Foreign Holding Companies and the US Taxation of Foreign Earnings: Evidence from TIPRA 2005

Posted: 9 Mar 2023

See all articles by Frank Murphy

Frank Murphy

University of Connecticut - Department of Accounting

Date Written: October 22, 2022

Abstract

I analyze US multinationals’ (MNCs) use of foreign holding companies in their organizational structures and the impact of holding companies on internal capital markets. The look-thru rule in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) reduces the after-tax cost of foreign intercompany financing transactions. I use TIPRA as a natural experimental setting to test whether a shift in US tax policy that reduces the cost of moving foreign capital increased firms’ reliance on foreign holding company subsidiaries. I find that MNCs responded to TIPRA by creating more foreign holding companies. Furthermore, consistent with the policy objectives of TIPRA, I document that MNCs that rely on holding companies gained tax efficiencies in their post-TIPRA foreign internal capital markets, reducing domestic taxation on foreign earnings and easing financial constraints. Overall, my results expand our understanding of foreign organizational structure decisions and their internal financing benefits. I contribute to the tax literature by documenting a response to TIPRA that sheds light on the growing complexity of foreign subsidiary ownership structures.

Keywords: internal capital markets, corporate taxation, subsidiary location decision, international tax policy

Suggested Citation

Murphy, Frank, Foreign Holding Companies and the US Taxation of Foreign Earnings: Evidence from TIPRA 2005 (October 22, 2022). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4266461

Frank Murphy (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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