Key determinants of repatriated earnings by US multinational enterprises

Abstract

Purpose

In 2004, as the economy lay in stagnation, Congress searched for ways to stimulate job growth. Many members of Congress believed that high US taxes on repatriated earnings discouraged US-based multinational enterprises (MNEs) from bringing cash (in the form of dividends) home and investing those monies in the USA. As a result, Congress passed, and President Bush signed into law, the 2004 American Jobs Creation Act (AJCA), which reduced tax rates to a maximum 5.25 percent on cash repatriations to the USA over the course of a single tax year, i.e. a “tax holiday”. The purpose of this paper is to explore key determinants of repatriated earnings by US multinational enterprises.

Design/methodology/approach

This paper uses data collected from IRS documents between 2004 and 2008 to explore the drivers of MNE repatriations, including the AJCA tax holiday, from various countries to the USA. The paper applies a Lintner equation within a gravity model framework to estimate international liquidity flows.

Findings

The results indicate that repatriations to the USA are more likely to originate in Latin America and other countries in the Western Hemisphere. Significant evidence is also found of agglomeration effects; countries with higher numbers of MNE subsidiaries were significantly more or less likely (depending on the year in question) to repatriate earnings to the USA.

Originality/value

While several studies in the literature have examined the effects of the AJCA on individual firm earnings, very few studies have examined the aggregate effects of MNE repatriations in the context of the AJCA. More specifically, past studies have identified how much money flows back to the USA, but have not examined the set of countries from which most of the money flows.

Citation

M. Brajcich, A., L. Friesner, D. and Q. McPherson, M. (2013), "Key determinants of repatriated earnings by US multinational enterprises", Multinational Business Review, Vol. 21 No. 3, pp. 269-289. https://doi.org/10.1108/MBR-05-2013-0028