Where in the world are "permanently reinvested" foreign earnings?

Abstract

This study uses permanently reinvested earnings (PRE) reported in U.S. multinational corporations (MNCs) financial statements, combined with detailed information on foreign affiliate assets to estimate the location and composition of PRE. We use these estimates to study the motivations for PRE designations and the implications of PRE for growth, liquidity, and the potential effects of U.S. tax reform. Our analysis suggests that PRE designations are driven by tax, earnings, and growth incentives – 95 percent of PRE is located in affiliates that would require recognition of an expected repatriation tax expense, and 38 percent of PRE is in high growth affiliates. While our estimates suggest that most PRE are associated with unrecognized repatriation tax obligations, the existence of some PRE in high tax jurisdictions reduces the potential tax cost associated with PRE. We also find that, for firms in overall non-binding foreign tax credit positions, a significantly greater proportion of PRE in low tax jurisdictions is held in cash, relative to high tax jurisdictions, suggesting liquidity implications arising from the current tax system.

Keywords: permanently reinvested earnings; repatriation tax

JEL Classification: M41