After-Tax Returns or Tax Minimization? Evidence from Pre-TCJA Tax Rates on Foreign Sourced Income

• In Event: International Accounting Issues

Abstract

Scholes, et. al. (2014) argue that firms should focus on maximizing their after-tax returns rather than focus on tax minimization. U.S. taxes on foreign sourced income have historically only applied when dividends were repatriated to the U.S. A focus on tax minimization would preclude such repatriated dividends as U.S. tax rates typically exceeded non-U.S. tax rates. However, a focus on after-tax returns would result in repatriated dividends when expected after-tax returns for a U.S. investment exceed expected returns for an investment outside the U.S. Evidence of such an after-tax returns focus is presented here by connecting taxes on foreign sourced income to projected U.S. growth rates relative to non-U.S. growth rates. A positive and statistically significant relation between the taxes and the growth rates suggests U.S. multinationals repatriate more foreign sourced income when growth rates favor U.S. investment. An after-tax returns focus is further supported with evidence that repatriation is negatively related to estimates of U.S. economic uncertainty and U.S. tax policy uncertainty. The results are limited to firms that are unlikely to be able to shield income from tax, such as non-tax aggressive firms and firms not in the information technology and pharmaceutical industries, and to firms that are financially constrained.

Authors

• Roger Graham, Oregon State University

• KUAN-CHEN (K.C.) LIN, Central Michigan University

• Jared Moore, Oregon State University