Bringing It Home: A Study of the Incentives Surrounding the Repatriation of Foreign Earnings under the American Jobs Creation Act of 2004

Abstract

The American Jobs Creation Act of 2004 (the Act) creates a temporary tax holiday that effectively reduces the U.S. tax rate on repatriations from foreign subsidiaries from 35 percent to 5.25 percent. Firms receive the reduced tax rate by electing to take an 85 percent dividends received deduction on repatriations in 2004 or 2005. This paper investigates the characteristics of firms that repatriate under the Act and how they use the repatriated funds. We find that firms that repatriate under the Act have lower investment opportunities and higher free cash flows than non-repatriating firms. Further, we find that repatriating firms increase share repurchases during 2005 by approximately $60 billion more than non-repatriating firms, an amount that cannot be explained by differences in earnings between the two groups of firms. This increase represents about 20 percent of the $291.6 billion repatriated by our sample firms under the Act.

Keywords: Multinational Firms, Foreign direct investment, Corporate Taxation, Payout policy, Repurchases

JEL Classification: F23, G35, H20, H25