Round-tripping of Domestic Profits under the American Jobs Creation Act of 2004

The American Jobs Creation Act of 2004 provided a substantial tax benefit to U.S. multinational corporations (MNCs) in the form of a temporary 85 percent deduction for repatriated dividends. An unforeseen consequence of this tax holiday may have also been to induce firms to reallocate domestic corporate profits toward low-tax foreign subsidiaries for immediate repatriation and thereby escape higher rates of corporate income taxation. This paper develops a model to illustrate round-tripping of this nature and estimates the extent to which income reallocation by U.S. multinationals responded to country-specific changes in repatriation taxes on foreign-source income. Foreign affiliates are estimated to have increased their reported earnings by $32 billion as a direct consequence of the tax holiday, though this likely represents an upper bound estimate of the round-tripping response given the relatively indirect nature of the non-equity pre-tax income measure of income reallocation used. Results involving more direct measures of transfer pricing or earnings stripping are inconclusive, while evidence of differential responses according to potential tax avoidance-facilitating firm characteristics is mixed. The overall results hence suggest moderate effects of a large temporary reduction in the repatriation tax on short-run income reallocation activity and may alleviate concerns with respect to the tax avoidance consequences of moving to a territorial tax system in the U.S., as is often proposed. ∗Contact: [email protected]. I thank David Albouy, Dhammika Dharmapala, Michelle Hanlon, Jim Hines, Jeff Hoopes, Laura Kawano, Logan Lewis, Michael Overesch, and Joel Slemrod as well as various seminar participants at the University of Michigan and the Bureau of Economic Analysis for their valuable comments. I also thank Fritz Foley and William Zeile for sharing their data expertise and the Rackham Graduate School at the University of Michigan for financial support. The statistical analysis of firm-level data on U.S. multinational companies was conducted at the Bureau of Economic Analysis, U.S. Department of Commerce under arrangements that maintain legal confidentiality. The views expressed are those of the author and do not reflect official positions of the U.S. Department of Commerce.