Responses of U.S. Multinational Firms to a Temporary Repatriation Tax Holiday and the Value Implications: A Literature Review and Synthesis

• In Event: Tax Issues, International and More

Abstract

We synthesize the extant theoretical and empirical literature examining U.S. multinational firms’ responses to a temporary tax holiday and the value implications. We review studies utilizing the setting of the American Jobs Creation Act of 2004 for analysis of firm repatriation and investment behaviors in response to a temporary change in tax policy that lowered the repatriation tax rate from a maximum of 35 percent to 5.25 percent effectively. We show that as agreed upon by empirical studies, tax matters for firms’ repatriation decisions; such empirical findings contradict classic theory by Hartman (1985) that predicts tax does not matter for repatriation. We develop a revised theoretical framework to fill in the gap between theoretical predictions and empirical findings and show why tax matters for firms’ repatriation decisions. We then review studies that investigate whether the temporary tax holiday changed firms’ investment behaviors by examining the use of the repatriated funds and the market implications of the tax holiday under the revised framework.

Authors

• Qi Dong, Penn State University - Erie

• Xin Zhao, Pennsylvania State University at Erie

• Ashutosh V Deshmukh, Penn State University - Erie