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The purpose of this study is to empirically identify incentives that drive resource shifting by US pharmaceutical firms to comparatively low-tax jurisdictions.

Using a panel of publicly listed companies, we investigate whether resource shifting is facilitated by two underlying factors. First, we examine whether pharmaceutical manufacturers whose intangible assets are disproportionately held as intellectual property are more or less likely to shift resources to jurisdictions outside of the USA. Second, we empirically determine whether manufacturers that derive most of their revenues from producing a specific type of product are more or less likely to shift income-producing resources to their international affiliates.

The empirical results suggest that pharmaceutical factors do practice strategic resource shifting. Moreover, pharmaceutical manufacturers which produce biologic medications are significantly less likely than other manufacturers to practice resource shifting. We find no evidence to suggest that firms whose intangible assets are more composed of intellectual property are any more or less likely to practice resource shifting.

To date, a plethora of studies exist which examine resource shifting in a large, general population of multinational corporations. However, there are relatively few studies that examine international resource shifting in the pharmaceutical industry.

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.

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.

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.

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.