Essays on the Repatriation Policies of Multinational Firms
This dissertation looks at the taxation of U.S. multinational firms and specifically at the taxation of dividend payments from foreign affiliates to their U.S. parent companies. The United States has an increasingly unusual tax system compared to other countries in that repatriating income earned abroad generally has tax consequences. This dissertation examines how taxes on intrafirm dividend payments affect multinational firm's intrafirm dividend policies and what effect firms' dividend payments have on their domestic investment.
I first look at the previous literature on the taxation of intrafirm dividend payments. Hartman (1985) is one of the major theoretical papers on intrafirm dividend taxation. In the Hartman model, with the assumptions that repatriation taxes are constant and unavoidable, repatriation taxes do not affect intrafirm dividend payments. However, all empirical evidence points to the fact that dividend payments do respond to the dividend tax rate. I discuss the research that has tried to reconcile the theory with the empirical evidence by investigating ways in which firms avoid dividend taxes and whether firms respond to temporary changes in the tax rate more than the permanent tax level. I also discuss research that looks at the effects of a tax holiday on intrafirm dividends in 2005 that was meant to encourage firms to remit their foreign earnings and increase their U.S. investment. Research suggests that the repatriations induced by the tax holiday were used to increase distributions to shareholders and were not used to expand domestic operations.
The next chapter examines how intrafirm dividend payments respond to a particular component of the tax rate -- that caused by fluctuations in the exchange rate between the currency of the foreign affiliate and the U.S. dollar. Since this component of the tax rate changes over time, it allows me to test if firms attempt to time their dividend payments to take advantage of temporary swings in the repatriation tax rate. I find that firms respond to this temporary component of the tax rate more than they do to the tax rate as a whole. I also find that the response to the exchange-rate component of the tax rate is concentrated among firms with the most resources to devote to tax planning and those firms with the most flexibility in timing their dividend payments. The dividend payments of large firms, firms with tax haven affiliates, and financially unconstrained firms are sensitive to the exchange-rate component of the repatriation tax rate while small firms, firms that do not own tax haven affiliates, and financially constrained firms are not. Therefore, I find evidence that certain, more sophisticated types of firms time their dividend payments to minimize their tax bill, but not all firms appear to engage in this tax timing behavior.
The final chapter investigates how firms' domestic investment responds to exogenous changes in firms' incentives to repatriate. The link between the availability of internal funds and investment has long been noted, and changes in the amount of foreign earnings firms repatriate may change the amount of financing available for domestic investment. This chapter looks particularly at whether there is a difference between financially constrained and unconstrained firms in the response of their domestic investment to repatriations, since the investment of financially constrained firms is generally assumed to be more sensitive to internal funds than that of financially unconstrained firms. I find suggestive evidence that the domestic investment of financially constrained firms responds to repatriations while the domestic investment of unconstrained firms does not, although the responses are not precisely estimated.
This dissertation sheds some light on multinational firms' responses to repatriation taxes and what effect repatriations have on firms' domestic operations, and it highlights that multinational firms exhibit a range of behaviors that depend on their size and financial constraints. Since repatriation payments from large firms make up a large portion of total repatriations, total repatriations and any financial and investment outcomes influenced by repatriation taxes will be most affected by what large firms do. However, when thinking about how tax policy affects individual firms' behavior, it is necessary to consider multinational firms' heterogenous responses.