An Empirical Investigation of the Effect of Imputation Credits on Remittance of Overseas Dividends

32 Pages Posted: 18 Oct 2007

See all articles by Ming-Chin Chen

Ming-Chin Chen

National Chengchi University (NCCU) - Department of Accounting

Sanjay Gupta

Michigan State University - Eli Broad College of Business

Date Written: September 2007

Abstract

Overseas dividend remittance is an important vehicle for multinational corporations (MNCs) to move funds among their global subsidiaries. Concerns that residence-based (e.g., U.S.) and territorial (e.g., European countries) tax systems distort dividend repatriations decisions have led countries such as Taiwan to adopt an imputation system. Under this system, double taxation is avoided through a credit for income tax paid at the corporate level to offset shareholders' personal tax. Using firm-level data from 2001-2004 for Taiwan-based MNCs with subsidiaries in China, this paper provides empirical evidence on the effect of imputation credits on overseas dividend remittances. We find that imputation credits have a positive effect on increasing foreign dividend payouts, thereby improving the efficiency loss induced by the tax cost for within-firm dividends. We also document evidence that parent companies' net fund flows from related-party transactions with their subsidiaries are negatively correlated with dividends repatriated from those affiliates, supporting the notion that transfer-pricing may be substituting for within-firm dividend remittance. Our results contribute to understanding the links between taxation and subsidiary dividend repatriation decisions that in turn is important for evaluating the effect of dividend taxes on the cost of capital.

Keywords: Dividend Remittance, Multinational Corporations, Imputation Systems, Transfer-Pricing Transaction

JEL Classification: H25, G35, M41

Suggested Citation

Chen, Ming-Chin and Gupta, Sanjay, An Empirical Investigation of the Effect of Imputation Credits on Remittance of Overseas Dividends (September 2007). Available at SSRN: https://ssrn.com/abstract=1022092 or http://dx.doi.org/10.2139/ssrn.1022092

Ming-Chin Chen

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan, Taipei
Taiwan

Sanjay Gupta (Contact Author)

Michigan State University - Eli Broad College of Business ( email )

632 Bogue Street, 520 BCC
East Lansing, MI 48824
United States
517-432-6488 (Phone)

HOME PAGE: http://www.broad.msu.edu/

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