recognized in paper. Firms without good might wish to repatriations until they can average the large foreign from lower-tax-rate controlled foreign Another possibility the definition differed for for Subpart income. Since dividends are taxable only and profits, repatriation Subpart F income can be preferred a larger nontaxable return But table calculating, one can see that deficit foreign reporting Subpart F income generate Subpart F income equal assets. This suggests that significant fraction is invested passively. contrast, excess credit firms reporting Subpart income generate total income equal percentage investment in Subpart F credit firms is more is the average foreign subsidiary. some calculating from table the deficit foreign reporting Subpart is 21.8 percent, whereas those average tax nearly twice much in rate, deferral particularly valuable. demonstrates this point more vividly. reason that is that transfer pricing is controlled foreign that face the highest expect competition return on investment increasing in the level the case except the highest It would pretax return on asset numbers in analogous numbers for foreign tax credit firms. reports data for deficit foreign The excess shift income whether the positive relation pretax investment rates turns negative for at lower James R. Jr./R. Glenn after-tax earnings. While this is true, can be misleading. Interest, rent, and royalties represent earnings. Their payment triggers States. More fully, these represented less 25 percent taxable income before interest, rent, turn to more important matters. Although it is interesting to compare the firms that paid interest, rent, royalties (34 to those that interest, rent, or royalties but not dividends (51 the most deferral exist only foreign subsidiary jurisdictions, as correctly point out. This, implications for the optimal capital structure foreign subsidiaries. Because dividends can delayed for many years but interest on on lease contracts, royalties on licensing agreements cannot be, equity is desirable in low-tax environments, distributions from pretax income locally are debt, leases, licenses are desirable arrangements, although these benefits must be traded off against the cost of precommitment to the this, capital structure may well differ systematically across foreign subsidiaries is not considered. Their dependent variable is dividends divided total assets. The arguments just made, however, suggest the ability explain cross-sectional dividends as the “tax price” dividends were stockholders’ equity rather assets to control for capital structure differences. Despite this, their well on this score. the results in table interpreting the foreign subsidiaries controlled foreign corporations appear generate no liability on their income each But, given percent (and this is before withholding taxes on dividends), repatriations would hardly tax anyway. skip over table constitutes good detective to deal the possible the results. Moving to table firms with credits account for and royalty this is consistent cannot see Such repatriations are neutral relative to dividends for credit firms. be shown to have price equal to that given the paper. other hand, are inferior to passive investment generates Subpart ignores the possibility that excess foreign which can be forward for future. Setting the tax a dividend repatriation zero for is akin the marginal tax rate operating losses is and this far from correct. A with an to those low-tax countries for is desirable for a short time. Such considerations can repatriation negative even excess foreign credits exist. to use up excess foreign credits not generate export sales from the United States rather than through foreign subsidiary, branch, or even a so-called foreign sales corporation. appropriate circumstances, this permits the sale to allocated to “foreign-source income,” allowing, in additional foreign credit to liability equal to the on half further complication that arises is that a credit for one income basket but credit for this case, the can be positive for a reporting excess foreign suggested earlier, bit puzzled prominence given the equity ideas this paper. The equity argument applies retained earnings are trapped in the corporation and cannot a major the paper alternatives to dividends as a deliver retained earnings the parent. There is one sense, though, the trapped equity argument does apply more naturally to the multinational setting Shoven’s evidence share repurchases as a way of to shareholders is sufficient to cast serious doubt the trapped equity argument in the United States. the multinational share repurchases liquidations give rise the extent and profits generated since 1962. related matter, such share repurchases counted as dividends for the purposes study, but I do that they the Micro Data Let me turn next the most interesting part in the paper: the micro data for 1984 in tables First, consider table begin with a minor quibble. indicate that, for firms paying interest, rent, or royalties, no dividends, to their parents, the the conventional wisdom that tax on foreign subsidiary multinationals provides an incentive the subsidiaries to postpone the is basically wide variety but not HH interpret Jun’s evidence fraction of multinationals simultaneously receive dividends from foreign subsidiar- well as new capital as being inconsistent with tax dividends can strategy in a number important situations. I will briefly list three First, it pays to repatriate, particularly from parent’s marginal rate is temporarily low. may be operating losses the add-on minimum tax prior dropped marginal percent; the minimum tax; or investment tax credit carryforwards.’ consistent with an repatriate when parent generates net Dividends paid to foreign subsidiaries were roughly the same as 1980 despite a reduction in And many firms net operating losses in 1982, the work Auerbach and Poterba, among others, apparently seized this to repatriate Auerbach and Poterba second situation in may pay to payments is excess foreign credits are about to expire unused. In a circumstance, it may pay to profits from low-tax foreign up the credits, especially profits would be repatriated anyway. This ensures that the subsidiary profits will escape a Note that it can be optimal repatriate from the around and new capital infusions in the all purely As a occurs from a low-tax foreign (such as the existence from a country can rise to net tax refund any firm in deficit foreign tax credit a country where the tax rate exceeds receive a foreign credit exceeding the tax on Related to this last point, let the question that the tax repatriation when foreign tax is zero possibly positive withholding tax must be incurred to effect the their Tobit model. But this claim 1987, 304-42). Repatriations by are used), there are returns to offer thousands Before providing few more general remarks about the paper. exists a dividend puzzle a multinational context the presence is the Treasury appears collect no on the profits the domestic a current dividend gives rise paid to profitable subsidiary the United States will, to a current revenues resort to a “trapped equity” calculus the cost to the declaring cost because, approximation, there cost, let alone a future one. Indeed, interesting aspect is that multinational firms appear to planning that they leave clearly identifiable audit trails that document their attempts to contain even second-order effects tax rules this, it is nevertheless to state no revenues on the foreign profits earned that HH (and forgotten is the shareholder-level tax. abroad, share and the resulting increase in rise to This source of tax following passage because the reduction in the capital gains break increases shareholder- their data, HH attempt out a framework for dividends, interest, rent, royalties, repatriate foreign earnings, rather reinvest them locally, foreign tax aside here, another dimension that they might considered is the alternative routes (from one controlled corporation to another in different maximize after-tax repatriations. Some the accounting elaborate software to do this. Price for example, package that to one allows as intermediate countries to repatriate. like to embellish somewhat. I some remarks about their data analysis. Glenn Hubbard and Mark 1988. The changes in corporate reorganization activity. Stanford University. 1972. Investment and financial behavior American direct investors international mobility Tarshis. New Columbia University Press the National Bureau Economic Research. Skelly, Daniel and James Hobbs. 1986. Statistics income studies international income and taxes. 1969. Fixed investment expenditures of foreign manufacturing affiliates of United States firms: Theoretical models and empirical evidence. 1972. Capital mobility and the international firm. The international mobility and movement New York: Columbia University Press for the National Bureau of Economic Wells, Jr. 1972. Managing the multinational and ownership pricing practices in the United States and Wahl, Jenny Bourne. 1987. Taxation gains and losses. D.C.: U.S. the Treasury, October. academic look at transfer pricing in a global economy. July), 87-96. D. B. dividend remittance practices owned European and Canadian subsidiaries American multinational corpora- thesis, Graduate School of Business Administration, Harvard particularly the analysis the micro data exercise serves much richness lost when inferences about economic behavior are to economic aggregates. Hubbard (hereafter partition the data good descriptive the analysis raises questions as it answers. And the nice things about working micro data is that might actually Whereas parsimony modeling is especially virtuous when data afford few freedom (the typical situation Mark A. Wolfson is the Joseph McDonald Professor in the Stanford University, the Thomas Henry Ford Foundation Visiting Professor the Graduate School Business Administration Harvard University, and research associate the National Bureau Economic Research. Dividend Repatriations Duerr. 1970. Intercompany transactions in the Managing International Business no. 1989. Taxes, tariffs transfer pricing multinational corporation decision-making. the Treasury. David. 1981. Domestic tax policy and foreign investment: no. 784. Cambridge, Mass.: National Bureau Research, October. policy and foreign direct Jr. 1988a. Multinational transfer pricing and its Where the profits Princeton University. 1988b. Taxation and U.S. multinational investment. and the H. Summers, Cambridge, Mass.: MIT National Bureau Horst, Thomas. 1972. Firm and industry determinants the decision empirical study. American taxation of multinational firms. American Economic and Peter Reiss. 1988. Corporate payouts and agency problems: Evidence from the undistributed profits tax 1936- 1938. Columbia University. Mimeo. 1986. Agency costs free cash flow, corporate finance, and American Economic Joosung. 1987. Taxation, international investment, and financing sources. Harvard University. A. 1977. London: Chapman Kopits, George Dividend remittance behavior within the international firm: cross-country analysis. Intra-firm royalties crossing frontiers and transfer-pricing behaviour. Economic Journal 1956. Distribution income of corporations among earnings, and American Economic 46:97- 113. McDaniel, Paul Ault. 1981. United States Netherlands: Kluwer. 1972. Remittances from direct foreign the European Economic Community: exploratory estimate of their determinants. Economia Internazionale Mutti, John. 1981. incentives and repatriation decisions Newlon, Timothy Scott. 1987. policy and the multinational firm’s financial policy and investment decisions.” Ph.D. diss., Princeton University. Poterba, James M. 1987. policy and corporate saving. Economic Activity Poterba, James and Lawrence H. Summers. 1985. The economic effects dividend taxation. In Homewood, Ill.: Irwin. Price Waterhouse. (various annual editions and individual country Price Waterhouse. corporate tax gap: Evidence tax compliance corporations. Harvard University. Mimeo. Glenn Hubbard the corporate income tax because attempt would have to made to measure “profits” of the CFC. One alternative would to adopt a variant a corporate “cash flow” which would tax the difference between net revenues and investment expenditures. In such a is no argument for crediting foreign taxes paid; because investment is expensed, firm’s equity. Absent the parent would its share (one minus the the net-of-foreign-tax returns removal of deferral and the credit system removes much the incentive to use financial transactions to time This is significant, only to the that other countries follow suit reducing their statutory tax Adler, Michael. 1979. U.S. multinationals: A manual computation techniques managerial decision rules. International finance and ed. M. Cambridge, Mass.: Control relationships between American corporations and their European subsidiaries. Research Study 107. New American Manage- ment Association. Alworth, Julian. 1988. The finance investment Oxford: Blackwell. Auerbach, Alan maximization and the cost Foreign investment and taxation. Cliffs, N.J.: 1979. Imperfect dividend policy, and the “bird Bell Journal Boskin, Michael and William the effects policy on the international location The effects capital accumulation, ed. M. Feldstein, 201-19. Chicago: University Chicago Press. 1981. The incidence and allocation effects a tax Public Economics Remmers. 1970. New York: Transfer pricing decisions in multinational corporations. International Business Studies Caves, Richard and economic bridge: Cambridge University Fazzari, Steven and Bruce constraints and corporate investment. Brookings Papers Hubbard. 1988. Financial factors in business Financial market volatility: Causes, consequences, and Federal Reserve Bank of Kansas City. and Daniel tax policy the overseas activities of multinational corporations: A quantitative assessment. Washing- ton, D.C.: the Treasury. Mimeo. Dividend Repatriations treat dividends paid in the first sixty days their annual accounting period during the previous This rule, enacted to permit firms complicated foreign situations the to calculate their foreign tax obligations before selecting their repatriation strategies the year, makes it almost impossible know the tax consequences of a year’s dividend payouts since firms not required their tax which year dividends paid in the first sixty days are not been previously though it applies to all the published all the micro of which we the aggregate numbers reported in publications represent dividends paid at any time during the tax year. this problem quantitatively significant (at least in billion paid in dividends (outside FIRE industries) only billion were have been paid during first sixty days. that the pretax rate return (on assets) generally rises with would expect. declines sharply, however, firms with highest foreign perhaps implying judicious use of transfer lower reported earnings in such jurisdictions. for this observation. reasonable candidates variables with which to deflate and subsequently; discussant Mark suggested stockholder’s equity rather than total assets. however, tightly constrained limited data: total the only reliable stock variable we could extract from average foreign tax rate CFC for none of the American parents in had domestic tax losses that year all are large corporations, is a very close approximation of their marginal corporate tax rates. average foreign tax rate is the best that without panel is impossible know exactly the indirectly creditable foreign tax rate dividends that exceed current-year earnings and profits. additional features of foreign tax systems not included in the that we ignore foreign withholding taxes represent net costs when American parents have foreign tax credits. The is that countries like Germany employ split-rate corporate tax systems that tax distributed profits differently (less heavily, the German than reinvested profits. Variations withholding taxes corporate tax systems change the results reported but we investigating those not fully satisfactory, of credits can be carried forward. That is, is an opportunity cost a given period a potential benefit from generating additional costs and benefits depend the discount rate and the probability a deficit state (itself Absent longitudinal data on the parent’s tax foreign income, there scope for incorporating this consideration. the extent that the estimated price effect mining, construction, transportation, trade, services, and the food, chemicals, nonelectrical machinery, motor vehicles; the excluded category is other manufacturing industries. estimated only in order potential problem that the dividend payments of a manufacturing CFC to a holding company that owns it would be double counted as Modifying these provisions multinationals (say, removing ‘‘deferral” and taxing earnings directly) is difficult within Glenn Hubbard payout ratios in Poterba (1987) not incorporate foreign earnings and retentions American multinationals, making the comparison However, adjusted payout ratios in Hines (1988b) differ greatly those in Poterba 17. Data years prior but are not years before 1968 are very similar 1972 in that trivial relative to actual dividend distributions. hesitates to construct series of such numbers in repatriations designated dividends in the may represent income that was previously (or possibly currently) deemed distributed as Subpart there is possibility of double counting that income. Figures dividend payments to American parents their domestic subsidiaries and its predecessor Form 2952; these forms instruct the taxpayer not the deemed distributions under somewhat ambiguous whether include as current-year dividend the current distributions of prior years. Because in the payout inventory this may not major problem. firms have little incentive to overstate their dividends we follow Treasury in treating dividends and income separately. growth of petroleum firms after anomalously low petroleum industry eamings in 1976. Since expense for tax purposes part of their exploration and development be low period of rapid growth. This observation should caution in drawing conclusions from simple cross sections of taxable income and tax rates. types of income Reform Act of functional separation various income this volume). addition, the creditability of foreign taxes 1975 been subject various limits. the sample the Statistics of Division of Internal Revenue the same that used the aggregate statistics described in sec. for this reporting on their tax forms that they have controlled foreign corporations data of cannot include corporations that file their tax forms, and there is some evidence that tax particularly serious problem earning income 1989). But unlikely to quantitatively significant compared the corporations we include. Frisch (1989) analyze data from CFCs in 1984, one that was not restricted in the same as ours. The CFCs in their sample had after-foreign-tax earnings billion, while billion; their paid $11.8 billion in dividends, $10.1 billion. add interest, rent, and royalty payments together in analysis because they represent repatriation methods that (usually) share the of tax deductibility in host countries. that they in particular, types of payments often subject different withholding foreign governments, their levels may be restricted in different ways. focus in any case is dividend payments; we presume firms to have less year-to-year discretion over interest, rent, and royalty payments than they dividend distributions. potential complication arises these data since, Reform Act of firms were allowed tax purposes Dividend Repatriations tinguishing branches from subsidiaries. Controlled foreign corporations are the subset of subsidiaries that meet the ownership requirements described in the text; they need not be (but usually are) majority owned a single parent. It seems reasonable here assume that there are taxes) differences between debt and equity the parent is the sole owner of either on this point. For a survey of withholding rates various types well below statutory various issues Price Waterhouse’s see also Poterba and Summers Tax-minimizing multinationals incentives to raise the (recorded) prices goods sold affiliates in low-tax jurisdictions other affiliates in higher-tax jurisdictions. Properly transfer pricing repatriate profits from high-tax foreign countries while generating deductions in those countries. Naturally, foreign tax authorities discourage tax-minimizing transfer price manipulations have adopted regulations firms from engaging in the purposes of this paper, will assume that those rules that transfer pricing be used tax avoidance in repatriations. evidence that transfer prices sensitive to considerations, see and Mutti see Bernard and Weiner (in this volume). Of in a wide circumstances, it is difficult even know what constitute appropriate transfer prices goods traded within multinational corporations; Hines approach to this problem. Foreign subsidiaries of multinational firms unable to use commonly employed domestic firms distribute earnings to shareholders without creating a dividend tax liability. share repurchases and liquidating foreign subsidiaries tax purposes they were 11. Detailed reviews of tax-minimizing patterns of intrafirrn financial transactions in multinationals can be found and Wolfson Scholes and well the effects of taxation on the decision foreign multinationals Even in the a domestic firm, signaling models must confront the empirical regularity (in mature firms have high payout rates growing firms presumably the greatest need signal) have very zero payout rates (see Fazzari, Hubbard, and dividend distributions and Hubbard caution must be exercised in interpreting such results. Kopits uses data on subsidiaries in different countries fixed country effects were not we cannot separate co-movements among variables reflecting persistent differences across countries in the mix the constituent subsidiaries) true within-group notes that (two-digit) industry groups more likely that analyses payout ratios country without information industry composition or comparison payout ratios a whole) with firms (as a whole) may not be informative. period before remains something of a black box to the tax tax system was quite different before but the reason that we not include those years in analysis is that tax data on multinational financial behavior are neither consistently nor comprehensively available for any of those years. Dividend Distributions Dependent Variable Independent Variable DividendsiAssets Dividends Parent dividendsiparent assets Industry dummies Log likelihood Percentage with payout Controlled foreign corporations also made sizable repatriations out of their pre-foreign-tax income the form interest, rent, royalties paid to their American parents. data are reported Goodspeed and Frisch This list includes France, Belgium, the Netherlands, and Norway; others such Switzerland and complicated systems that are hybrids territorial and residence somewhat more detail the foreign credit mechanism and recent changes therein, see Auk and Bradford (in this volume); more comprehensive earlier law, see McDaniel and Ault (1981). be eligible for the must own at least 10 percent of a foreign affiliate, and only those taxes that qualify as income taxes creditable. Further, there some complications in the calculation deemed-paid credits that are important to the results presented in feature may more important an international setting since exchange rate variability can create substantial changes dollar-denominated capital values. a critical analysis of recent legislative changes in the income and capital values affected foreign exchange movements, see somewhat detailed. foreign operations take place through affiliates; those that separately incorporated are subsidiaries. Majority ownership is sometimes very from a legal, economic, and data-reporting standpoint; much Commerce data foreign operations majority-owned foreign affiliates, without with Deficit Earnings and Profits All Industries Assets and Profits After Dividends Royalties than current earnings and profits after tax: Foreign tax rate: 57,264 9,424 8,818 2,436 Payout more than current earnings in millions dollars. Details may not add Pretax After-tax CFCs Parents Assets Earnings Earnings Dividends Royalties Subpart F Dividends and Interest, credit; Subpart Excess credit; Subpart F Deficit credit; Deficit credit; Subpart F Excess credit; Subpart F Excess credit; Subpart credit; Subpart F Deficit credit; Authors’ tabulations based Treasury data described column totals. Distribution Breakdowns: Detail Credit Position and Subpart F Liabilities, Pretax After-tax Assets Earnings Earnings Dividends Royalties CFCs Parents Dividends and interest, Excess credit; credit; Subpart credit; Subpart credit; Subpart F Excess credit; Subpart Excess credit; Deficit credit; Subpart F Deficit credit; James R. Financial Flows between Parties Related Interest, Rent, Royalties Received Paid to Dividends and interest, Dividends and interest, Author’s tabulations based on amounts are in billions dollars. Figures in parentheses Distribution Breakdowns: Pretax After- Rent, Subpart Dividends and interest, rent, royalties Dividends and interest, rent, royalties 732 183 8,277 433 Authors’ tabulations based described in the text. Dollar amounts are in billions dollars. Figures in parentheses are shares column totals. Income and Foreign Branch Income Branch Income Branch Income After-tax Foreign After-tax Foreign a Share After-tax Foreign as Branch Branch Dividends Branch Branch Dividends Branch Branch Rate Paid" Income Rate Paida Nonelectrical machinery Electronic equipment Motor vehicles Transportation and public utilities Insurance carriers Total of manufacturing six except six [9]; 1980 [8]; 1976 1976 "Dividends paid include payments to and its domestic subsidiary. are in millions. Data obtained from corporation returns. Dividend Repatriations CFCs Relative CFC Dividend 1980 1976 All industries Nonelectrical machinery Electronic equipment Motor vehicles Transportation and public utilities Insurance carriers except six 1982 table table 1980 table 1, pp. 190(N95 in in 1976 table in [7]; [7]; 1972 table 16, pp. 93-97 in [3]; 1968 table 2, 17 in [3]; 1966 [2]; 1965 table table 1962 table table Note: Dollar amounts in millions are includable (Subpart CFCs. Figures in parentheses are ratios income to dividends paid corporations and their domestic "1972 and 1968 dividend payments include dividends paid to foreign subsidiaries Payout Ratios 1982 1980 1974" 1972" 1968= 1966" 1965" 1962" Motor vehicles Transportation and public utilities 39 Total of manufacturing six manufacturing, except 1982 table table 1980 table 1, pp. 190-95 190-95 1976 table table 1974 table 2, pp. 14-33 in in 1972 table [3]; 1968 table table 1966 table table 1965 table in [2]; 1962 table table Note: Data are corporations and their 2952. Payout ratios based after-tax earnings appear first; payout ratios based on pretax earnings are parentheses. 1972-82: corporations with assets of at least $250 dividends paid to related persons, 1966 and 1965 payments foreign corporation, 1962 dividends paid domestic corporations, 1972 and dividends include payments foreign subsidiaries and Their Domestic Subsidiaries Payout Ratios 1982 1980 1976 1974" 1972" 1968" 1966" 1965" 1962' Nonelectrical machinery Electronic equipment Indirect Dividend 1982 1980 1976 1974 1972 1968 Dividends paid 13,762 13,211 6,570 4,682 1,978 Fraction representing: Payments to Payments to .36 .08 .24 .21 19.3 23.6 Rent and royalties/dividends .30 .30 [12]; 1980 1980 1976 table 11, pp. 262-85 in [7]; 1974 [6]; 1972 1972 1968 table 2, p. 17 in [3] Note: Dollar amounts are current dollars. Pretax Earnings Interest, Rent, 1976 1974 1972 1976 1974 1972 1976 1974 1972 Nonelectrical machinery Electronic equipment Motor vehicles six manufacturing manufacturing, except .18 .19 .22 .08 .12 .06 .09 .21 .18 .19 .20 .13 .10 .18 .26 .19 .19 .26 .31 .43 .06 .17 .20 .14 .06 .10 .24 .21 .10 .16 .02 1.12 .19 .16 .20 .16 .34 .32 .35 .21 .26 .28 .36 .28 .38 .20 .34 .35 .35 .32 .06 .16 .26 .28 .19 .22 .15 .34 1.50 .32 .43 .03 .13 .21 .26 [7]; 1974 [6]; 1972 1972 1968 table 2, pp. 13-17 in [3]. Note: Figures are corporations and their corporations with assets 1976 1974 1972 .21 .21 .22 .33 .30 .39 .30 .24 .25 .39 .20 .46 .06 .26 .20 United Kingdom .38 .71 .30 .27 CFC Dividend Dividend 1974 table 7, pp. 61-84 in [6]; 1972 1972 1968 table 8, pp. 43-64 in [3]; 1962 1962 "Payout ratios after-tax earnings payments to all related domestic corporations. CFC Payouts to 1982 1976 1974 1972 United Kingdom All others 4,829 3,112 58 3 18 11 460 329 329 1976 table 16, pp. 310-21 in [7]; 1974 table 7, pp. 61-84 in [6]; 1972 1972 1968 table 8, pp. 43-64 in [3]; 1962 1962 aAll figures are in millions of current dollars. Payments to corporations filing returns. payments to domestic corporations. payments to all related persons. 1980 1976 1974 1972 1968" 1 1965" 1962" 8,358 3,112 3,210 1,978 1,512 1,445 1,127 22 11 2,985 1,775 1,237 968 198 114 158 121 87 72 922 1,004 566 656 325 227 173 118 908 2,417 486 1,028 805 493 324 314 293 Nonelectrical machinery 383 1,825 317 655 618 175 135 52 Electronic equipment 182 97 118 42 35 42 Motor vehicles 359 569 345 193 269 197 Transportation and public utilities 85 113 27 21 294 350 178 87 71 83 144 37 36 Insurance carriers 41 28 Total of 5,956 2,108 1,061 1,679 516 628 542 361 235 239 189 8 24 24 1980 table 1, pp. 190-95 in [8]; 1976 [7]; 1974 1974 1972 table 16, pp. 93-97 in [3]; 1968 [3]; 1966 1966 1965 table 25, p. 254-57 in [2]; 1962 table 13, p. 86 in [l]. Nore: All figures are in dividends paid related persons, directly owned foreign corporation, foreign corporation, and dividends paid to corporations with assets Dividends Wid 1982 1980 1976 1974 1972 1968" 1965" 1962" Motor vehicles public utilities Insurance carriers except six 8 9 11 22 32 38 50 3238 22 18 30 26 32 47 42 34 40 43 12 36 39 32 32 31 34 18 11 23 142 68 60 21 11 24 28 35 26 29 5 11 4 2 3 3 33 50 5 20 22 10 66 31 21 32 37 47 33 26 33 32 27 23 32 40 38 43 43 1980 table 1, pp. 190-95 in [8]; 1976 table 11, pp. 262-85 in [7]; 1974 [6]; 1972 [3]; 1966 1966 1965 table 25, pp. 254-57 in 121; 1962 table 13, p. 86 in [l]. a1968 dividends paid to related directly owned foreign corporation, directly owned foreign dividends paid to domestic corporation. corporations with assets bFinance, insurance, and real are adapted from Poterba Dividend Repatriations Repatriations U.S. Department of the Treasury, Internal Revenue Service. Supplemental 1962. “Foreign Income Taxes Reported Corporation Income Returns.” Washington, Government Printing Printing -. Supplemental Report, Statistics of Income 1964, 1965, 1966. Income and Taxes Reported on Corporation Income Returns.” Washington, Government Printing Office. Office. . Supplemental Report, Statistics of Income 1968, 1972. Corporations and Controlled Foreign Corpora- tions.” Washington, Government Printing Office. Office. -. Supplemental Report, Statistics of Income 1968-72. International Income and Taxes. “Foreign Tax Credit Claimed Corporation Income Returns.” Washington, Government Printing Office. Office. -. Supplemental Report, Statistics of Income 1974. International Income and Taxes. Credit Claimed Corporation Income Government Printing Office. Office. -. Supplemental Report, Statistics of Income 1974-78. International Income and Taxes. “U.S. Corporations and Their Controlled Foreign Corpora- Government Printing Office. Office. . Supplemental Report, Statistics of Income 1976-79. International Income and Taxes. “Foreign Income and Taxes Reported on Returns.” Washington, Government Printing Office. Office. . 1985. “Compendium International Income and Taxes, 1979-1983.” Washington, Government Printing Office. [9] Barlow, 1986. “Foreign Industry, 1982.” of the Treasury, Internal Revenue Revenue Carson, Chris. 1986. “Corporate Foreign 1982: A Geographic of the Treasury, Internal Revenue Revenue 1 llsimenauer, Ronald. 1986. “Controlled Foreign the Treasury, Internal Revenue Revenue 121 States, William. 1986-87. “Controlled Foreign Corporations, 1982: A Geographic Focus.” Department of the Treasury, Internal Revenue Glenn Hubbard matters for capital. Alternatively, dividend patterns are concern to the parent for agency cost reasons), rates matter for the cost Our results demonstrate that simple pedagogical cases likely to difficult to apply. The relative unimportance for investment industry groups (such as manufacturing) casts doubt on the trapped equity credit positions, the tax view that some stream repatriations, trading with tax excess credit positions. The interaction (i) the credit adjusts for the (ii) deferral income only repatriated implies any point subsidiaries (most, our sample) are likely corner solutions, no dividends. One concern stemming from our 1984 is parents are able to take advantage financial transactions their abilities to time to reduce tax liabilities. That the combination system and deferral can diminish substantially the United States from the taxation overseas operations activity conducted firms, these revenue consequences may be the recent reduction in from 46 percent increases that many firms will excess foreign credits.33 The effect the rate reduction may be offset somewhat the introduction foreign income calculating indirect foreign Reform Act remains to that the current system taxing foreign subsidiaries multinationals can generate our analysis suggests the importance explicitly the payments from subsidiaries to parents are accomplished. The present taxing multinationals’ income raising little transactions. Whether current sensible approach depends very much our international percentage points, or relative to assets. One cannot a change to evaluate the effects a large reduction corporate taxes Reform Act since the lower tax rate affects the probability an excess credit position. When the excess foreign increased, ceteris paribus. The ratio parent dividends to parent assets a strong effect on distributions. This is consistent view that parents for agency problems control (between domestic shareholders domestic management) are and, ceteris demand more cash from their to make these payments. Alternatively, domestic parents receiving dividends from their for those funds, one is to distribute dividends to shareholders. coefficient estimates are dramatically changed whether or industry dummies are included. report coefficients for industry dummies when they are present; breakdowns estimated effects on payouts that were neither statistically significant nor economically important. report results the dependent variable include Subpart income. The estimated coefficients are similar two columns, a result multinationals that treats Subpart income as dividend income. Summary and Despite the growing importance overseas affiliates firms, relatively little known about multinationals’ decisions to repatriate their foreign earnings. Analyses aggregate data (and data disaggregated to the major industry categories) on distributions current earnings. Given the (domestic) tax costs this activity, it seems at first subsidiaries should in dividends. The models of dividend decisions this case straightforward, however. First, the aggregate data the fact distributions are skewed; no dividends. Second, the granting credits for foreign taxes that many excess foreign not what it appears. Understanding links between taxation subsidiary repatriation decisions important for assessing the effect “dividend taxes” on the cost the “trapped the dividend decision (in repatriations are residuals accounts), only the foreign corporate CFC assets.26 represents the is a the parent in a credit position, the tax price is given excess credit positions, price to the parent owe withholding taxes on credited against With panel incorporate the excess credivdeficit credit the parent a switching-regime model. Indeed, one could transition process excess credit to deficit principle to estimate the only a single cross section to observe the two regimes. The credit position is still endogenous. example, higher payouts from CFCs prices make the excess foreign credits. Indeed, even location (and hence the foreign a CFC parent’s other CFCs. Potential instrumental variables identify the credit regime include interest, rent, the extent that are exogenous). Unfortunately, the data do come in a form one to identify this non-CFC income foreign taxes order to employ instrumental variables procedure. Accordingly, excess crediudeficit credit position parent as exogenous Given the significance (revealed distributions. There are two regimes dummy variable equal to the parent excess credit (and equal to zero otherwise) zero otherwise) + P4(1 - Xi)TAX,IEi if Di � 0, = 0 otherwise. That is, the intercept excess credit right-hand side industry dummy the parent to its presents estimated coefficients from The principal summarized as follows. Conditional its parent’s having deficit the tax CFC dividends a negative effect distributions. The response percentage points. Evaluated at price, a tax rate would raise the Dividend Repatriations their payouts exceed current-year income; still, current reasonable proxies for earlier years. There is substantial variation rates for these the dividends coming from bunching at the lower ranges. income, the pattern one might expect, different; the income are lightly taxed foreign governments. Since American parents receive foreign credits for the foreign taxes also receive credits for foreign withholding on repatriation those dividends), the residual after-credit income taxes to the government on small. However, these small collections are associated a system that large effect on transactions generally, as finding that dividend repatriations from multination- als raises little revenue for U.S. government needs to the broader context the tax system. The (potential) U.S.-taxable interest, rent, than they otherwise would. the interest, rent, and royalty billion out excess foreign credits; the were presumably taxable at full rates. foreign earnings companies since any added dividends the company its foreign and they may pay capital gains taxes on share price appreciation foreign earnings as well. in our sample estimating a simple regression dividend distributions is clearly particular, estimated price effects a regression biased toward zero. Simple probit models (not reported) reinforce the our discussion The primary determinants a dividend are excess credit position its parent interest, rent, appear to this respect. Estimating the Effects on Repatriations begin with basic model the form index the parent and after-foreign-tax earnings Hines, Jr./R. Glenn Hubbard CFC financial behavior that includes dividends royalties received from other CFCs the same American parent. table indicates, dividend from one CFC same parent are small, grossing sample. Interest, rent, are significantly are received With some adjustments, then, remains true that CFCs appear to generate liability on their increasing significance Subpart F time both a fraction presents information on the Subpart F different repatriation regimes. Subpart F income billion, representing a reduction from its level 1982. In addition, Subpart income is heavily dividends, a with the some CFCs foreign investments incur Subpart F liabilities minimizing strategy (relative to paying dividends directly). strategy makes little sense, in the significant costs The foreign credit status directly affects the tax cost its CFCs’ repatriations. firms’ foreign credit positions the Subpart F payouts the non-FIRE CFCs described in table Several features these decompositions interest. First, sizable shares total CFC assets (38 percent), dividends (53 percent) are firms with excess foreign credits. Second, deficit foreign credits account for a disproportionate share the form interest, rent, royalties. This pattern whose host adjust their interest, rent, and royalty payments parties. Third, also account for a disproportionate share (58 Subpart F income, again small number that pay and the credit status the dividends, the question arises government collects foreign subsidiaries breaks down incur Subpart F liabilities whose parents have deficit top panel presents data whose payout is less than their current-year earnings and profits; the CFCs the bottom panel current-year earnings. is unfortunately impossible to from tax-form data their deemed-paid credits interest, rent, or royalties in 1984.24 1,815 CFCs-with the assets 17 percent interest, rent, no dividends; their interest, rent, royalty distributions equaled their after-tax earnings. The 732 15 percent total assets 19 percent total after-tax paid both interest, rents, royalties distributed more than their current after-tax earnings Finally, the 17 percent total assets 30 percent only dividends dividend distributions are the CFCs no dividends difficult to reconcile these patterns a strict behavior. In that framework, the managers the universe CFCs are unfettered the requirement to dividends each course, the a single annual cross section obscure the payout behavior firms that regular dividends on a less annual basis, and some nondividend payout methods to control their CFCs. More eight thousand CFCs, dividends, interest, rents, royalties to their American domestic subsidiaries. the other hand, the data in table to be quite consistent a tax-minimization firm behavior. Most liability on their foreign earnings. dividends rather other forms repatriation is consistent interest, rent, royalties faced rates (34 percent) those choosing interest, rent, no dividends (51 percent). the complicated can complicate interpretation the statistics presented particular, it a relatively small companies (owned American parents) themselves the shares the CFCs our sample; the dividends that they receive from the CFCs they would not appear as repatriated CFCs to their domestic subsidiaries, even holding companies then turned sent the profits back to the States. Those dividends the holding but such dividend repatriations at the same time that dividends are large. fact, CFCs nonbank holding companies are relatively the sample, are the industries generally; the sum FIRE CFCs equals confirmation that financial flows within greatly complicate the interpretation presents a were provided information on the controlled foreign corporations in controlled foreign corporations firms whose operating losses and hence were untaxable their foreign income that year. In addition, exclusions for inactive corporations, corporations part-year returns, miscoded data reduce the sample 12,041 foreign corporations American parent the Internal Revenue Service information returns (see Skelly our sample captures The sample does only foreign affiliates are branches or with no controlled foreign corporations their subsidiaries. Furthermore, the span only year. While cross-sectional data are not ideal for our the year 1984 offers a distinct advantage over such as 1982 1980. Recessions 1980 created losses for CFCs parents, reducing their chances their taxable incomes particularly unreliable proxies contrast, 1984 a year economic expansion in the Most significantly, micro data to examine whether the distributions obtained from aggregate data patterns among relatively homogeneous CFCs. find much the opposite Most CFCs paid large payouts. report some estimate a simple the response payouts to the tax dividends, incorporating features the tax price regime. on the data for 12,041 CFCs in 1984, the average after-tax earnings) to their domestic percent. Including interest, rent, royalties raises the rate to over 60 percent. such average payout seem consistent the Treasury for earlier However, summary figures micro data obscure important illustrate this starkly, we decompose (in table the sample into four cells, according “dividends” or “interest, rent, distributed to the American parent are greater each cell, report levels assets, pre-tax earnings, after-tax earnings, dividends, interest, rent, and royalties as as the U.S. parents them, accounting total CFC assets 33 percent to be passive investments, reflects an larger rise foreign-earned income to reinvest actively abroad. multinationals are also required to on the current deduct against income the current losses) their foreign branches. Since income is eligible for deferral taxes, it is low-tax foreign countries as branches rather literature suggests that two types firms might benefit from branch subsidiary organization: petroleum firms that recognize up-front losses from the special deductions for dry depletion allowances and banks that can avoid onerous foreign incorporating in foreign countries. indicates the importance multinationals for the three separate data on available: 1982, 1980, branch income (net foreign taxes) 1980 is equal to subsidiary dividend payments their domestic subsidiaries branch income is dividends. The industry of branch income is quite different from that however. Finance, insurance, real estate (FIRE) earn more income, and petroleum companies earned more than the non-FIRE branch income in 1982 and FIRE branches manufacturing branches endured foreign that average 89 percent 1976. Since parent receive from subsidiaries in calculating their foreign credits, these highly manufacturing branches act as “tax cows” lightly taxed subsidiaries from can repatriate dividends credits from their branches.20 Whether the credits from foreign branches can subsidiary dividend behavior requires an examination that only firm-level data can provide. Repatriation Behavior from Micro Summary Evidence from the Data analyze the dividend payout information. These data argue for different interpretation behavior than suppose from the aggregate numbers. strong evidence the view that effectively minimize their Glenn Hubbard these indirect distributions selected years which detailed data available. In 1976 and more dividends were directly. In other which relevant data available, direct payments are only about two-thirds total dividend we reevaluate dividend distributions after-tax and also pre-tax current earnings) selected years. payout ratios reported represent distributions directly to parent and (domestic) corporations controlled payout ratios understate total dividend distributions reported since payments other subsidiaries parent are included. Nonetheless, the payout ratios are quite percent for all industries most years (based after-tax earnings); payouts manufacturing industries than payout rates reported in substantially higher those for domestic corporations noted previously distributing dividends is not the only way tax liabilities with their after-tax foreign are subject to passive income foreign earnings reinvested in the United States as “deemed distributed” American parents and hence currently taxable. documents a dramatic rise the level recent years.17 income rose in 1968 percent of actual dividend distributions [from table that year) actual dividends). Manufacturing industries the bulk income over period, particularly nonelectrical machinery, and electronic equipment industries; motor vehicles Since Subpart income produces a liability very similar actual dividend repatriation, repatriated actual deemed distributions indicate the fraction foreign income the percentages is clear that been rising explanation for recent increase income is the secular rise interest rates and corresponding rise the returns investments. But, more broadly, a pattern increasing repatriations, with vehicle for those repatriations. dividend distributions, course, Subpart income does make funds directly available to However, making passive foreign investments and incurring liabilities-rather than uting dividends-allows tax liability the principal amount reinvested since applies only to the return reinvested funds. income, then, Dividend Repatriations broadly confirms their results, adjusted data econometric specifications. Aggregate Repatriation This section examines the pattern aggregate repatriations multinationals over the after-tax earnings are substantial, ranging for 1982 to 1962. The calculated domestic corporations reported (1987).16 Dividend payout rates are slightly higher for subsidiaries manufacturing industries. manufacturing, there across major industry for example, high rates for vehicles (payouts exceeding current earnings recession years) payouts in electronic equipment. Corresponding dollar are reported manufacturing industries account far the the dividends multinational corporations each report CFC dividends their incorpora- tion. The data in table indicate a strong geographic dividend payout rates, suggesting that on dividend distributions are likely particular circumstances individual companies rather a country’s rate on corporations. exhibits dividend country, illustrating the continuing importance operations in Canada, the Germany, France, Brazil, Mexico, and the Netherlands. earlier, dividends are a subsidiary repatriate funds its American parent. distributions are important as well. separate data on the distributions are available, interest, rents, account for the) distributions 1976, 31 percent in 1974, 1968. Here again, there is substantial variation across major industry categories, interest, rents, royalties virtually nonexistent Within manufacturing, motor the form interest, rents, royalties, while nonelectrical machinery relied more heavily Even apart from considerations transfer pricing, focusing on dividend distributions from subsidiaries parents directly seriously underesti- mate total payments. particular, dividends are often distributed domestic subsidiaries parent company the parent’s foreign subsidiaries. subsidiary dividend to earnings changes studies for domestic payouts to shareholders; effects were systematic evidence incorporating Kopits’s (1972) study 1962 data on subsidiary repatriations selected countries. Kopits that ‘‘mature subsidiaries” (those low growth desired capital stock) ratios, ceteris do subsidiaries with more rapidly growing desired capital he also price” effects, especially separate taxes on undistributed profits. Additional evidence against the dividends are a residual accumulated. Zenoff’s (1966) survey patterns within multinationals found that firms with “young” subsidiaries patterns according the subsidiaries’ for funds while remittance “established” subsidiaries were set according to rules (see also Brooke and Remmers 1970, chap. 6). a sample majority-owned affiliates U.S. multinationals 1987) finds that roughly 25 percent simultaneously repatriated dividends received from capital infusions. This only seems to belie the trapped equity but throws taxes since two-way funds between its more disadvantaged. Finally, Hines (1988b) observes that, even the Hartman framework, particular features of the the indirect foreign credit should subsidiary reinvestment decisions) sensitive to the tax and financial other subsidiaries; evidence for 1982 is consistent these features. Mutti (1981) analyzed repatriation patterns from a large cross section subsidiaries operating eleven foreign countries Dividends were the dominant form which has profits tax very low rank correlation coefficient total repatriations. controlled for industry effects, considerations appeared important. payments relative to earnings were negatively related to interest and royalty payments (treated as predetermined in Mutti’s estimating aggregate foreign direct investment also the repatriation decisions Hartman (1981) and Boskin and Gale (1987) the level foreign direct investment out retained earnings to be sensitive to rates rates in the abroad. The corollary repatriations are also sensitive relative taxes. private information capital investment projects is majority-owned or owned affiliates alternative information problem stresses “agency cost” consid- example, absent substantial equity interest the venture alternatively, compensation be tempted to raise costs investing funds intended for ‘‘soft capital” expenditures (such as organ- izational expenditures or maintenance) in perquisites or gain. Such soft capital expenditures are harder to observe monitor than “hard capital” (capital investment projects). Monitoring is additionally complicated differences in local language custom, the possible involvement country nationals (or the host country government) conflicting objectives, The optimal such a setting less variable across project than would prevail under symmetric information (see the extent direct ownership subsidiary managers are limited, incentive-compatible necessarily mitigate the use artificially lower the subsidiary’s accounting Such concerns the management literature as well. complicated schemes for shuffling profits among subsidiaries has administrative costs and the increased difficulty managerial performance. The for internal accounting systems monitor managerial decision making has and Remmers and in evidence for by Tang Previous Studies Dividend Repatriation Patterns Empirical evidence on the determinants multinational dividend has been part because study, Barlow and hypothesized that a multinational would make an reinvest the earnings a large realization. Such a pattern was early empirical evidence, documented the importance continuing infusions parents to established subsidiaries; additional evidence continuing external provided by The issue dividend repatriations profitability was Mauer and who worked within the partial adjustment dividend payments. They found much more rapid from subsidiaries is compensation for technology transferred via royalties and license fees. There minimization through strategies that trade for dividends. this point showing that the tax-minimizing royalty least as large as tax shelter provided by any from dividends schemes encounter two stumbling external: governments are understandably unenthusiastic about such behavior by multinationals and generally limit firms’ discretion pricing and decisions. Sales of goods between multinationals and generally required length,” prices, though in practice this enforce.’ Similarly, many countries limit multinationals to using interest rates and have formula restrictions rent and royalty a consequence, tax-minimizing firms may be unable use nondividend methods to repatriate foreign second difficulty that tax-minimization is that, corporate control, the parent may subsidiary as an this point is developed below. addition to altering the form payment across repatriation mechanisms given point in time, global tax-minimization strategies alter dividend payments during a period in which the parent is making losses at tax liabilities. from ‘‘trapped equity” behavior in that ies’ distribution patterns their own but also their tax prices relative to those for other subsidiaries parent. In parent characteristics global tax extent that subsidiaries can, at margin, alter among royalties, interest, then whether excess credit alternatively, losing money be important factors in dividend third general view suggests that are “valued” the parent. desires a particular and tax authorities have effectively forestalled royalty payments and transfer pricing at the margin. parent values dividend distributions per models with information between tively) figure prominently. dividend payments convey information about the profitability the firm; such signals-valuable because the private given the tax cost believe that Since foreign corporate rates are generally than withholding tax saving deducting repatriations outweighs the cost liabilities. Hence, a excess foreign credits should seek the “Dividend Puzzle” Given the structure multinationals, one likely to example, given the credit for foreign taxes paid, rates are relative to tax rates, not all liability on this income historically (prior to passage Reform Act 1986), foreign have been lower than the statutory corporate income tax Dividends are As we the controlled foreign corporations more than their foreign earnings each as dividends. The “dividend puzzle” the following: dividends, given dividends are often least favorable (from a repatriating earnings? The same puzzle arises in the analysis dividend payouts to their the domestic puzzle suggest three general approaches to this question. first view the “trapped equity” or “tax capitalization” corporate dividends associated (1977), Auerbach (1979), Bradford (1981)8 and applied Hartman (1985) the analysis foreign dividends received multinationals. Suppose that a capitalizes a owned subsidiary with an initial transfer the subsidiary growth opportunities investment exceeds internally generated funds, the parent transfers additional funds to it. a mature subsidiary, equity is investment opportunities, and the subsidiary repatriates residual funds. Costly repatriations can delayed as long the subsidiary active investment opportunities abroad, but, once these are exhausted, the Subpart F rules prevent the use passive investments to defer the trapped equity dividend payouts are (permanent) changes they respond only to particular, the difference its internally generated its profitable investment opportunities. and other subsidiaries are irrelevant. A second corresponds to the notion that a multinational chooses financial policy subsidiaries in order to minimize the firm’s preferred tool is transfer pricing across affiliates to in low-tax “havens.” addition, one portion income received qualify as not meet the percent ownership rule. to the parent the only to the parent service debt capital contributions usually has the additional country. Astute the subsidiary to shift earnings the parent other subsidiaries the parent having more the parent similar function. governments often impose moderate taxes interest, rent, and royalty payments from foreign affiliates their American parents; these withholding taxes are fully creditable against foreign various repatriation channels Taxes and the Repatriation our concern is the effect rules just described on repatriation decisions. Consider foreign subsidiary to its American Assume that the classical corporate income taxes on dividends. Then the dividend but it rate and the foreign credit generated the dividend payment. parent corporations excess foreign their subsidiaries current earnings, the foreign foreign (1 - ?*)E*], where T* is the foreign is the subsidiary’s foreign earnings. Hence, the dividend payment obliges the parent to pay net and the parent keeps Significant withholding taxes imposed foreign governments offer complication, especially for excess credit positions. with deficit credits, the payment dividend increases their foreign the withholding on the dividend, but their liability is reduced equal amount the foreign excess credit positions, subsidiary dividend payments trigger tax liabilities no corresponding reduction dividends raise total worldwide tax burdens. Abstracting for the from considerations transfer pricing, alternative repatriation strategies include payments to the parent royalties, all are generally deductible for Dividend Repatriations firm pays the foreign government, but its credit is limited to a U.S. receives full credits for taxes paid only it is “deficit credit” position, tax rate is less tax rate on domestic operations. “excess credits” credits exceed liability on its foreign income. Since 1976, the requires American calculate their foreign credits on worldwide basis, foreign income foreign taxes are added together in the the foreign credit limit. Furthermore, income is into different functional applicable credits certain foreign earnings another important system. This deferral takes very common systems: unrealized capital The second is that earnings foreign subsidiaries corporations are taxation until repatriated to their American parent corporations. This deferral is available only to foreign operations are separately incorporated foreign countries the parent) and not to Multinationals generally can choose the legal form foreign operations, this choice can affect their are generally their subsidiaries’ foreign income only receive “indirect” foreign credits (“deemed-paid credits”) for foreign income taxes subsidiaries) on income subsequently received dividends. The taxes branch are earned, just as would profits within the United States. On other hand, organizing as branch offers the investor the deducting from income foreign branch losses and may some cases) lenient foreign regulations. The deferral taxation creates incentive for to delay their subsidiaries to their American parents. Congress enacted the Subpart provisions in part to prevent liability on income earned abroad is continually taxes. Subpart rules apply controlled foreign corporations (CFCs), are foreign corporations at least holding stakes The Subpart rules include provisions that treat passive income, income invested in property, as distributed to is subject to immediate Controlled foreign corporations reinvest their earnings active foreign the Subpart can continue to defer U.S. liability on earnings. The 1986 further expands the coverage currently taxable American investors passive foreign investment Hines, Jr./R. Glenn Hubbard controlled foreign corporations until they effect on repatriation behavior of this deferred taxation that we the current applied to multinational firms and consider financial transactions (and, repatriation patterns aggregate time-series data overseas operations principal findings which we foreign subsidiaries to their new micro data on 12,041 controlled foreign corpora- tions (and their parents) collected from source exposes variations not detectable data. In particular, we find that most subsidiaries their parents and that the tax system collected little revenue on their foreign income their internal implications for reform are presented in States claims tax authority persons resident America, meaning that American individuals and corporations must pay tax to the government on whether earned in the United not the only possible criterion for and a number European countries their residents which only that income earned within the borders is subject to system is arguably a more common practice is used the United Kingdom and Japan. Hence, an understanding the international effects residence taxation the United States shed light international taxation throughout the world. In addition to their tax liabilities, American multinational corpora- tions usually taxes to foreign governments earned locally their borders. In subject Americans earning income abroad to double taxation, provides a foreign credit for income taxes (and related taxes) foreign governments. simplest possible situation, a corporation earning $100 in a foreign percent tax rate (and a foreign tax obligation only $24 to the government since (34 percent is reduced to the foreign tax credit however, limited to U.S. if, in rate were percent, then Coming Home Glenn Hubbard corporations earn a growing volume through their affiliated foreign companies. The subject to taxation both host foreign arrangement that dramatically complicates the companies’ international financial Under these circumstances, obvious arise about the extent behavior of paper analyzes the financial American multinational corporations to their States. These American companies are returned (“repatriated”) to investors. Their size generally reflects the American investments the last year data are American multinationals earned which they repatriated billion in dividends to their American parent companies. These repatriations are only to access to also to which generally R. Hines, assistant professor public affairs University and a faculty research fellow the National Bureau Economic Research. Glenn Hubbard economics and the Graduate School Columbia University and a research associate the National Bureau Economic Research. Daniel Frisch and Timothy Goodspeed invaluable advice and using the U.S. Treasury’s tax data and their outstanding research assistance; David Bradford, Albert0 Giovannini, Trevor Harris, Karl Scholz, and helpful comments and suggestions; and to the National Bureau Economic Research support. The disclaimer applies.