Taxation of International Investment and Accounting Valuation
37 Pages Posted: 18 Aug 2006
Date Written: August 18, 2006
This paper develops a model of a firm's foreign investment decisions and characterizes its optimal investment and repatriation strategies. It then derives the theoretical relation between firm value and the book value of the deferred tax liability associated with such investments or, if no liability is recognized for financial reporting purposes, the reduction in firm value associated with permanently reinvested foreign earnings. It shows that the valuation relevance of these items depends on whether the earnings are invested in operating assets or financial assets. It also shows the effects of a temporary tax holiday on firm value.
Keywords: Taxation, multinational investment, deferred tax liability, permanently reinvested earnings
JEL Classification: H25, G31, G12
Suggested Citation: Suggested Citation