Taxation of International Investment and Accounting Valuation
Posted: 7 Jul 2008
Date Written: July 7, 2008
This paper develops a model of a firm's foreign investment decisions and characterizes its optimal investment and repatriation strategies. It then derives the theoretical relation between the level of a foreign subsidiary's permanently reinvested earnings as reported in the income tax footnote and the value of the subsidiary to the parent. It shows that the valuation relevance of this item depends on whether the earnings are invested in operating assets or financial assets. It also shows the effects of a temporary tax holiday on firm value.
Keywords: Taxation, multinational investment, permanently reinvested earnings, tax holidays
JEL Classification: G31, G12, M41, H87
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