Credit and Deferral as International Investment Incentives

41 Pages Posted: 16 Dec 2010

Date Written: October 1992

Abstract

The US government taxes the foreign income of American firms, using a system that grants credits for foreign taxes paid and permits tax deferral for unrepatriated income. This paper shows that the tax system encourages firms to restrict their equity stakes in new foreign investments, and to finance their new investments with considerable debt. These incentives are strongest for US investments in low-tax foreign countries, and exist even when transfer price regulation effectively limits the profit rates foreign subsidiaries can earn. The behavior of US multinationals in 1984 appears to reflect these tax incentives.

Suggested Citation

Hines, James Rodger, Credit and Deferral as International Investment Incentives (October 1992). NBER Working Paper No. w4191. Available at SSRN: https://ssrn.com/abstract=1726245

James Rodger Hines (Contact Author)

University of Michigan ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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