Territorial tax system reform and the financial behavior of multinational firms

We investigate whether the move from the worldwide tax system to the territorial tax system in Japan in 2009 affects the financial behavior of overseas affiliates of Japanese multinational companies. The reform substantially reduces the tax costs of profit repatriation in the form of dividends for J...

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Main Authors: XING, Jing, BOND, Stephen, MAFFINI, Giorgia
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Language:English
Published: Institutional Knowledge at Singapore Management University 2016
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Online Access:https://ink.library.smu.edu.sg/soe_research/2391
https://ink.library.smu.edu.sg/context/soe_research/article/3386/viewcontent/SSRN_id2858438.pdf
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spelling sg-smu-ink.soe_research-33862020-06-01T10:16:47Z Territorial tax system reform and the financial behavior of multinational firms XING, Jing BOND, Stephen MAFFINI, Giorgia We investigate whether the move from the worldwide tax system to the territorial tax system in Japan in 2009 affects the financial behavior of overseas affiliates of Japanese multinational companies. The reform substantially reduces the tax costs of profit repatriation in the form of dividends for Japanese overseas affiliates. We use this reform as a quasi-natural experiment to investigate whether and how the tax system affects multinationals’ cash holding and financing policies. Findings from our study sheds some light on possible outcomes of similar tax reforms in countries such as the United States. Based on a sample of Japanese overseas affiliates located in both Europe and Asia, we do not find a robust link between the tax costs of dividend repatriation and the cash-asset ratio for Japanese overseas affiliates before the territorial tax system reform. Moreover, we do not find that Japanese overseas affiliates reduced their cash-holdings since the territorial tax reform, no matter whether they are located in countries with high tax costs of repatriation or in countries with low tax costs of repatriation. We further conduct Difference-in-Differences analysis to compare Japanese overseas affiliates with similar US overseas affiliates located in the same host countries. The comparison between the Japanese and US overseas affiliates are reasonable as the tax system on foreign profits were similar in the two countries before Japan moved to the territorial tax system. We do not find significant difference in the cash-holding patterns and capital structures between Japanese and similar US overseas affiliates. While the territorial tax system reform did not change multinationals’ financial behavior during our sample period, the reform can enhance the competitiveness of Japanese firms in foreign countries by reducing their tax burden of repatriation. 2016-10-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soe_research/2391 https://ink.library.smu.edu.sg/context/soe_research/article/3386/viewcontent/SSRN_id2858438.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Economics eng Institutional Knowledge at Singapore Management University Accounting Finance and Financial Management
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Accounting
Finance and Financial Management
spellingShingle Accounting
Finance and Financial Management
XING, Jing
BOND, Stephen
MAFFINI, Giorgia
Territorial tax system reform and the financial behavior of multinational firms
description We investigate whether the move from the worldwide tax system to the territorial tax system in Japan in 2009 affects the financial behavior of overseas affiliates of Japanese multinational companies. The reform substantially reduces the tax costs of profit repatriation in the form of dividends for Japanese overseas affiliates. We use this reform as a quasi-natural experiment to investigate whether and how the tax system affects multinationals’ cash holding and financing policies. Findings from our study sheds some light on possible outcomes of similar tax reforms in countries such as the United States. Based on a sample of Japanese overseas affiliates located in both Europe and Asia, we do not find a robust link between the tax costs of dividend repatriation and the cash-asset ratio for Japanese overseas affiliates before the territorial tax system reform. Moreover, we do not find that Japanese overseas affiliates reduced their cash-holdings since the territorial tax reform, no matter whether they are located in countries with high tax costs of repatriation or in countries with low tax costs of repatriation. We further conduct Difference-in-Differences analysis to compare Japanese overseas affiliates with similar US overseas affiliates located in the same host countries. The comparison between the Japanese and US overseas affiliates are reasonable as the tax system on foreign profits were similar in the two countries before Japan moved to the territorial tax system. We do not find significant difference in the cash-holding patterns and capital structures between Japanese and similar US overseas affiliates. While the territorial tax system reform did not change multinationals’ financial behavior during our sample period, the reform can enhance the competitiveness of Japanese firms in foreign countries by reducing their tax burden of repatriation.
format text
author XING, Jing
BOND, Stephen
MAFFINI, Giorgia
author_facet XING, Jing
BOND, Stephen
MAFFINI, Giorgia
author_sort XING, Jing
title Territorial tax system reform and the financial behavior of multinational firms
title_short Territorial tax system reform and the financial behavior of multinational firms
title_full Territorial tax system reform and the financial behavior of multinational firms
title_fullStr Territorial tax system reform and the financial behavior of multinational firms
title_full_unstemmed Territorial tax system reform and the financial behavior of multinational firms
title_sort territorial tax system reform and the financial behavior of multinational firms
publisher Institutional Knowledge at Singapore Management University
publishDate 2016
url https://ink.library.smu.edu.sg/soe_research/2391
https://ink.library.smu.edu.sg/context/soe_research/article/3386/viewcontent/SSRN_id2858438.pdf
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