“Do debt constraints influence firms’ sensitivity to a temporary tax holiday on repatriations?”

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Author Information : Susan Albring (Whitman School of Management, Syracuse University)
Lillian F. Mills (McCombs School of Business, University of Texas at Austin)
Kaye Newberry (McCombs School of Business, University of Texas at Austin)

Year of Publication : Social Science Research Network (2011)

Summary of Findings : U.S. multinationals with greater access to external debt markets have more flexibility to time their repatriations around a tax holiday and, as such, are the primary beneficiaries of any tax savings.

Research Questions : Do U.S. multinationals’ private and public debt constraints influence their responses to a temporary reduction in repatriation taxes?

What we know : The American Jobs Creation Act (hereafter AJCA 2004) provided a temporary reduction in the repatriation tax rate (generally for the 2005 tax year) in hopes of motivating firms to bring monies back to the U.S. for domestic investment. The response to the tax holiday was overwhelming, with estimates of $312 billion being repatriated under the holiday (Redmiles 2008). This momentous event provides a natural experiment for studying the economic implications of tax holiday provisions.

Novel Findings : External debt constraints played an important role in determining firm responses to the tax holiday.

Firms subject to fewer financial covenants in their private debt agreements or with greater access to public bond markets repatriated significantly more of their eligible funds.

U.S. multinationals with greater access to external debt markets have more flexibility to time their repatriations around a tax holiday and, as such, are the primary beneficiaries of any tax savings.

Implications for Policy: Our results suggest that U.S. multinationals with greater access to external debt markets have more flexibility to time their repatriations around a tax holiday and, as such, they are the primary beneficiaries of any tax savings. It is unlikely that these firms were the intended target of AJCA 2004 given the stated legislative goals of directing repatriated funds towards financial stabilization and previously unfunded positive return investments.

Full Citations : Albring, Susan and Mills, Lillian F. and Newberry, Kaye, Do Debt Constraints Influence Firms' Sensitivity to a Temporary Tax Holiday on Repatriations? (February 3, 2010). Journal of American Taxation Association, Fall 2011; McCombs Research Paper Series No. ACC-03-10.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1478967

Abstract : We examine whether U.S. multinationals’ private and public debt constraints influence their responses to a temporary reduction in repatriation taxes. Using a sample of 421 U.S. multinationals with permanently reinvested earnings, we find that external debt constraints played an important role in determining their responses to the tax holiday. Specifically, we find that firms subject to fewer financial covenants in their private debt agreements or with greater access to public bond markets repatriated significantly more of their eligible funds. Our results suggest that U.S. multinationals with greater access to external debt markets have more flexibility to time their repatriations around a tax holiday and, as such, they are the primary beneficiaries of any tax savings. It is unlikely that these firms were the intended target of AJCA 2004 given the stated legislative goals of directing repatriated funds towards financial stabilization and previously unfunded positive return investments.

Susan Albring

Susan Albring

Professor Albring is an associate professor of accounting. Her research is focused on the effect of repatriation of foreign earnings on firm capital structure decisions.
Susan Albring
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