Corporate Taxation And Corporate Tax

1123 WordsMar 8, 20175 Pages
As stated in the law of the United States, which sets on a residence basis, all the profits from the foreign subsidiaries of American multinational firms have to be taxed at the corporate tax rate. As a result, the tax code creates a strong incentive for firms to retain these earnings in their subsidiaries aboard. Grubert and Mutti (2001) argue that the decisions on repatriations are highly sensitive to tax consideration. However, these income tax payments incurred can be deferred indefinitely until repatriated to the United States. In order to avoid international double taxation, U.S. multinational firms are entitled to get tax credits to only pay the difference between what they have paid at the tax rate in host country and the tax…show more content…
multinational firms. These passive earnings of controlled foreign corporations (CFC) that is characterized as rental income and dividends by Internal Revenue Service (IRS) would be taxed immediately by the United States even if they were not repatriated to parent firms. Then I dig deep into how the effect of repatriation tax costs appears differently across different firms through exploring various firm characteristics in order to study cross-sectional heterogeneity. To do this, firm size and public debt rating are used as proxies for financing constraints criteria in a similar way as described in Faulkender and Wang (2006)’s paper. Almeida, Campello, and Weisbach (2004) prove that financially constrained firms with high default risk save a larger proportion of cash flow as cash when it is costly for them to raise funds from external capital market. Correspondingly, less financial constrained firms have more flexibility in funding domestic projects from external capital market, aside from repatriating cash flow from low tax jurisdictions when high repatriation tax costs will be triggered. The transfer of cash flow within the firms from foreign subsidiaries to parents can’t be tracked closely through the Compustat data. As a consequence, additional firm activities that have to be supported by cash stockpile are examined in the paper. Dividend payment to shareholders is one of the
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