"Basket" Cases: International Joint Ventures after the Tax Reform Act of 1986

43 Pages Posted: 26 Nov 1996  

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

James R. Hines Jr.

University of Michigan; NBER

Date Written: September 1996

Abstract

This paper examines the impact of the Tax Reform Act of 1986 (TRA) on international joint ventures by American firms. The evidence suggests that the TRA had a significant effect on the organizational form of U.S. business activity abroad. The TRA mandates the use of separate credits on income received from foreign corporations owned 50% or less by Americans. This limitation on worldwide averaging greatly reduces the attractiveness of joint ventures to American investors, particularly ventures in low-tax foreign countries. Aggregate data indicate that U.S. participation in international joint ventures fell sharply after 1986. The decline in U.S. joint venture activity is most pronounced in low-tax countries, which is consistent with the incentives created by the TRA. Moreover, joint ventures in low-tax countries use more debt and pay greater royalties to their U.S. parents after 1986, which reflects their incentives to economize on dividend payments

Suggested Citation

Desai, Mihir A. and Hines Jr., James R., "Basket" Cases: International Joint Ventures after the Tax Reform Act of 1986 (September 1996). NBER Working Paper No. w5755. Available at SSRN: https://ssrn.com/abstract=4460

Mihir A. Desai

National Bureau of Economic Research (NBER)

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Harvard Business School - Finance Unit ( email )

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617-496-6592 (Fax)

James Rodger Hines (Contact Author)

University of Michigan ( email )

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Ann Arbor, MI 48109-1215
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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