Harry Grubert

Repatriation Taxes, Repatriation Strategies and Multinational Financial Policy

Several investment-repatriation strategies are added to the standard model of a parent and its affiliate in which the affiliate is located in a low-tax country and is limited to two alternatives: repatriating taxable dividends to the parent or investing in its own real operations. In our model, the subsidiary can invest in passive assets which the parent can borrow against, making any direct taxable flow to the parent unnecessary. The low-tax subsidiary can also use its earnings to invest in a related high-tax affiliate which becomes the vehicle for tax-free repatriations. Alternatively, the low-tax affiliate can be capitalized by equity injections through an upper-tier sibling. This reduces the tax on repatriations from the low-tax subsidiary because taxes at home on foreign source income are based on a blend of the siblings tax rates. We show analytically how the availability of these strategies can effect real investment in the low-tax subsidiary and throughout the worldwide corporation. We use firm level data for U.S. multinational corporations to test for the importance of these alternative strategies. The evidence is generally consistent with the theory, particularly the triangular strategies using related affiliates.

Taxes and the division of foreign operating income among royalties, interest, dividends and retained earnings

Abstract How do taxes influence the way U.S. corporations divide foreign affiliate operating income among royalties, dividends, interest, and retained earnings? The paper goes beyond previous work that focused largely on dividend repatriation behavior, and provides a comprehensive analysis of the disposition of foreign subsidiary operating income. The empirical results show that taxes have a large and statistically significant effect on the composition of payments. Own tax prices discourage the payment of dividends, royalties and interest. But dividend and other repatriation taxes do not increase retained earnings, they only alter the composition of payments. The results are, therefore, consistent with a generalized Hartman–Sinn model of the mature controlled foreign corporation that has various alternative repatriation vehicles. Finally, this paper integrates the choice of payments with income shifting among countries because the latter may be part of a low-tax strategy for repatriations. In this general framework, conventional composite tax prices are not appropriate because the response to a change in a composite tax price depends on which components changed.

Empirical asymmetries in foreign direct investment and taxation

Abstract This paper assesses the sensitivity of the operations of multinational corporations (MNCs) to host country taxation. The empirical analysis is based on two different measures of MNC activity by U.S. majority-owned foreign affiliates: panel data for aggregate real gross product in manufacturing that originates in a given host country and micro data for a single year regarding the likelihood of a firm locating in a given host country. The empirical estimates indicate that investment geared toward export markets, rather than the domestic market, is particularly sensitive to host country taxation, that this sensitivity appears to be greater in developing countries than developed countries, and that it is becoming greater over time.

The taxation of capital income in an open economy: the importance of resident-nonresident tax treatment

Abstract The authors develop a simulation model of the United States and the rest of the world to demonstrate how international capital mobility alters the incidence and capital formation incentives of taxes on capital income. The model explicitly recognizes that U.S. and foreign investors hold a different mix of assets in each country. Only a modest degree of international mobility is necessary to substantially alter closed-economy patterns of tax incidence. Differences in the tax treatment of residents and foreigners are particularly important in evaluating tax reductions at the individual level or the integration of corporate and individual income taxes.

Source rules, trade and income taxes, and electronic commerce: designing rules for the taxation of cross-border income.

Several issues in the design of international tax rules are examined. One is whether the income from intangible assets such as royalties should be taxed by the host country in which the intangibles are used or the home country in which they were developed. Another is whether local sales should be a basis for taxing foreign companies even if they have no local physical presence. A third related issue is whether a destination basis income tax is a valid policy option. The introduction develops a general framework to evaluate tax regimes, based on efficiency along various behavioral margins such as the choice of where to exploit an intangible asset. The analysis concludes that the income from intangible assets should be taxed by the home country, not the country where it is used. Also, any attempt to tax foreign companies based on their local sales is simply the equivalent of a tariff. The paper shows that there are some extreme circumstances which would justify a tariff to offset the distortions created by an income tax, but electronic commerce does not seem to qualify for this departure from the benefits of free trade. Finally, a destination basis income tax creates an incentive to invest abroad rather than at home. It is an improper attempt to graft a consumption tax concept onto an income tax.