Do Debt Constraints Influence Firms' Sensitivity to a Temporary Tax Holiday on Repatriations?

46 Pages Posted: 27 Sep 2009 Last revised: 21 Nov 2010

See all articles by Susan Albring

Susan Albring

Syracuse University - Joseph I. Lubin School of Accounting

Lillian F. Mills

The University of Texas at Austin; University of Texas at Austin - McCombs School of Business

Kaye Newberry

University of Houston - Bauer College of Business

Date Written: February 3, 2010

Abstract

We examine whether U.S. multinationals’ private and public debt constraints influence their responses to a temporary reduction in repatriation taxes. Using a sample of 421 U.S. multinationals with permanently reinvested earnings, we find that external debt constraints played an important role in determining their responses to the tax holiday. Specifically, we find that firms subject to fewer financial covenants in their private debt agreements or with greater access to public bond markets repatriated significantly more of their eligible funds. Our results suggest that U.S. multinationals with greater access to external debt markets have more flexibility to time their repatriations around a tax holiday and, as such, they are the primary beneficiaries of any tax savings. It is unlikely that these firms were the intended target of AJCA 2004 given the stated legislative goals of directing repatriated funds towards financial stabilization and previously unfunded positive return investments.

Keywords: American Jobs Creation Act, repatriation tax, permanently reinvested foreign earnings, debt constraints

JEL Classification: M4, H2, L1

Suggested Citation

Albring, Susan M. and Mills, Lillian F. and Mills, Lillian F. and Newberry, Kaye, Do Debt Constraints Influence Firms' Sensitivity to a Temporary Tax Holiday on Repatriations? (February 3, 2010). Journal of American Taxation Association, Fall 2011, McCombs Research Paper Series No. ACC-03-10, Available at SSRN: https://ssrn.com/abstract=1478967

Susan M. Albring (Contact Author)

Syracuse University - Joseph I. Lubin School of Accounting ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States

Lillian F. Mills

The University of Texas at Austin ( email )

McCombs School of Business
1 University Station B6400
Austin, TX 78712-0211

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Kaye Newberry

University of Houston - Bauer College of Business ( email )

4800 Calhoun Road
Houston, TX 77204
United States

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