The Effect of Financial Reporting on the Location, Reinvestment, and Repatriation Decisions of Multinational Companies

Abstract:     
We analyze survey responses of nearly 600 tax executives to better understand decisions related to location of operations, reinvestment, and profit repatriation. Prior literature does not examine how these decisions are affected by the ability to avoid recording for financial reporting purposes the U.S. income tax expense on foreign earnings. Our evidence indicates that avoiding financial accounting expense is an important influence on decisions about where firms locate operations, as well as whether to reinvest or repatriate foreign earnings. Indeed, the importance of avoiding expense recognition is statistically indistinguishable from the importance of avoiding real, cash taxes. This result is important in light of the decades of research on location and repatriation decisions that examines cash tax implications but has heretofore not investigated the importance of financial reporting effects. Our analysis suggests that financial reporting considerations could be one cause of "trapped" equity and high foreign cash holdings.

Keywords: investment, reinvestment, repatriation, tax expense, multinational, tax policy, tax stimulus, tax reform

JEL Classifications: M40, H20, H25

Working Paper Series