Changes in U.S. Multinational Firms’ Investment and Income Shifting after the 2017 Tax Cuts and Jobs Act (TCJA)

Abstract

This paper investigates the extent to which the GILTI (global intangible low-taxed income) tax and FDII (foreign-derived intangible income) deduction affect how U.S. multinational firms’ investment and income shifting strategies change after the 2017 Tax Cuts and Jobs Act (the Act or TCJA). Overall, we find evidence that U.S. multinationals increase worldwide capital expenditures after the Act by 1.7 to 2.0 percent of property, plant, and equipment. We also find evidence that the GILTI tax is associated with an increase in foreign tangible assets of 3.2 percent of property, plant, and equipment, but no evidence that the FDII deduction is associated with a decrease in domestic investment. The evidence also suggests that firms with foreign tax rates between 21 percent and 35 percent shift 80 percent less income out of the U.S. following the Act. This effect is driven by the GILTI-FDII framework, suggesting that these provisions achieved their intended effect.

Keywords: partial territorial taxation, Tax Cuts and Jobs Act, TCJA, investment, income shifting, GILTI, FDII, corporate tax rate cut

JEL Classification: M00, M4, M41, H2, H25