Is the Cash Locked Out?
Evidence from U.S. Multinational Tax Filings
Christine L. Dobridge†
Paul S. Landefeld
Federal Reserve Board of Governors
Joint Committee on Taxation
March 2017
Abstract
We study the effect of repatriation tax costs on the cash holdings of U.S. multinational corporations using
confidential data on cash holdings of foreign subsidiaries from U.S. corporate tax filings. We exploit
numerous declines in foreign tax rates over time and show that following foreign tax cuts, firms increase
cash holdings in countries with a tax rate decrease and reduce cash holdings of the U.S. parent corporation;
we estimate a semi-elasticity of -1.9 for the affiliate cash-to-net asset ratio with respect to a foreign tax
change. On net, declining foreign tax rates lead to an increase in overall firm cash holdings, suggesting
that an increase in repatriation tax costs has been an important driver of the overall increase in corporate
cash in recent years.
We would like to thank Tom Barthold, Peter Merrill, and Mitchell Petersen for helpful comments, as well as seminar
participants at the Federal Reserve Board of Governors and conference participants at the 2016 Annual Conference on Taxation.
We are also grateful to Tyler Wake for providing research assistance. The views and opinions expressed here are the authors’
own. They are not necessarily those of the Board of Governors of the Federal Reserve System, its members, or its staff. This
research embodies work undertaken for the staff of the Joint Committee on Taxation, but as members of both parties and both
houses of Congress comprise the Joint Committee on Taxation, this work should not be construed to represent the position of
any member of the Committee. This work is integral to the Joint Committee on Taxation staff’s work and its ability to model
and estimate the effects of changes in the tax treatment of U.S. multinational corporations.
†Corresponding author. The Federal Reserve Board of Governors, 20th St. and Constitution Ave. N.W., Washington, D.C.
20551. Phone: (202) 912-4341. E-mail: [email protected].
1. Introduction
U.S multinational firms have come under intense public scrutiny in the last several years for
holding trillions of dollars of cash overseas—cash that is often dubbed to be “locked out” of the United
States due to the tax costs of repatriating those foreign earnings. One motivation for the current U.S.
corporate tax reform efforts is to end the “lockout” of foreign earnings and cash in order to boost domestic
investment and employment. 1 Indeed, the tax costs of repatriating foreign earnings have increased
substantially in the past several decades as the foreign tax rate on U.S. subsidiaries has declined while the
U.S. corporate tax rate has remained constant (Figure 1A). Over the same period, U.S. corporate cash
holdings have grown to record levels, primarily driven by an increase in cash holdings of U.S.
multinational corporations (Figure 1B)—raising additional questions about the role of tax costs in boosting
the total stockpile of multinational cash. Evidence on the direct role of repatriation tax costs in cash
holding decisions is limited and mixed to date, however. Bates, Kahle and Stulz (2009) and Pinkowitz,
Stulz and Williamson (2016) find little role for international tax costs in explaining the high cash holdings
of U.S. firms, for example. Foley, Hartzell, Titman and Twite (2007) and Faulkender, Hankins and
Petersen (2015), on the other hand, show higher repatriation tax costs and lower effective foreign tax rates
are associated with higher foreign cash holdings.
In this paper, we take a fresh look at the extent to which repatriation tax costs have affected the
foreign, domestic, and overall cash holdings of U.S multinationals. Using confidential data on cash
holdings of U.S. foreign subsidiaries and a difference-in-differences research design, we present new
evidence on 1) whether an increase in repatriation tax costs has caused firms to hold more cash overseas
1
The House “blueprint” for tax reform, entitled “A Better Way for Tax Reform,” states that “American worldwide companies
currently hold more than $2 trillion in capital overseas.” In an op-ed on the blueprint, Kevin Brady, Chairman of the House
Ways and Means Committee, wrote that “…the new blueprint encourages American companies to bring home trillions of
dollars of income that is currently “stranded” abroad—money that can be invested in U.S. communities to create new jobs,
increase wages, and grow American businesses” (Wall Street Journal, June 24, 2016). A copy of the blueprint is available at
https://waysandmeans.house.gov/taxreform/.
p. 1
and estimates of the magnitude of the effect and 2) whether an increase in repatriation tax costs has
contributed to the cash buildup in multinational firms overall.
Under U.S. tax law, foreign earnings of U.S. corporations are generally only taxed when they are
repatriated back to the United States; at that point, firms pay the full U.S. tax rate less a credit for the
foreign taxes already paid. This wedge between the U.S. rate and foreign tax rates results in a tax cost of
repatriation and creates incentives for firms to defer repatriation and to increase overseas cash. Studying
the direct effect of repatriation tax costs on the cash holdings of multinational corporations directly
presents a number of empirical challenges, however.
First, identifying the effect of repatriation tax costs on cash holdings is challenging because it is
difficult to disentangle the repatriation tax cost motivation for holding cash from other motivations such
as agency concerns, a lack of investment opportunities, or precautionary savings motives. For example,
entrenched managers subject to poor governance may prefer to locate liquid assets abroad and in low taxrate locations, particularly—i.e., tax havens—due to less regulatory scrutiny and oversight in those
locations (Harford, Wang, and Zang, 2016; Bennedsen and Zeume, 2017). Or firms may hold cash in
lower tax rate countries because investment opportunities are poor in the United States and firms do not
intend to deploy the cash in the form of U.S. investment. The second challenge is that data on the cash
holdings of multinationals are traditionally limited. Information from public financial filings on the
geographic location of multinational operations, taxes paid, or cash holdings are sparse, restricting many
of the analyses of publicly available data to the relationship between aggregate firm cash holdings and
aggregate foreign income and foreign taxes paid.
We address the endogeneity challenges by using a quasi-experimental setting to isolate the effect
of repatriation tax costs on corporate cash holdings. We use a differences-in-differences strategy that
exploits numerous changes in foreign statutory corporate tax rates over the past decade. Foreign tax cuts
p. 2
directly result in higher repatriation tax costs for firms; statutory tax rate cuts occurred in 71 of the 114
countries with foreign subsidiaries in our 2003-2012 data sample, with an average of about 17 tax rate
cuts that occurred each year. We test for the effects of repatriation tax costs on cash holdings domestically
and abroad by comparing subsidiaries of firms affected by foreign tax cuts with subsidiaries of firms that
were not affected. As foreign tax rate cuts may also have other effects on firm decision-making—e.g., by
lowering the cost of capital in a country—we also study the effect of tax cuts on firm repatriations and
real investment to provide additional support to the repatriation tax cost motivation for holding cash. We
focus our study on foreign tax cuts as there were relatively few tax increases during the sample period.
Next, to address the data challenges, we utilize confidential, detailed data from corporate tax filings
on the cash holdings, total assets, tangible assets, and repatriations of foreign subsidiaries and the U.S.
parent. Using annual data on the location of cash and asset holdings of foreign subsidiaries from 2003 to
2012 allows us to study the specific relationship between cash holdings and country-level tax rates as well
as firms’ decisions to hold cash domestically versus overseas. (In the U.S. tax code, foreign subsidiaries
are designated as controlled foreign corporations or CFCs; we will refer to them as such for the remainder
of the paper.)
We test two simple hypotheses that follow from a tax repatriation cost motivation for holding cash.
Since foreign tax cuts cause higher repatriation tax costs for firms, Hypothesis 1 is that following foreign
tax cuts, firms increase CFC cash holdings in countries that have lowered their tax rates. We first conduct
an entity-level analysis and study how firms allocate cash between CFCs and the U.S. parent following
foreign tax cuts. We estimate the average treatment effect of a foreign tax rate cut on the average cash
holdings of CFCs in countries with the tax cut (referred to as “Treated CFCs”), the cash holdings of the
U.S. parent corporations (“Treated U.S. Parents”), and the cash holdings of CFCs in other countries that
do not experience a tax cut (“Other CFCs”). We measure cash holdings as the CFC cash-to-net asset ratio
p. 3
(total assets net of cash) and the cash-to asset ratio. As many countries in the sample experience multiple
tax rate cuts, we study the effect of the multiple treatment episodes by constructing cohorts of treated and
control entities for each treatment year in the sample and then pooling cohorts to generate the final dataset.
Second, we estimate the semi-elasticity of cash holdings with respect to tax cuts in Treated CFCs,
Other CFCs and Treated U.S. Parents. The cohort-level strategy allows us to estimate the semi-elasticity
of cash holdings to tax cuts because we have numerous rate changes across the distribution of rates in the
sample, including multiple rate cuts of varying amounts over the sample period in several countries. We
also study the effect of lower foreign tax rates on the probability of repatriating earnings from a given
CFC country. Lower foreign tax rates may affect corporate cash accumulation for other reasons than the
repatriation tax cost channel, e.g., by changing the cost of capital for firms in the affected country. If
repatriation costs are a key part of the story, we would expect to see a decline in repatriations following
rate cuts in addition to an increase in cash holdings.
Next we investigate whether repatriation tax costs have affected overall firm cash holdings; if
repatriation tax costs have been a driver of the run-up in total multinational cash seen in Figure 1B, we
expect to see an increase in total corporate cash following foreign tax cuts. Hypothesis 2, therefore, is that
following foreign tax cuts, firms hold more cash overall. We estimate the average treatment effect of a
foreign tax cut on overall firm cash holdings by comparing the cash holdings of treated firms—firms with
at least one CFC with a foreign tax cut—to holdings of control firms, using the same cohort-level
difference-in-difference strategy.
We document three main findings. First, we show that following foreign tax cuts, firms reallocate
cash holdings from the U.S. parent to countries with a tax rate cut. Firms increase cash holdings (the cashto-asset ratio, specifically), by 2 to 3 percent on average in countries with a tax rate decrease—the Treated
CFCs—and reduce cash holdings of the U.S. parent corporation by an average of 8 to 11 percent. Firms
p. 4
leave cash holdings unchanged in Other CFCs with no tax rate cut. Second, we estimate the magnitude
of the effect. We estimate a semi-elasticity of -1.9 for the cash-to-net asset ratio with respect to a statutory
foreign tax change in a treated CFC country; i.e. a 1 percentage point tax rate cut results in a 1.9 percent
increase in the cash-to-net asset ratio of the Treated CFCs. In addition, we show that tax rate cuts lead to
a decline in the probability of repatriating earnings from a country that experiences a tax cut, and an
increase in the probability of repatriating earnings from another country in which the firm has operations.
The fact that we see a shift in repatriations from higher repatriation cost countries (i.e., tax cut countries)
to lower repatriation cost countries (i.e., other countries in the corporate group) suggests that repatriation
tax costs are a key reason for the buildup of cash even if other factors are also at play. We also show that
following corporate tax cuts, firm capital expenditures in Treated CFC countries remains unchanged,
providing additional evidence for the repatriation tax cost channel in driving our cash holding results.
While in our entity-level analysis, we find that firms reallocate cash holdings from the U.S. parent
to the Treated CFC following foreign tax cuts, the net effect on overall firm cash holdings is unclear. Do
the foreign cash increases outweigh the domestic reductions or vice versa? Our third main result, therefore,
is for total firm cash holdings. We find that firm cash holdings increase overall following foreign tax cuts,
by between 2 percent to 6 percent, depending on the specification. These results suggest that an increase
in repatriation tax costs has been an important driver of the overall increase in corporate cash holdings
over the past decade.
To validate the difference-in-differences design, we show that treatment and control CFCs have
similar average and median levels of cash and face similar statutory tax rates in the years prior to treatment;
we see little evidence of a pre-trend in cash holdings compared to the net assets (net of cash) of Treated
CFCs prior to treatment, though we do see some trend in the ratio of cash to total assets prior to treatment.
We also show robustness of our analysis to a number of factors including excluding the repatriation tax
p. 5
holiday of 2005, excluding the financial crisis periods, winsorizing the data sample for outliers, and
excluding CFCs that experience a tax rate increase in any year of the cohort instead of just the treatment
year.
We contribute to literatures in finance and economics that study the determinants of corporate cash
holdings and the profit shifting of multinational corporations. Tax repatriation costs have been proposed
as an important driver of multinational cash holdings. Our work is most closely tied to Foley, Hartzell,
Titman, and Twite (2007), which was the first paper to consider how the incentives created by repatriation
taxes might explain the rising levels of cash holdings by U.S. multinationals. Foley et al. use Compustat
data spanning 1982-2004 to show that multinational firms with higher repatriation tax burdens hold higher
amounts of cash in the consolidated group. They then use BEA’s benchmark surveys on U.S. Direct
Investment Abroad from 1982-1999 and show that firms facing higher repatriation tax costs locate more
cash abroad and less cash domestically. They also show that for individual subsidiaries, lower tax rates
are correlated with higher cash holdings in the affiliate.
Our work is broadly consistent with Foley et al. and builds on it in a number of ways. First, we use
a quasi-experimental design to identify the effect of a foreign statutory tax rate cut on cash holdings at the
CFC level as well as on firm cash holdings overall. This strategy helps alleviate endogeneity concerns in
studying the relationship between foreign tax rates and cash holdings. Our strategy also allows us to
estimate a semi-elasticity of cash holdings with respect to statutory tax rate changes instead of effective
tax rate levels. This eliminates the concern that foreign taxes paid and marginal effective tax rates result
from choices made by the firm and are jointly determined with cash holdings. Second, we gain insight
into the reallocation of cash within firms by simultaneously estimating the effect of a tax rate change in
one country on subsidiaries in other countries as well as the U.S. parent. Third, we show a direct effect of
foreign tax rate changes on repatriation and investment decisions. Finally, the strategy isolates the effect
p. 6
of rate cuts in middle-tax-rate countries on cash holdings from the effect of access to extraordinarily low
tax rates in tax haven countries, where firms may be building up large stockpiles of cash and few real
assets. Blouin, Krull, and Robinson (2014), for example, show that a substantial share of permanently
reinvested earnings are held in tax-haven countries. Our results, almost uniquely, are not a story about
cash hoarding in tax havens.
In other work on repatriation tax costs and cash holdings, Faulkender, Hankins, and Petersen
(2016) also find that the foreign cash balances of multinational firms are explained by low effective foreign
tax rates and the ease of within-firm profit transfers; they find that precautionary savings motives better
explain the level of domestic cash holdings. As in Foley et al. (2007), Faulkender, Hankins and Petersen’s
work does not isolate the effect of foreign tax rate changes on cash holdings, however, as our quasiexperimental setting does. In contrast to these two papers, other recent research has not found an important
role for repatriation costs in explaining cash holdings. Bates, Kahle, and Stulz (2009), for example, find
that cash holdings increase similarly for firms with foreign taxable income and those without foreign
taxable income in their sample. And Stulz, Pinkowitz, and Williamson (2015) show that excluding R&D
intensive firms, U.S. multinationals do not hold more cash than similar foreign firms despite different tax
regimes. Hartman (1985) shows that U.S. repatriation taxes do not affect firm decisions to repatriate
foreign earnings if U.S. taxation of foreign earnings is inevitable and there is no uncertainty about future
tax rates; these assumptions are highly restrictive, however.
Our work also relates to the broader literature studying motivations for firm cash holdings. The
contribution of the paper is to isolate the effect of foreign tax rate changes on cash holdings, not to rule
out the importance of these other factors in explaining firm cash holdings. As discussed above, it is often
difficult to disentangle these various motives when using aggregate data and a non-experimental setting.
Financially constrained firms have incentives to increase cash due to precautionary savings motives or in
p. 7
order to finance future investment opportunities (Opler, Pinkowitz, Stulz, and Williamson, 1999; Bates,
Kahle, and Stulz, 2009; Almeida, Campello, and Weisbach, 2005; Bolton, Chen and Wang (2011). Jensen
(1986) shows an agency cost motive for holding cash—that managers are reluctant to pay out cash to
shareholders because of agency conflicts that incentivize them to take actions that increase managerial
power; a number of papers show a relationship between poor governance, higher agency costs and
increased firm cash holdings (Dittmar, Mahrt-Smith, and Servaes (2003); Dittmar and Mahrt-Smith
(2007); Pinkowitz, Stulz, and Williamson (2006); Gao, Harford, and Li (2013); Harford, Wang and Zhang
(2016)). Finally, classic models in corporate finance theory derive transaction cost motives for holding
cash (e.g., Baumol (1952) and Miller and Orr (1966)) but transaction costs are known to be less important
for large firms like multinationals due to economies of scale in transaction costs (Mulligan (1997)).
In addition to the literature on corporate cash holdings, our work is related to the existing research
on the profit shifting decisions of multinational corporations. The literature dates from Grubert and Mutti
(1991) and Hines and Rice (1994), and in general finds that firms are quite responsive to tax rates in
deciding where to earn income. 2 Our work relates to this literature in showing that firms are also
responsive to tax rates in deciding where to hold cash. Our approach has the advantage, however, of using
tax rate changes to identify the elasticity of cash with respect to foreign statutory tax rates instead of
effective foreign tax rate levels. Our approach also isolates the effect of tax change in middle-tax countries
from the importance of tax havens with extremely low rates. Recent work by Dowd, Landefeld, and Moore
(2016) shows that lightly taxed earnings (as in tax haven countries) exhibit far higher elasticities to tax
rates than more heavily taxed earnings, suggesting that tax havens are an important part of the discussion
around profit shifting. This work also leads to concern that traditionally estimated elasticities may
overstate the responsiveness of earnings due to the importance of tax havens with extremely low rates.
2
A recent survey by Dharmapala (2014) provides a comprehensive overview of this literature.
p. 8
Our strategy isolates the effect of a foreign tax cut from a firm’s decision to hold cash in tax havens; in
our sample period, there are no tax cuts in tax haven countries.
The remainder of the paper proceeds as follows: In Section 2, we review the U.S. tax law regarding
repatriation of foreign earnings. In Sections 3 and 4, we present the data and the empirical methodology,
respectively. In Section 5, we discuss the results and we conclude in Section 6.
2. Background on U.S. Tax Law
The U.S. corporate tax code operates under a “worldwide” system of taxation, whereby U.S.
corporations are taxed on both U.S. and foreign earnings. However, U.S. firms may delay taxation of
foreign earnings until distributing those earnings to the U.S. parent corporation in the form of a dividend.
Such a distribution is also known as the repatriation of foreign earnings. When repatriating foreign
earnings to the U.S. parent corporation, the United States allows the firm to offset its U.S. tax on the
repatriated earnings with a tax credit for foreign taxes paid on the foreign earnings. The rules governing
foreign tax credit calculation are complicated, but in general, these credits are limited such that a
corporation cannot use these credits to offset tax liability on U.S. source income. Under subpart F of the
U.S. tax code, certain types of CFC income, particularly investment income in the form of dividends,
interest, rents, royalties, and capital gains are not subject to the general rules of deferral of U.S. taxation
of foreign earnings. 3 Generally, this would include any interest earned on foreign cash holdings overseas.
These features of the U.S. tax code, specifically deferral, have led to concern over the “lockout”
of foreign earnings from the United States. The residual U.S. tax owed upon repatriation distorts the return
to investment in a U.S. asset versus a foreign asset if funded by foreign cash. Our two hypotheses center
around the fact that falling tax rates overseas results in an increase in the residual tax owed upon
3
For more details on the U.S. taxation of foreign income, see Joint Committee on Taxation, Present Law and Selected Policy
Issues in the U.S. Taxation of Cross-Border Income, (JCX-51-15), March 16, 2015.
p. 9
repatriation. This represents a decline in the after-tax return to U.S. investment, potentially causing firms
to hold larger amounts of cash overseas and larger amounts of cash in total. For example, a firm with $1
million in taxable earnings in a country with a 20 percent statutory corporate tax rate will pay $200,000
in corporate taxes in that country and will have $800,000 remaining to reinvest, hold as cash, or allocate
in the jurisdiction in which it is earned. If this firm chooses to repatriate the remaining income, however,
it will pay a 15 percent U.S. tax on the repatriated earnings, which is the 35 percent U.S. statutory corporate
tax rate minus a tax credit for the 20 percent foreign tax. This firm will pay an additional $150,000 in U.S.
corporate taxes and will have $650,000 to reinvest, hold as cash, or otherwise allocate domestically or
abroad. The residual tax drives a wedge between the funds available for investment in the United States
and the amount available for investment overseas. Increasing the residual tax (or decreasing the foreign
tax) enlarges this wedge, making both holding cash and investment overseas more attractive.
3. Data
We use data on the cash holdings, total assets, repatriations, and tangible assets of U.S. parent
corporations and their foreign subsidiaries from three corporate tax filings: form 1120, the “U.S.
Corporation Income Tax Return,” form 5471, the “Information Return of U.S. Persons with Respect to
Certain Foreign Corporations, ” and form 1118, the “Foreign Tax Credit – Corporations.” Form 1120 is
the tax return filed for the consolidated U.S. group. Form 5471 is the tax filing for each controlled foreign
corporation (CFC) of the consolidated U.S. group. Form 1118 is filed by the U.S. corporation in order to
claim credits for foreign taxes paid. The data are produced by the Statistics of Income (SOI) division of
the Internal Revenue Service (IRS), which uses these data to publish aggregate statistics and reports on
the activities of U.S. corporations and their CFCs. They also provide the samples to a number of
government agencies, including the U.S. Congress’s Joint Committee on Taxation (JCT); the JCT uses
the data to evaluate the economic and revenue impact of proposed legislation.
p. 10
Every year the SOI produces a stratified, random sample of tax returns based on the universe of
form 1120 filings, with large firms sampled every year. 4 Elements of the SOI sample design and our focus
on large multinational corporations lead to a high degree of firm persistence in our sample, essentially
creating an unbalanced panel after we link firms across years. These data allow us to observe the U.S.
corporation’s income on a tax basis, as well as their taxes paid including any credits or special deductions
from form 1120. It also provides a book-based balance sheet from Schedule L. This dataset provides us
with information on the cash and asset holdings of the U.S. parent corporation as well as some information
on their transactions with their overseas subsidiaries in the form of dividends and foreign tax credits. The
SOI also provides a sample of form 5471 on a bi-annual basis. U.S. parent corporations file a separate
form 5471 for each foreign subsidiary for which they hold an ownership position of greater than 50
percent. Since 2004 this sample has included all firms in the 1120 sample that file a form 5471. Form
5471 is a purely informational return, but provides basic income and balance sheet information on a U.S.
GAAP book basis from Schedules C and F. By 2012, SOI estimated that more than 14,000 U.S.
corporations filed form 5471 for over 88,000 CFCs. Form 1118 is filed by each U.S. parent corporation
in order to calculate and claim their foreign tax credit and SOI provides data on this firm annually for each
firm in the 1120 sample. Form 1118 includes information on elective repatriations and on other types of
foreign-source income received by the U.S. parent corporation from each source country. In 2012, around
7,000 firms filed form 1118.
We form our analysis sample by linking together U.S. corporations and their CFCs over time,
forming an unbalanced panel of multinationals. Although the sample of form 5471 is bi-annual, firms
report cash holdings and total assets as of the beginning of the year as well as the end of the year. Since
the beginning-of-year values are equivalent to values as of the end of the previous year, we can construct
4
Large firms are those with over $50 million in assets or $5 million in sales.
p. 11
annual, end-of-year values of cash and total assets to use in this study. Our analysis sample covers the
years 2003 to 2012. Prior to 2004, the SOI sample of form 5471 was based on U.S. corporations with $500
million or more in assets and their 7,500 largest CFCs. Because of this sample change, 2003 is the first
year of data on cash and assets that we utilize in the sample. We exclude firms in the following industries
from the sample: finance, insurance, utilities, and extractive industries. We aggregate cash holdings and
assets to the total country level because the same-country exception to subpart F of the tax code largely
allows cash to move relatively freely within a country. The hypotheses that we are testing focus on how
cash held in treated countries responds to tax rate cuts, not on how the dynamics of cash holdings change
between foreign subsidiaries within a country after a tax rate cut. To study total firm cash holdings, we
sum the cash holdings and assets of the U.S. parent corporation together with cash holdings and assets of
all CFCs. Cash holdings as reported on form 5471 are defined equivalently to cash holdings in firm
financial accounts and also include marketable securities. In our study of investment decisions, we define
CFC-level investment as tangible capital assets (buildings and other depreciable assets, depletable assets,
and land) as reported on Schedule F of form 5471. Data on capital expenditures more directly are not
available at the CFC level. We study tangible capital both as a share of total CFC assets and as a share of
total CFC assets excluding cash.
Critical to our analysis are data on statutory tax rates across countries and over time. We obtain
this information by matching the data on cash and asset holdings to data on country-level statutory tax
rates by year for our sample period of 2003 to 2012 as collected by Dowd, Landefeld, and Moore (2016).
We use statutory tax rates to avoid potential endogeneity in the relationship between firm-level average
tax rates, which are influenced by the profit and loss positions of the firm, and cash holdings. Figure 3
presents a map indicating the number of distinct statutory tax cuts by country in the sample period and
figure 4 presents a map indicating the total value of those tax cuts by country in the sample period. There
p. 12
is a large amount of variation in the number and magnitude of tax rate cuts in the sample. Statutory tax
rate cuts occur in 71 of the 114 countries in the sample and an average of about 17 tax rate cuts occur each
year. Over a third of countries in the sample cut tax rates more than, and about fifteen percent of countries
cut tax rates more than twice. There is also a wide range of the total value of these tax rate cuts. The
median tax rate cut is 2 percentage points, the average tax rate cut is 4 percentage points, while the
maximum rate cut was 40 percentage points in Kuwait in 2009. Appendix Table 1 details the highest
corporate marginal tax rates by year for all countries with foreign subsidiaries in the sample for which
data are available.
4. Empirical Strategy
To study the effect of international tax rate changes on foreign and domestic cash holdings, we use
a differences-in-differences strategy that exploits the numerous foreign tax rates cuts by country over time.
We first analyze how foreign tax rate cuts affect cash holdings at the entity level (for U.S. parents and
their CFCs) and then analyze the effect at the overall firm level. The statutory tax cuts in our sample period
affected a substantial fraction of firms in the sample. Of the approximately 13,000 unique multinational
firms in our sample, over 8,000 have at least one CFC in a country that experiences a tax cut in the sample
period. Of the over 60,000 unique CFC-country pairs in the sample, about 28,000 experience at least one
foreign tax cut. We focus the analysis on tax cut events only as there are relatively few instances of tax
rate increases in the sample period and they affect a small fraction of our observations. Compared to a
sample size of over 1.2 million observations, only about 16,000 are subject to a rate increase.
We take advantage the fact that many countries in the sample experience multiple tax rate cuts—
i.e., multiple treatment episodes—by constructing cohorts of treated and control entities for each treatment
year in the sample and then pooling all cohorts to generate the final dataset (see Greenstone, Hornbeck,
and Moretti (2010) and Gormley and Matsa (2011) for other examples of this method). This procedure
p. 13
results in eight separate cohorts centered on the treatment years 2004 to 2011. This methodology has
advantages over a more standard difference-in differences regression in which a dummy variable switches
from zero to one for the treatment group after the first date of treatment. As many countries cut tax rates
more than once over the sample period, firms typically face multiple rate changes in multiple jurisdictions
over the course of the sample. Constructing data cohorts in this manner allows us to study each tax cut as
a separate treatment event and more clearly separate the effects of multiple treatment periods; this is also
useful when we estimate the semi-elasticity of cash holdings with respect to tax cuts because countries
with multiple rate cuts often cut by different amounts each time. In addition, by standardizing the time
window around treatment, we are left with a more balanced regression panel which will help lessen noise
in the coefficient estimates. This is particularly important in the SOI sample, which is not a true panel and
thus entry and exit from the sample can occur frequently.
Each cohort in the sample comprises observations for the year of the tax change and the two years
prior to and after the change. 5 We define “Treated CFCs” as CFCs located within a country that has a tax
rate cut in the treatment year. “Other CFCs” are CFCs for which another subsidiary within their corporate
group experiences a rate decline in the treatment year, while their own rate remains constant. “Control
CFCs” are CFCs for whom no member of the corporate group experiences a rate decline in the treatment
year. “Treated Parents” are U.S. parent corporations with a CFC in a country that has a tax rate cut in the
treatment year. “Control Parents” are U.S. parent corporations without a CFC in a country that has a tax
rate cut in the treatment year.
To present an example of the strategy, take firm A with CFCs in Turkey, the United Kingdom and
Australia, and firm B with CFCs only in Australia. Turkey cut its corporate tax rate from 33 percent in
5
Due to data restrictions, the first cohort only includes one pre-treatment year and the last cohort contains only one posttreatment year.
p. 14
2004 to 30 percent in 2005 to 20 percent in 2006 and its tax rate has remained flat at 20 percent since that
time. The United Kingdom cut its corporate tax rate from 30 percent in 2008, to 28 percent in 2009, to 26
percent in 2011 and to 24 percent in 2012. The Australian corporate tax rate has remained flat at 30 percent
throughout the sample.
For the 2006 treatment cohort, firm A’s Turkey CFCs are Treated CFCs since there is was a
Turkish tax cut in that year. Firm A’s U.K. and Australia CFCs are Other CFCs since they are CFCs of a
treated firm, but did not experience a corporate tax cut in the treatment period, and firm A’s U.S. parent
is a Treated Parent. In the 2009 treatment cohort, however, now firm A’s U.K. CFC is a Treated CFC
since the U.K. experiences a rate cut in 2009, and firm A’s Turkey and Australia CFCs are Other CFCs.
Since firm B is not treated in either the 2006 or the 2009 treatment cohort, firm B’s Australia CFC is a
Control CFC in both cohorts and the firm B parent is a Control Parent in both cohorts as well.
Of note, because this paper studies the effects of foreign tax cuts on cash holdings, the identifying
variation in tax rate changes that we use in tax rate changes is independent of the use of tax havens by
U.S. corporations. Countries like the Bahamas, Bermuda, the Cayman Islands and Ireland have a constant
tax rate over time in the sample (zero percent for the Bahamas, Bermuda, and the Cayman Islands, and 13
percent in Ireland) and so CFCs in these countries are either “Other” or “Control” CFCs in the sample
period. This is in contrast to a number of papers which use the level of tax rates to estimate the behavioral
response of firms. Dowd, Landefeld, and Moore (2016) show that these approaches may rely heavily on
tax havens for identification in the profit shifting literature, potentially complicating their application to a
non-tax haven context.
In forming cohorts, we restrict our sample to firms that report CFCs in at least two countries outside
the United States and have at least $5 million in total assets as reported by the U.S. parent. We classify a
CFC as treated if they experience a statutory rate decline of greater than 1 percentage point. Those with
p. 15
no change or rate increases are treated as “Other” or “Control” entities. Because the United States enacted
no changes to their corporate rate over the sample, the U.S. parent corporation is always defined as either
“Other” or “Control.” (We will refer to the former as “Treated Parents” from here on). Initially we treat
the relatively few subsidiaries in countries with tax rate increases as untreated, and show robustness to
that assumption.
Entity-level analysis
The empirical specification that we use to analyze how cash holdings are allocated between a U.S.
parent corporation and its CFCs following foreign tax cuts is presented in specification (1) below:
(1)
Ln(Cash/Assets)ijct = β1TreatedCFC×Postcjt + β2OtherCFC×Posticjt +
β3US_Parent×Postcjt + β4OtherCFCij + δt + δi + δj + δc + εijct,
where i indexes firms, t indexes years, c indexes country of CFC location, and j indexes the treatment
cohort. TreatedCFC×Post is a dummy variable that equals one if an observation is for a CFC country in
which a statutory tax rate decline has been introduced by year t. OtherCFC×Post is a dummy variable that
equals one if an observation is for a CFC country that does not experience a tax cut but belongs to the
same firm as a treated CFC country and the TreatedCFC×Post dummy variable equals one.
US_Parent×Post is a dummy variable equal to one if an observation is for the U.S. parent of a firm with
a Treated CFC and the TreatedCFC×Post dummy variable equals one. We include firm fixed effects to
control for unobservable firm characteristics that are constant across time and we include time fixed effects
to control for common time shocks across entities. We include country fixed effects to control for
unobservable country-level characteristics that may induce firms to hold cash in a specific country or drive
country-level fiscal policy. While the firm, time, and country fixed effects account subsume the Post,
US_Parent and TreatedCFC dummy variables that would otherwise be included in a full difference-in-
p. 16
differences specification, we include a OtherCFC dummy variable to account for the average effect of
being an untreated CFC within the corporate structure of a firm that is treated with a tax cut elsewhere.
For example, a CFC located in Australia—a country not treated with a tax cut during the sample period—
may be either a control CFC or an OtherCFC depending whether another CFC of the firm is treated with
a tax cut or not. Therefore, neither a firm fixed effect nor the country fixed effect subsume the OtherCFC
variable. We cluster standard errors at the country level—the level of treatment—to account for potential
unobserved correlation at the country level over time (Bertrand, Duflo, and Mullinathan, 2004). Our main
dependent variables of interest are the natural logarithm of the cash-to-assets ratio and the natural
logarithm of the cash-to-net assets ratio, where net assets equal total assets minus cash holdings.
In this model, β1 measures the average treatment effect of a tax rate cut on the cash-to-asset ratio
in the treated country, β2 measures the effect on the cash-to-asset ratio in other countries in which a firm
has operations, and β3 measures the effect on the cash-to-asset ratio of the U.S. parent corporation. In
accordance with the hypothesis that foreign tax cuts cause firms to hold more cash in countries that cut
tax rates, we hypothesize the sign on β1 to be positive.
Next, we estimate the semi-elasticity of entity cash holdings with respect to the tax rate change—
i.e., the percent change in the entity cash-to-asset ratios with respect to a one unit change in the tax rate.
To estimate the semi-elasticity, we use a variation on equation (1) in which we interact the
TreatedCFC×Post, OtherCFC×Post, and US_Parent ×Post dummy variables with the statutory tax rate
level in the treated country or a composite tax rate for the U.S parent or other, untreated CFCs, as of the
year of treatment. The tax rates are designated (τ) in the below specification:
(2)
Ln(Cash/Assets)ijct = β1TreatedCFC×Post×τicjt + β2OtherCFC×Post×τicjt +
β3US_Parent×Post×τicjt + β4TreatedCFC×Postcjt + β5OtherCFC×Posticjt +
β6US_Parent×Postcjt + β7TreatedCFCicj + β8OtherCFCij + ρτicj + δt + δi + δj + εijct
p. 17
The variables in this specification are defined and indexed as in specification (1) above. We include
firm, year and cohort fixed effects as in specification (1) as well, and cluster standard errors at the country
level. In this specification, however, we do not include a country-level fixed effects since we have included
the statutory tax rate at the year of treatment, and do not have sufficient variation in the data sample to
estimate the effect of the tax rate separately from a country fixed effect. Therefore, we also include a
TreatedCFC dummy in the specification.
The main coefficients of interest are 1) β1, which measures the semi-elasticity of the cash-to-assets
ratio in treated CFC countries with respect to the tax rate change, 2) β2, which measures the semi-elasticity
of the cash-to-assets ratio in other, untreated CFC countries with respect to the tax rate change, and 3) β3,
which measures the elasticity of the cash-to-asset ratio of the U.S. parent corporation with respect to the
tax rate change. The coefficients β4, β5, and β6 measure the effect of a tax rate cut on the various treated
firm entities in the limit when the tax rate goes to zero.
We study the semi-elasticity of cash holdings in the treated CFC country with respect to two
different tax rates changes in the treated country: 1) the country statutory tax rate in the year of treatment
and 2) a composite tax rate that reflects the relative tax rate of the CFC country in the year of treatment as
compared to the rest of the multinational group, following Huzinga and Laeven (2008). Huizinga and
Laeven show that multinational’s profit shifting decisions depend on this composite tax rate, and we
hypothesize that firm cash holding decisions may be sensitive not only to just the statutory rate changes,
but also to the relative tax rate of a treated CFC country compared to the rest of the countries in which the
CFC has operations.
We study the semi-elasticity of cash holdings of the treated U.S. Parents and the Other CFCs with
respect to the composite tax rate only. Given the large number of tax rate changes in each year of the
sample, many treated U.S. parents have CFCs in more than one country that experience a tax rate change.
p. 18
Therefore, there is no single country tax rate that is appropriate to study for all treated parents and other
CFCs.
The formula for the composite tax variable is:
𝐶𝐶𝑖𝑖 =
1
(𝜏𝜏𝑖𝑖 − 𝜏𝜏𝑘𝑘 )
1−𝜏𝜏
∑𝑛𝑛𝑘𝑘≠𝑖𝑖 𝑛𝑛𝑘𝑘 1 ,
1−𝜏𝜏𝑖𝑖
∑𝑘𝑘=1
1
1−𝜏𝜏𝑘𝑘
where 𝜏𝜏𝑖𝑖 is the tax rate of a given affiliate. Thus 𝐶𝐶𝑖𝑖 is the weighted average difference between an affiliate’s
own tax rate and the tax rate of all other members of the multinational group, represented by 𝜏𝜏𝑖𝑖 − 𝜏𝜏𝑘𝑘 ,
scaled by the CFC net-of-tax rate, 1 − 𝜏𝜏𝑖𝑖 . 6 This variable is intuitive in that positive values of 𝐶𝐶𝑖𝑖 indicate
that the tax rate of group member 𝑖𝑖 is generally higher than the average of the rest of group, suggesting
that country 𝑖𝑖 is less attractive as a location to accumulate earnings or cash. The opposite is true when 𝐶𝐶𝑖𝑖
is negative.
In this regression framework, the expected sign of the elasticity between cash holdings and the
statutory and consolidated tax rates is negative for the Treated CFCs (β1). If a there is a statutory tax cut
in a treated CFC country, the composite tax rate for that CFC country will decrease. A decline in the
consolidated tax rate of the treated CFC country is hypothesized to cause an increase in cash holdings in
that country, resulting in a negative regression coefficient. The expected sign of the elasticity of cash
6
It is worthwhile to note that our definition of the composite tax variable is different than the one as developed in Huizinga
and Laeven (2008) because our formulation is equal weighted and theirs is sales weighted. We do this for three reasons. First,
the bi-annual sample of CFCs means that we do not observe sales in every year. Second, the tax data include any consolidated
branches or disregarded entities, meaning that sales reported in one country may not actually have occurred in that country.
Third, the motivation in using sales is that location of sales is relatively difficult to manipulate, an assertion that may be accurate
in financial reporting data, but is likely to be incorrect in tax data where firms have incentives to attribute sales to low tax
jurisdictions. Finally, while Huizinga and Laeven are interested in the profit shifting motives, they are concerned about the
costs associated with separating profit from real activity (sales), a concern that is less salient when thinking only about the
accumulation of cash.
p. 19
holdings with respect to the statutory tax rate for the Treated CFC is also negative; a decline in the statutory
tax rate is hypothesized to result in an increase in cash holdings in that country.
The expected sign of the elasticity between cash holdings and the consolidated tax rates is negative
(or zero) for the Other CFCs and the U.S. parents (β2 and β3, respectively). If there is a tax cut in a treated
CFC country, the composite tax rate for the U.S. parent will increase, as will the consolidated tax rate in
the other CFC countries in which the firm operates that don’t have a tax rate cut. An increase in the
consolidated tax rate of the parent and the other CFCs would be expected to result in a decrease in cash
holdings in those countries or no change in the cash holdings, resulting in a negative or zero regression
coefficient.
Firm-level analysis:
To study the effect of foreign tax cuts on firm cash holdings as a whole, we estimate specification
(3) below, which is the firm-level specification analogous to the entity-level specification above:
(3)
Ln(Cash/Assets)ijnt = β1TreatedFirm×Postijt + β2TreatedFirmij + δt + δj + δn + εijnt,
where i indexes firms, t indexes years, j indexes treatment cohorts and n indexes industry.
TreatedFirm×Post is a dummy variable equal to one if a CFC of a firm has been treated by year t in the
cohort period. TreatedFirm is a dummy variable equal to one if a CFC of a firm has been treated in the
cohort period. We cluster standard errors at the firm level to account for potential unobserved correlation
at the firm level over time. Our dependent variables of interest are again the logarithm of the cash-toassets ratio and the logarithm of the cash-to-net assets ratio, where net assets equal total assets minus cash
holdings. The regression coefficient of interest in this specification is β1, which is interpreted as the
average treatment effect of a firm experiencing a tax cut in a CFC on the firm’s cash holdings.
p. 20
Summary Statistics:
Figure 2 presents trends in the level of cash holdings of U.S. parents and CFCs in our sample, as
well as the cash-to-assets ratios of U.S. parents and CFCs. Figure 2A shows the level of aggregate cash
holdings. After trending up gradually from 2004 to 2007, U.S. parent cash holdings increased substantially
during the U.S. financial crisis in 2008 and 2009. After falling back in 2010, U.S. parent cash holdings
resumed an upwards trend in 2011 and 2012 and for our sample of firms, stood at around $1.5 trillion in
2012. Aggregate CFC cash holdings, in contrast, have seen a more sustained upward trend over time.
Since dipping in 2005, the year of the repatriation tax holiday, CFC cash holdings have increased steadily
and stood at about $850 billion in 2012 for firms in our sample. Figure 2B shows the ratio of aggregate
cash to aggregate assets for U.S. parents and CFCs in the sample. Since the repatriation holiday in 2005,
the CFC cash-to-asset ratio has trended up substantially. The U.S. parent cash-to-assets ratio shows less
of a trend—the ratio has remained more stable between 4 and 6 percent excluding the financial crisis
years.
We present summary statistics for all entity types included in the sample in Table 1; statistics are
presented for the pre-treatment year, for all cohorts. We use the full data sample for analysis in the paper,
but the results are little changed if we winsorize the data at the 1 percent or 5 percent level. The table
reports the mean, median and standard deviation of entity cash, assets, the cash-to-assets ratio, the cashto-net assets ratio (where net assets are defined as assets minus cash), and the statutory tax rate. In terms
of the cash-to-assets ratio, we see similar average and median levels for the “Treated” and “Control” U.S.
parents, as well as similar average and median levels for the Treated, Control, and Other CFCs. Of note,
firms hold a much greater share of CFC assets as cash than they do of U.S. parent assets as cash—a median
of 11 to 12 percent, for example, compared to a median of 4 to 5 percent. The average cash-to-net assets
ratio is much more dispersed across entity types, with larger standard deviations. Likewise the levels of
p. 21
cash holdings and asset holdings in the sample have much wider variation. Treated U.S. parents tend to
be larger than Control parents, and likewise have higher cash holdings. This is partly because larger firms
have more CFCs and are more likely to be treated. Similarly, Treated and Other CFCs also tend to be
larger than Control CFCs and have higher cash holdings.
5. Results
Entity-level analysis
We begin the empirical analysis by studying how foreign tax cuts affect the allocation of cash
holdings across entity types on average. Table 2 presents results from specification (1), the differencesin-differences estimates of the average treatment effect of a CFC country tax cut on cash holdings. Results
for the natural logarithm of cash-to-net assets are presented in column 1 and results for the natural
logarithm of cash-to-assets are presented in column 2. Note that the regressions for the natural logarithm
of cash-to-net assets contain fewer observations because net assets are zero or are reported as negative for
some firms.
We find that following foreign tax cuts, firms increase cash holdings by an average of 2 to 3 percent
in the treated CFC country—2.4 percent in the cash-to-assets specification and 3.0 percent in the cash-tonet assets specification. Firms then reduce cash holdings of the parent corporation by an average of 8.1
percent and 10.5 percent for the cash-to-assets and cash-to-net assets ratio, respectively. We see no change
in cash holdings in Other CFCs of the treated firms—the CFCs in countries with no tax rate change. This
result for Treated CFCs is in line with our hypothesis that after a corporate tax cut—an increase in
repatriation tax costs from that country—firms increase cash holdings in that country. The reallocation of
cash holdings away from domestically held cash to cash held in treated countries illustrates that
corporations are rebalancing their cash positions domestically and abroad. Finally, the fact that we do not
p. 22
see any change in the cash holdings of Other CFCs is in line with the fact that repatriation tax costs have
not directly changed for those CFCs. If repatriation tax costs are the cause of firm cash changes, we would
not expect to see a change in cash holdings of Other CFCs, and indeed we do not.
Table 3 shows the dynamics of the treatment effect on a year-by-year basis with respect to the
treatment year equal to year zero. We see some statistically significant increase in the cash-to-assets ratio
prior to treatment, though we do not see an increase in the cash-to-net assets ratio prior to treatment. Some
pre-trend in the data is perhaps unsurprising as most of these tax cuts are announced well in advance. We
see an increase in the point estimates of the magnitude of cash holdings in the year of treatment and beyond
for both measures of cash holdings; the effect is larger for the cash-to-net asset specification. In the two
years prior to treatment, for example, the point estimates suggest 3.2 to 3.3 percent higher cash-to-net
assets holdings of treated CFCs as compared to control CFCs. This estimate increases to 4.2 percent and
5.1 percent in the year of treatment and the second year after treatment. Though the pre- and post-treatment
point estimates are not statistically different, this provides further suggestive evidence that the average
treatment effect of a tax cut was larger in the post-treatment period. We find a downward trend in the cash
holdings of the U.S. parent corporation throughout the 5-year sample window. This is unsurprising as
many treated U.S. parents are treated in every year of the sample, given the large number of foreign tax
rate changes in each year. As in the above aggregate analysis, we find no statistically significant effect of
the foreign tax cuts on the Other CFCs in any year of the data sample.
Next, we explore the magnitude of the effect of a tax rate change on the quantity of cash holdings.
In Table 4, we present estimates of the semi-elasticity of the cash-to-assets ratio with respect to a change
in the tax rate. Columns 1 and 3 show estimates of the semi-elasticity of cash holdings in the Treated CFC
with respect to the statutory tax rate. Columns 2 and 4 show estimates of the semi-elasticity of cash
holdings in the Treated CFC with respect to the composite tax rate, as defined in the section above. All
p. 23
four columns present semi-elasticity estimates of the treated Parent CFCs and Other Parent CFCs with
respect to the entity’s composite tax rate.
As hypothesized, the sign of the semi-elasticity of cash holdings with respect to the statutory and
composite tax rates is negative for the Treated CFCs. The semi-elasticity with respect to the statutory rate
is -1.7 and -1.9, for the cash-to-assets and cash-to-net assets specifications, respectively. These
coefficients are interpreted as a 1.7-to-1.9 percent increase in cash-to-assets (or net assets) for a 1
percentage point decrease in the country statutory tax rate. The semi-elasticities with respect to the
composite tax rate are smaller—a 1.3-to-1.4 percent increase in cash-to-assets (net assets) for a 1
percentage point decrease in the country’s composite tax rate, although these estimates are not statistically
different.
The semi-elasticity estimates of U.S. parent cash-to-asset ratios with respect to the U.S. parent
composite tax rate range from -0.9 to -1.3, depending on the specification. After a foreign tax cut, the U.S.
parent composite tax rate increases in comparison to its other entities. The negative sign on the U.S. parent
elasticity indicates, therefore, that the U.S. parent cash holdings go down in response to this U.S. parent
relative tax rate increase. The semi-elasticity estimates of -0.9 to -1.3 for the U.S. parent cash holdings are
interpreted as a 0.9 percent and 1.3 percent decrease in the parent cash-to-assets and cash-to-net assets
ratios, respectively, with respect to a 1 percentage point increase in the parent composite tax rate. As in
the differences-in-differences regressions, there is no statistically significant effect of the composite tax
rate change on the cash holdings in the Other CFCs.
Of note, our estimate of the semi-elasticity of cash-to-net asset ratios (-1.9) is much larger than the
-0.9 semi-elasticity as estimated by Foley, et al. (2007), although it is not statistically different from that
estimate. Aside from differences in the data source and specification, the larger point estimate could
potentially be due partly to the more recent time period of our sample. The Foley, et al. sample ends in
p. 24
1999 while ours begins in 2003. In the late 1990s a number of regulatory and legislative changes affected
the taxation of foreign income, making it less likely that earnings overseas would be taxed immediately
and thus making repatriation tax costs more salient to firms. These changes included “check-the-box”
regulations, CFC look-through legislation, and the reinstatement of the Active Financing Exception.
Second, as our analysis shows, the period we analyze was one of dramatically falling foreign tax rates
which again, may have made firms more reluctant to incur repatriation taxes. Finally, events like the
repatriation tax holiday enacted in 2004 and subsequent discussion of a repeat of that holiday or overall
corporate tax reform, may have made firms more sensitive to repatriation costs. All of these factors suggest
that the semi-elasticity for the more recent period is higher than that found by Foley, et al. (2007).
While declining foreign tax rates appear to be a contributing factor to rising cash-to-asset ratios
overseas, it is unclear whether the effect is driven by increased repatriation costs or other effects of lower
corporate tax rates, like the lower cost of capital for firms. It is difficult to separately identify the effect of
lower corporate tax rates from higher repatriation costs over our sample since there is no change to the
U.S. corporate rate. To try and separate the repatriation tax cost channel from other potential channels, we
next study the repatriation and investment effects of the foreign tax cuts. If repatriation costs are indeed
in important part of the story, we would expect to also see a decline in repatriations from Treated CFCs
following rate cuts. If repatriation tax costs are not a driver of firm cash holding decisions, we would
expect to see no effect on repatriations. Turning to the investment decision, if a lower cost of capital or
improved investment opportunities are driving the firm cash holding decisions, we expect to see an
increase in investment in the Treated CFC following rate cuts.
First, we study the firm repatriation decision and estimate the magnitude of the change in the
probability of repatriating earnings with respect to a tax cut (Table 5). This is the same specification as in
p. 25
Table 4, but the dependent variable is a binary variable equal to one if a CFC makes a repatriation to the
U.S. parent in that year.
We find that after a tax cut in a Treated CFC, firms reduce the probability of repatriating earnings
from Treated CFCs, which now have higher repatriation costs, and increase the probability of repatriating
earnings from Other CFCs, which have lower repatriation costs in comparison. We find that a 1 percentage
point decline in the statutory tax rate of the Treated CFC country results in a 0.1 percentage point reduction
in the probability of repatriating earnings from that country. A 1 percentage point decline in the Treated
CFC composite tax rate results in a 0.13 percentage point reduction in the probability of repatriating
earnings from that country. Turning to the effect on repatriations from Other CFCs, recall that as the
Treated CFC tax rate declines, the composite tax rate of the Other CFC countries increase. We find that a
1 percentage point increase in the Other CFC composite tax rate results in a 0.03 to 0.04 percentage point
increase in the probability of repatriating earnings from an Other CFC. If the cash-to-assets results were
simply driven by firms pursuing and earning higher after-tax profits in countries that cut their rates, we
would expect no change in their repatriation policy. These results suggest that instead, the increase in
repatriation tax costs is a key factor that contributes to the increase in cash holdings and the reduction of
repatriated earnings.
Next we evaluate firm investment behavior in the various treated corporate entities following a
foreign tax cut. We present results in Table 6 for the semi-elasticity estimates of investment with respect
to the corporate tax change. We measure firm investment as tangible capital assets (buildings and other
depreciable assets, depletable assets, and land) as a share of total assets and net assets (assets net of cash
holdings).
The first main result for investment is that we find no statistically significant effect of the tax rate
cut on investment in a Treated CFC country. We do not find an effect on investment for either a statutory
p. 26
tax rate (columns 1 and 3) or the composite tax rate decrease (columns 2 and 4). The effect is not driven
by the increase in Treated CFC country cash boosting total CFC assets—we see no effect on the
investment share of assets excluding cash holdings (columns 3 and 4) as well as the investment share of
total assets (columns 1 and 2). These results provide further support that repatriation tax costs are a key
driver of the cash buildup in Treated CFC countries following foreign tax cuts, not improved investment
opportunities in those countries.
Next we turn to the effect of foreign tax cuts on investment domestically and in Other CFC
countries. We find that after foreign tax cuts, which raise the U.S. parent composite tax rate, U.S. parents
reduce investment as compared to control entities. We estimate a semi-elasticity ranging from -1.0 to 1.2, interpreted as after a one percentage point increase in the U.S. parent composite tax rate, domestic
investment falls by 1.0 to 1.2 percent. Interestingly, we find the opposite result for Other CFC countries;
in these countries, we find a semi-elasticity estimate of 0.5 with respect to an Other CFC consolidated tax
rate increase. That is, a one percentage point increase in the Other CFC composite tax rate results in a 0.5
percent increase in investment in Other CFC countries. These results are broadly consistent with the
growing body of work suggesting that repatriation tax costs result in a distortion of firm investment policy
between foreign and domestic investment—particularly that they may cause underinvestment
domestically and overinvestment abroad. Harford, Wang, and Zhang (2016) present evidence that firms
holding more cash overseas are more likely to underinvest domestically, for example. And Hanlon, Lester
and Verdi (2015) present evidence that firm with higher repatriation tax costs conduct more valuedecreasing foreign acquisitions, suggesting that this foreign investment reflects agency-driven managerial
behavior.
p. 27
Firm-level analysis
In our final analysis, we turn to estimates of the effect of foreign tax cuts on firm cash holdings
overall (Table 7). The entity-level analysis revealed that firms hold less cash domestically and more cash
on average in a treated CFC country, but the net effect of the tax cuts on cash holding is unclear; many
firms have CFCs in multiple countries that experience tax cuts in a given year. We find that foreign tax
cuts do result in an increase in firm cash holdings overall. Overall firm cash-to-net asset and cash-to-asset
ratios increase by between 2 percent to 6 percent, depending on the specification. This result suggests that
an increase in repatriation tax costs alone, in isolation from other factors like poor investment opportunities
or precautionary savings motives, has been an important driver of the average overall increase in corporate
cash holdings over the past decade.
Robustness
In Table 8, we show that these results are robust to a number of different sample variations. Our
sample period covers two key events that affected domestic and foreign cash holdings of U.S.
corporations: 1) the temporary repatriation holiday, passed in 2004, and 2) the 2008/2009 financial crisis.
The American Jobs Creation Act was passed in late 2004 and allowed for a one-time tax holiday on the
repatriation of foreign earnings to the United States, which increased repatriations in 2005 and 2006
(Dharmapala, Foley and Forbes (2009), Blouin and Krull (2009), and Faulkender and Petersen (2011)).
Figure 2 shows that firms reduced aggregate CFC cash holdings in that year, consistent with higher
repatriated cash. The financial crisis period of 2008 and 2009 also had a sizeable effect on U.S. parent
cash holdings. We show that any one of these periods is not driving our results; our results are little
changed when we drop the 2005, 2006, 2008 and 2009 cohorts in turn (columns 1-4 and 7-10 of Table 8).
We also show that our results are robust to winsorizing for outliers (columns 5 and 11). As noted above,
the cash-to-net assets variable is particularly noisy in the sample. Finally, we show the results are robust
p. 28
to excluding subsidiaries from the sample that experience a tax rate increase in any year of the cohort, not
just in the treatment year (columns 6 and 12). There are a small number of observations—16,000—with
these tax rate increases as compared to the whole sample size of over 1.2 million observations.
6. Conclusion
In this paper, we provide evidence that foreign tax cuts—and the resulting increase in repatriation
tax costs— have led to firms holding more cash overseas in countries that have cut taxes and less cash in
the U.S. parent corporation. We show that foreign tax cuts have also led to a decline in repatriated foreign
earnings from tax cuts countries to the United States, and have been a significant driver of the increase in
firm cash holdings overall. While this work highlights the importance of repatriation tax costs in firm
liquidity decisions, it also has a number of implications for policymakers concerned about the lockout of
foreign earnings and considering options for tax reform.
As Figure 2 shows, by 2012, firms in our sample alone held around $850 billion in cash overseas,
suggesting that understanding the tax incentives for holding cash overseas are important. This is
particularly true as to the extent that earnings which are indefinitely reinvested in real assets will be less
responsive to any tax reform aimed at bringing foreign earnings back to the United States than will
indefinitely reinvested earnings that are held as cash. In addition, over the past few years there have been
a number of high profile corporate inversions, in which cross-border merger and acquisition (M&A)
activity has led to the “inversion” of U.S. multinationals—i.e., multinationals being re-domiciled in a
foreign country. Recent research (e.g., Bird, Edwards, Shevlin, 2015) suggests that some of this inversion
activity has been driven by the lockout effect. Other research suggests that the large levels of locked-out
cash may also drive non-optimal acquisition of foreign assets by U.S. multinationals unwilling to pay the
repatriation tax costs (Hanlon, Lester, and Verdi, 2015) and may drive underinvestment domestically and
overinvestment abroad (Harford, Wang, and Zhang, 2016). More work is necessary to understand the
p. 29
relationship between cross-border capital expenditures, M&A, and foreign cash holdings, but to the extent
those incentives exist, it is important to understand the role tax changes play in encouraging higher levels
of foreign cash.
p. 30
References
Almeida, H., M. Campello, and M. S. Weisbach, 2004, "The Cash Flow Sensitivity of Cash," Journal of
Finance, 59(4), 1777-1804.
Bates, T. W., K. M. Kahle, and R. M. Stulz, 2009, “Why Do U.S. Firms Hold So Much More Cash than
They Used To?” Journal of Finance 64(5), 1985–2021.
Baumol, W.J., 1952, “The Transactions Demand for Cash: An Inventory Theoretic Approach.” Quarterly
Journal of Economics 66(4) 545-556.
Bertrand, M., E. Duflo, and S. Mullainathan, 2004. “How Much Should We Trust Differences-inDifferences Estimates?” The Quarterly Journal of Economics 119(1), 249-275.
Blouin, J., L. Krull, and L. Robinson, “The Location, Composition, and Investment Implications of
Permanently Reinvested Earnings.” Working Paper, (2014).
Blouin, J. and L. Krull, “Bringing It Home: A Study of the Incentives Surrounding the Repatriation of
Foreign Earnings Under the American Jobs Creation Act of 2004.” Journal of Accounting Research 47(4),
1027-1059.
Bolton, P., H. Chen, and N. Wang, 2011, "A Unified Theory of Tobin’s q, Corporate Investment,
Financing, and Risk Management." Journal of Finance 66(5), 1545-1578.
Dharmapala, D., 2014, “What Do We Know About Base Erosion and Profit Shifting? A Review of the
Empirical Literature,” Fiscal Studies 35(4), 421–448.
Dharmapala, D., C. F. Foley, and K. Forbes, 2011, "Watch What I Do, Not What I Say: The Unintended
Consequences of the Homeland Investment Act." The Journal of Finance 66 (3), 753-787.
Dittmar, A. and J. Mahrt-Smith, 2007, "Corporate Governance and the Value of Cash Holdings," Journal
of Financial Economics 83(3), 599–634.
Dittmar, A., J. Mahrt-Smith, and H. Servaes, 2003, "International Corporate Governance and Corporate
Cash Holdings," Journal of Financial and Quantitative Analysis 38(1), 111-133.
Dowd, T., P. Landefeld, and A. Moore, 2017, “Profit Shifting of U.S. Multinationals,” Journal of Public
Economics 148, 1-13.
Duchin, R., T. Gilbert, J. Harford, and C. M. Hrdlicka, 2015, “Precautionary Savings with Risky Assets:
When Cash Is Not Cash,” Journal of Finance. Forthcoming.
Faulkender, M, K. Hankins, and M. Petersen. “Understanding Precautionary Cash at Home and Abroad,”
Working Paper (2016).
Faulkender, M.W. and M. A. Petersen, 2012, “Investment and Capital Constraints: Repatriations under
the American Jobs Creation Act,” Review of Financial Studies 25(11), 3351-3388.
Foley, C.F., J. C. Hartzell, S. Titman, G. Twite, 2007, “Why Do Firms Hold So Much Cash? A Tax-based
Explanation,” Journal of Financial Economics 86(3), 579–607.
p. 31
Gao, H., Harford, J., & Li, K., 2013, “Determinants of Corporate Cash Policy: Insights from Private
Firms,” Journal of Financial Economics 109(3), pp. 623-639
Gormley, T. and D. Matsa, 2011, “Growing Out of Trouble: Corporate Responses to Liability Risk.”
Review of Financial Studies 24(8), (2011).
Greenstone, M., R. Hornbeck, and E. Moretti, 2010, “Identifying Agglomeration Spillovers: Evidence
from Million Dollar Plants.” Journal of Political Economy, 118(3), 536-598.
Grubert, H., and J. Mutti, 1991, “Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision
Making,” Review of Economics and Statistics, 73, 285–293.
Hanlon, M., R. Lester and R. Verdi, 2015, “The Effect of Repatriation Tax Costs on U.S. Multinational
Investment.” Journal of Financial Economics, 116(1), 179-196.
Harford, J., C. Wang, and K. Zhang, “Foreign Cash: Taxes, Internal Capital Markets, and Agency
Problems,” Working Paper (2016).
Hines, J. R., E.M. Rice, 1994, “Fiscal Paradise: Foreign Tax Havens and American Business.” Quarterly
Journal of Economics 109, 149–182.
Huizinga, H. and L. Laeven, 2008, “International profit shifting within multinationals: A multi-country
perspective,” Journal of Public Economics 92 (5-6), 1164-1182.
Joint Committee on Taxation. “Background, Summary and Implications of the OECD/G20 Base Erosion
and Profit Shifting Project.” JCX-193-15, (2015).
Miller, M., and D. Orr, 1966, “A Model of the Demand for Money by Firms,” The Quarterly Journal of
Economics 80(3) 413-435.
Mulligan, C., 1997, “Scale Economies, the Value of Time, and the Demand for Money: Longitudinal
Evidence from Firms,” Journal of Political Economy 105(5) 1061-1079.
Opler, T., L. Pinkowitz, R. Stulz, and R. Williamson, 1999, “The Determinants and Implications of
Corporate Cash Holdings,” Journal of Financial Economics 52(1), 3–46.
Pinkowitz, L., R. Stulz, and R. Williamson, 2016. “Do U.S. Firms Hold More Cash than Foreign Firms
Do?” Review of Financial Studies 29(8), 2194-2240.
p. 32
Figure 1: Cash Holdings of Public U.S. Multinational and Domestic Corporations; Average
Foreign Tax Rate on U.S. Controlled Foreign Corporations (CFCs)
Figure 1A presents the average foreign tax rate on U.S. CFCs, which has declined steadily from 1998 to 2012. The
average foreign tax rate on U.S. CFCs is calculated as total cash taxes paid by the CFC to its country of incorporation
divided by the sum of pre-tax earnings and profits (Source: Joint Committee on Taxation, 2015). Figure 1B presents
the level of cash holdings for public U.S. multinational and domestic firms, where we define multinational firms as
those with pretax foreign income of greater than 5 percent of total firm pretax income in a given year (Source:
Compustat). We exclude financial firms, utilities, and firms in international affairs or non-operating establishments
from the sample.
Cash Holdings of Public U.S. Firms
Average Foreign Tax Rate on U.S. CFCs
Percent
0.30
0.25
0.20
0.15
0.10
0.05
1998
2000
2002
2004
2006
2008
2010
2012
Source: Joint Committee on Taxation (2014)
Billion $
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1990
1995
Source: Compustat
(A)
All
Multinational
Domestic
2000
2005
2010
2015
(B)
Figure 2: Cash Holdings of U.S. Parent Corporations and U.S. Controlled Foreign Corporations
This figure presents the level of cash holdings for U.S. parent corporations and CFCs in our data sample (Figure
A), as well as the ratio of aggregate cash holdings to aggregate assets for parent corporations and CFCs (Figure
B).
U.S. Corporate Cash Holdings
Billion $
2000
1800
1600
1400
U.S. Parent
1200
1000
800
600
CFCs
400
200
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
U.S. Cash-to-Asset Ratios
Ratio
0.08
0.07
U.S. Parent
CFCs
0.06
0.05
0.04
0.03
(A)
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
(B)
p. 33
Figure 3: Number of Tax Cuts in the Sample Period by Country
This figure shows a map indicating the number of statutory tax cuts implemented by each country in the sample
period. Shades of orange and red represent different numbers of tax cuts while countries in gray are in the sample
but are countries that did not implement any tax cuts. Countries in white are not in the sample.
p. 34
Figure 4: Total Magnitude of Tax Cuts over the Sample Period by Country
This figure shows a map indicating the total value of statutory tax cuts implemented by country in the sample
period. Shades of red and orange represent different magnitudes of the total tax cuts implemented in a country
while countries in gray are in the sample but did not implement any tax cuts. Countries in white are not in the
sample.
p. 35
Table 1: Summary Statistics, Pre-Treatment Years by Entity Type
U.S. Parents
Treated
Control
(1)
(2)
Cash/Asset Ratio
Cash/Net Asset Ratio
Cash ($M)
Assets ($M)
Statutory Rate
Observations
Mean
Median
Std. Dev.
Mean
Median
Std. Dev.
Mean
Median
Std. Dev.
Mean
Median
Std. Dev.
Mean
Median
Std. Dev.
0.11
0.04
0.15
0.29
0.04
9.67
394.6
14.5
10,406.8
6,894.1
348.7
65,032.9
0.35
0.35
0.00
19,515
0.13
0.05
0.19
0.67
0.05
25.23
64.4
4.7
524.6
1,591.6
82.1
13,160.6
0.35
0.35
0.00
28,579
Controlled Foreign Corporations
Treated
Other
Control
(3)
(4)
(5)
0.24
0.11
1.83
41.95
0.12
3294.85
15.3
0.6
304.9
270.9
7.2
3,824.7
0.31
0.31
0.05
37,423
0.23
0.28
0.11
0.12
1.50
4.43
0.38
165.59
0.12
0.12
6432.76 57179.45
20.3
5.1
0.7
0.2
353.9
60.3
336.4
85.7
8.8
2.8
3,902.0 1,304.9
0.28
0.29
0.30
0.30
0.08
0.09
120,570 67,441
This table presents summary statistics for the pre-treatment year of each treatment cohort, for each entity type studied:
U.S. Parents (Treated and Control) and Controlled Foreign Corporations (Treated, Control and Other).
p. 36
Table 2: Effect of Foreign Tax Cuts on the Allocation of CFC and Parent
Cash Holdings
Ln(Cash/Net Assets)
(1)
Ln(Cash/Assets)
(2)
0.0301**
[0.0133]
0.0141
[0.0129]
-0.105***
[0.0352]
0.0173
[0.0669]
0.0236**
[0.0117]
0.0067
[0.00965]
-0.0813***
[0.0286]
0.0188
[0.0520]
Year FE
Cohort FE
Firm FE
Country FE
X
X
X
X
X
X
X
X
Observations
R-Squared
1,227,307
0.32
1,252,584
0.33
TreatedCFC×Post
OtherCFC×Post
US_Parent×Post
OtherCFC
This table presents regression results from empirical specification (1), the entity-level regressions. Column 1
presents results in which the dependent variable is the natural logarithm of the ratio of cash to total assets minus
cash. Column 2 presents results in which the dependent variable is the natrual logarithm of the ratio of cash to
total assets. TreatedCFC×Post is a dummy variable that equals one if an observation is for a CFC country in
which a statutory rate decline has been introduced by year t. OtherCFC×Post is a dummy variable that equals
one if an observation is for a CFC country that belongs to the same firm as a treated CFC country and the
TreatedCFC×Post dummy variable equals one. US_Parent×Post is a dummy variable equal to one if an
observation is for the U.S. parent of a firm with a treated CFC and the TreatedCFC×Post dummy variable
equals one. Standard errors are clustered at the country level. *, **, and *** indicate significance at the 1
percent, 5 percent and 10 percent level respectively.
p. 37
Table 3: Dynamics of the Effect of Foreign Tax Cuts on U.S. Parent and CFC
Cash Holdings Over Time
TreatedCFC×Post(t-2)
TreatedCFC×Post (t-1)
TreatedCFC×Post (t)
TreatedCFC×Post (t+1)
TreatedCFC×Post (t+2)
OtherCFC×Post (t-2)
OtherCFC×Post (t-1)
OtherCFC×Post (t)
OtherCFC×Post (t+1)
OtherCFC×Post (t+2)
US_Parent×Post (t-2)
US_Parent×Post (t-1)
US_Parent×Post (t)
US_Parent×Post (t+1)
US_Parent×Post (t+2)
Year, Cohort, Firm, Country FEs
Observations
R-Squared
Ln(Cash/Net Assets)
(1)
Ln(Cash/Assets)
(2)
0.0326
[0.0202]
0.0322
[0.0202]
0.0422*
[0.0217]
0.0509**
[0.0239]
0.0442*
[0.0256]
0.0235
0.0307*
[0.0179]
0.0321*
[0.0176]
0.0386**
[0.0187]
0.0384*
[0.0199]
0.0328
[0.0215]
0.0249
[0.0236]
0.0226
[0.0235]
0.0284
[0.0255]
0.0364
[0.0296]
0.0312
[0.0274]
-0.117***
[0.039 ]
[0.0211]
0.0197
[0.0205]
0.0212
[0.0215]
0.0224
[0.0236]
0.0215
[0.0222]
-0.103***
[0.033 ]
-0.127***
[0.0404]
-0.135***
[0.0406]
-0.143***
[0.0442]
-0.142***
[0.0508]
-0.0102
[0.0597]
-0.108***
[0.0341]
-0.113***
[0.0338]
-0.113***
[0.0360]
-0.109***
[0.0408]
-0.00492
[0.0458]
X
1,227,307
0.32
X
1,252,584
0.325
This table presents regression results from empirical specification (1), the entity-level regressions, on a year-by-year
basis for each year of the treatment cohort. Year t designates the year of treatment, i.e., the corporate tax rate cut. Column
1 presents results in which the dependent variable is the natural logarithm of the ratio of cash to total assets minus cash.
Column 2 presents results in which the dependent variable is the natrual logarithm of the ratio of cash to total assets.
TreatedCFC×Post is a dummy variable that equals one if an observation is for a CFC country in which a statutory rate
decline has been introduced by year t. OtherCFC×Post is a dummy variable that equals one if an observation is for a
CFC country that belongs to the same firm as a treated CFC country and the TreatedCFC×Post dummy variable equals
one. US_Parent×Post is a dummy variable equal to one if an observation is for the U.S. parent of a firm with a treated
CFC and the TreatedCFC×Post dummy variable equals one. Standard errors are clustered at the country level and are
reported in brackets below the coefficient estimates. *, **, and *** indicate significance at the 1 percent, 5 percent and
10 percent level respectively.
p. 38
Table 4: Estimates of the Semi-elasticity of Foreign Tax Rates on
U.S. Parent and CFC Cash Holdings
Ln(Cash/Net Assets) Ln(Cash/Net Assets)
(1)
(2)
TreatedCFC×Post×τstat
-1.895**
[0.856]
TreatedCFC×Post×τcomposite
OtherCFC×Post×τcomposite
US_Parent×Post×τcomposite
TreatedCFC×Post
OtherCFC×Post
US_Parent×Post
τstat
τcomposite
TreatedCFC
OtherCFC
Observations
R-squared
Year FE
Cohort FE
Firm FE
Ln(Cash/Assets)
(3)
Ln(Cash/Assets)
(4)
-1.717**
[0.764]
0.0268
[0.253]
-1.136**
[0.517]
-1.380**
[0.639]
0.0256
[0.257]
-1.251**
[0.541]
0.0499
[0.220]
-0.868*
[0.445]
-1.278**
[0.578]
0.0451
[0.224]
-0.977**
[0.460]
0.511**
[0.230]
0.0534***
[0.0160]
-0.0348
[0.0305]
-0.0588
[0.0424]
0.0396**
[0.0175]
-0.04
[0.0295]
0.464**
[0.205]
0.0404***
[0.0128]
-0.0325
[0.0266]
-0.0528
[0.0377]
0.0284**
[0.0140]
-0.0364
[0.0259]
-0.227**
[0.105]
0.0798
[0.477]
0.0063
[0.147]
0.0579
[0.0703]
-0.093
[0.508]
0.00622
[0.147]
0.0614
[0.0709]
-0.192**
[0.0921]
0.263
[0.424]
0.00878
[0.129]
0.0565
[0.0552]
0.121
[0.453]
0.00873
[0.128]
0.0597
[0.0558]
1,227,307
0.282
1,252,584
0.28
1,227,307
0.28
1,227,307
0.28
X
X
X
X
X
X
X
X
X
X
X
X
This table presents regression results from empirical specification (2), the entity-level regressions with the continuous interaction of the tax rate, which
recover estimates of the semi-elasticity of cash holdings with respect to changes in the tax rate. Columns 1 and 2 presents results in which the dependent
variable is the natural logarithm of the ratio of cash to total assets minus cash. Columns 3 and 4 presents results in which the dependent variable is the
natrual logarithm of the ratio of cash to total assets. τstat is the highest marginal statutory corporate tax rate in a treated country as of the year of treatment.
τcomposite is the entity-level composite tax rate in the year of treatment as described in section 4. TreatedCFC×Post is a dummy variable that equals one if
an observation is for a CFC country in which a statutory rate decline has been introduced by year t. OtherCFC×Post is a dummy variable that equals one if
an observation is for a CFC country that belongs to the same firm as a treated CFC country and the TreatedCFC×Post dummy variable equals one.
US_Parent×Post is a dummy variable equal to one if an observation is for the U.S. parent of a firm with a treated CFC and the TreatedCFC×Post dummy
variable equals one. Standard errors are clustered at the country level. *, **, and *** indicate significance at the 1 percent, 5 percent and 10 percent level
respectively.
p. 39
Table 5: Estimates of the Effect of Foreign Tax Rate Cuts on
the Probabiliy of Repatriating from U.S. CFCs
Any Repatriation
(1)
TreatedCFC×Post×τstat
0.104*
[0.0585]
TreatedCFC×Post×τcomposite
OtherCFC×Post×τcomposite
TreatedCFC×Post
OtherCFC×Post
τstat
τcomposite
TreatedCFC
OtherCFC
Observations
R-squared
Year FE
Cohort FE
Firm FE
Any Repatriation
(2)
0.0290*
[0.0170]
0.130**
[0.0592]
0.0410***
[0.0147]
-0.0267*
[0.0156]
-0.00577***
[0.00132]
0.0102***
[0.00350]
-0.00201
[0.00138]
0.0693***
[0.00863]
0.106**
[0.0470]
0.00558
[0.00781]
0.000924
[0.00264]
0.147***
[0.0453]
0.00608
[0.00780]
0.00212
[0.00256]
1,093,811
0.200
1,093,811
0.199
X
X
X
X
X
X
This table presents regression results from empirical specification (2), the entity-level regressions with the
continuous interaction of the tax rate, which recover estimates of the change in the probability of repatriating
earnings with respect to changes in the tax rate. The dependent variable in the regressions is a dummy
variable equal to one if a CFC repatriated earnings in a given year. τstat is the highest marginal statutory
corporate tax rate in a treated country as of the year of treatment. τcomposite is the entity-level composite tax
rate in the year of treatment as described in section 4. TreatedCFC×Post is a dummy variable that equals one
if an observation is for a CFC country in which a statutory rate decline has been introduced by year t.
OtherCFC×Post is a dummy variable that equals one if an observation is for a CFC country that belongs to
the same firm as a treated CFC country and the TreatedCFC×Post dummy variable equals one. Standard
errors are clustered at the country level. *, **, and *** indicate significance at the 1 percent, 5 percent and 10
percent level respectively.
p. 40
Table 6: Estimates of the Semi-elasticity of Foreign Tax Rates on
Tangible Assets of U.S. CFCs
Ln(PPE/Net Assets) Ln(PPE/Net Assets)
(1)
(2)
TreatedCFC×Post×τstat
-0.426
[0.728]
US_Parent×Post×τcomposite
TreatedCFC×Post
OtherCFC×Post
US_Parent×Post
τstat
τcomposite
TreatedCFC
OtherCFC
Observations
R-squared
Year FE
Cohort FE
Firm FE
Ln(PPE/Assets)
(4)
-0.196
[0.688]
TreatedCFC×Post×τcomposite
OtherCFC×Post×τcomposite
Ln(PPE/Assets)
(3)
0.514***
[0.193]
-1.200***
[0.395]
-0.406
[0.512]
0.496**
[0.194]
-1.234***
[0.401]
0.515***
[0.187]
-0.989***
[0.363]
-0.244
[0.486]
0.495***
[0.184]
-1.011***
[0.365]
0.0921
[0.207]
-0.0193*
[0.0115]
0.0864***
[0.0301]
-0.0203
[0.0253]
-0.0113
[0.0122]
0.0991***
[0.0323]
0.0278
[0.196]
-0.0320**
[0.0125]
0.0899***
[0.0321]
-0.0135
[0.0232]
-0.021
[0.0141]
0.105***
[0.0343]
0.210***
[0.0559]
0.418
[0.398]
0.0693
[0.0911]
-0.128***
[0.0481]
0.790*
[0.405]
0.0726
[0.0848]
-0.159***
[0.0547]
0.269***
[0.0666]
0.566
[0.402]
0.0717
[0.0848]
-0.161***
[0.0542]
0.790*
[0.405]
0.0726
[0.0848]
-0.159***
[0.0547]
1,112,184
0.306
1,112,184
0.306
1,117,500
0.32
1,117,500
0.32
X
X
X
X
X
X
X
X
X
X
X
X
This table presents regression results from empirical specification (2), the entity-level regressions with the continuous interaction of the tax
rate, which recover estimates of the semi-elasticity of investment with respect to changes in the tax rate. Columns 1 and 2 present results for
the natural logarithm of tangible assets (designated in the table as property, plant and equipment or PPE; we include buildings and other
depreciable assets, depletable assets and land) as a share of total assets. Columns 3 and 3 present results for the natural logarithm of PPE as
a share of net assets defined as total assets minus cash. τstat is the highest marginal statutory corporate tax rate in a treated country as of the
year of treatment. τcomposite is the entity-level composite tax rate in the year of treatment as described in section 4. TreatedCFC×Post is a
dummy variable that equals one if an observation is for a CFC country in which a statutory rate decline has been introduced by year t.
OtherCFC×Post is a dummy variable that equals one if an observation is for a CFC country that belongs to the same firm as a treated CFC
country and the TreatedCFC×Post dummy variable equals one. US_Parent×Post is a dummy variable equal to one if an observation is for
the U.S. parent of a firm with a treated CFC and the TreatedCFC×Post dummy variable equals one. Standard errors are clustered at the
country level. *, **, and *** indicate significance at the 1 percent, 5 percent and 10 percent level respectively.
p. 41
Table 7: Effect of Foreign Tax Cuts on Overall Firm-Level Cash Holdings
Ln(Cash/Net Assets) Ln(Cash/Net Assets)
(1)
(2)
TreatedFirm×Post
Ln(Cash/Assets) Ln(Cash/Assets)
(3)
(4)
0.0231**
[0.0115]
-0.0927***
[0.0222]
0.0153
[0.0108]
-0.101***
[0.0202]
0.0596***
[0.0106]
0.0709***
[0.0207]
0.0528***
[0.0101]
0.0576***
[0.0192]
Year FE
Cohort FE
Industry FE
X
X
X
X
X
X
X
X
X
X
Observations
R-Squared
232,658
0.002
232,658
0.134
232,705
0.003
232,705
0.115
TreatedFirm
This table presents regression results from empirical specification (3), the firm-level regressions. Columns 1 and 2 present
results in which the dependent variable is the natural logarithm of the ratio of cash to total assets minus cash. Columns 3 and 4
present results in which the dependent variable is the natrual logarithm of the ratio of cash to total assets. TreatedFirm×Post
is a dummy variable equal to one if a CFC of a firm has been treated by year t in the cohort period. TreatedFirm is a dummy
variable equal to one if a CFC of a firm has been treated in the cohort period. Standard errors are clustered at the firm level. *,
**, and *** indicate significance at the 1 percent, 5 percent and 10 percent level respectively.
p. 42
p. 43
1, 090, 603
0.33
X
0.0231*
[0.0117]
0.00736
[0.0121]
-0.0823***
[0.0231]
X
1,079,072
0.33
1, 088, 595
0.33
0.0243*
[0.0143]
0.0093
[0.0133]
-0.0878***
[0.0241]
X
0.0254**
[0.0123]
0.0111
[0.0123]
-0.0819***
[0.0227]
1,088,631
0.33
X
0.0134
[0.00905]
0.00307
[0.0117]
-0.0914***
[0.0189]
0.0231**
[0.0115]
0.00881
[0.0129]
-0.0908***
[0.0221]
1, 252, 584
0.34
1, 236, 983
0.33
X
0.0224*
[0.0118]
0.00718
[0.0126]
-0.0851***
[0.0222]
Winsorize
1%
(5)
X
Exclude Tax
Increase
Countries in
Any Year
(6)
X
1, 066, 564
0.32
1, 068, 549
0.32
0.0318**
[0.0139]
0.0195
[0.0166]
-0.106***
[0.0281]
X
0.0286**
[0.0131]
0.0154
[0.0163]
-0.108***
[0.0281]
1,057,417
0.32
X
0.0285*
[0.0157]
0.0163
[0.0171]
-0.110***
[0.0287]
1,066,755
0.32
X
0.0197*
[0.0107]
0.00868
[0.0155]
-0.114***
[0.0223]
Exclude
Exclude
Exclude
Exclude
2005 Cohort 2006 Cohort 2008 Cohort 2009 Cohort
(7)
(8)
(9)
(10)
Ln(Cash/Net Assets)
X
0.0288**
[0.0135]
0.0144
[0.0169]
-0.108***
[0.0269]
1,227,307 1, 212, 070
0.34
0.32
X
0.0298**
[0.0133]
0.0159
[0.0174]
-0.117***
[0.0276]
Winsorize
1%
(11)
Exclude Tax
Increase
Countries in
Any Year
(12)
This table presents regression results from empirical specification (1), the entity-level regressions that show the average treatment effect of a foreign tax cut on the cash holdings of "Treated" Controlled Foreign Corporations (CFCs in
countries that experience a tax cut), "Other" CFCs (CFCs in countries that do not experience a tax cut but are part of a firm with at least one "Treated" CFC), and Treated U.S. Parents (Parents with a CFC in a country that experiences a tax
cut). Columns 1-4 show results for the effect of foreign tax cuts on entity-level cash-to-asset ratios and columns 5-8 show results for cash-to-net asset ratios. Columns 1 and 7 show results for a sample that excludes the 2005 tax cut cohort.
Columns 2 and 8, 3 and 9, and 4 and 10 show analagous results for excluding the 2006, 2008, and 2009 data cohorts, respectively. Columns 5 and 11 show results for a sample winsorized to the 1 percent level. Columns 6 and 12 show
results for a sample that excludes any entity with a tax rate increase in any year of the cohort. Standard errors are clustered at the country level. *, **, and *** indicate significance at the 1 percent, 5 percent and 10 percent level
respectively.
Observations
R-Squared
Year, Cohort, Firm
Country, Industry FE
Parent×Post
OtherCFC×Post
TreatedCFC×Post
Ln(Cash/Assets)
Exclude
Exclude
Exclude
Exclude
2005 Cohort 2006 Cohort 2008 Cohort 2009 Cohort
(1)
(2)
(3)
(4)
Table 8: Robustness Results
Appendix Table 1: Statutory Corporate Tax Rates
Country
Albania
Angola
Argentina
Armenia
Aruba
Australia
Austria
Bahamas, The
Bahrain
Bangladesh
Barbados
Belarus
Belgium
Bermuda
Bolivia
Bosnia and Herzegovina
Botswana
Brazil
Bulgaria
Cambodia
Canada
Cayman Islands
Chile
China
Colombia
Costa Rica
Croatia
Cyprus
Czech Republic
Denmark
Dominican Republic
Ecuador
Egypt, Arab Rep.
El Salvador
Estonia
Fiji
Finland
France
2003
0.35
0.30
0.34
0.00
0.00
0.30
0.34
0.00
0.25
0.30
0.34
0.37
0.00
0.17
0.33
0.35
0.36
0.20
0.10
0.31
0.30
0.25
0.36
0.32
0.29
0.34
2004
0.35
0.30
0.34
0.00
0.00
0.30
0.34
0.00
0.25
0.30
0.34
0.36
0.00
0.17
0.33
0.35
0.30
0.20
0.10
0.28
0.30
0.25
0.36
0.31
0.29
0.34
2005
0.23
0.35
0.35
0.30
0.25
0.00
0.00
0.30
0.30
0.34
0.00
0.25
0.30
0.25
0.34
0.15
0.36
0.00
0.17
0.33
0.35
0.30
0.20
0.10
0.26
0.28
0.25
0.25
0.31
0.26
0.34
2006
0.20
0.35
0.35
0.20
0.35
0.30
0.25
0.00
0.00
0.30
0.25
0.24
0.34
0.00
0.25
0.10
0.25
0.34
0.15
0.36
0.00
0.17
0.33
0.35
0.30
0.20
0.10
0.24
0.28
0.30
0.25
0.20
0.23
0.31
0.26
0.33
2007
0.20
0.35
0.35
0.20
0.28
0.30
0.25
0.00
0.00
0.30
0.25
0.24
0.34
0.00
0.25
0.10
0.25
0.34
0.10
0.36
0.00
0.17
0.33
0.34
0.30
0.20
0.10
0.24
0.25
0.25
0.25
0.20
0.22
0.31
0.26
0.33
2008
0.10
0.35
0.35
0.20
0.28
0.30
0.25
0.00
0.00
0.30
0.25
0.24
0.34
0.00
0.25
0.10
0.25
0.34
0.10
0.34
0.00
0.17
0.25
0.33
0.30
0.20
0.10
0.21
0.25
0.25
0.25
0.20
0.21
0.31
0.26
0.33
2009
0.10
0.35
0.35
0.20
0.28
0.30
0.25
0.00
0.00
0.28
0.25
0.24
0.34
0.00
0.25
0.10
0.25
0.34
0.10
0.33
0.00
0.17
0.25
0.33
0.30
0.20
0.10
0.20
0.25
0.25
0.25
0.20
0.21
0.29
0.26
0.33
2010
0.10
0.35
0.35
0.20
0.28
0.30
0.25
0.00
0.00
0.28
0.25
0.24
0.34
0.00
0.25
0.10
0.25
0.34
0.10
0.20
0.31
0.00
0.17
0.25
0.33
0.30
0.20
0.10
0.19
0.25
0.25
0.25
0.20
0.21
0.28
0.26
0.33
2011
0.10
0.35
0.35
0.20
0.28
0.30
0.25
0.00
0.00
0.28
0.25
0.24
0.34
0.00
0.25
0.10
0.22
0.34
0.10
0.20
0.28
0.00
0.20
0.25
0.33
0.30
0.20
0.10
0.19
0.25
0.29
0.24
0.20
0.21
0.28
0.26
0.33
2012
0.10
0.35
0.35
0.20
0.28
0.30
0.25
0.00
0.00
0.28
0.25
0.18
0.34
0.00
0.25
0.10
0.22
0.34
0.10
0.20
0.26
0.00
0.19
0.25
0.33
0.30
0.20
0.10
0.19
0.25
0.29
0.23
0.25
0.30
0.21
0.28
0.25
0.33
This table presents the highest statutory marginal corporate tax rate rounded to two decimal places by year, for each country in the sample in which a
U.S. parent has a Controlled Foreign Corporation (CFC) and for which data are available. Source: Dowd, Landefeld, and Moore (2017).
p. 44
Appendix Table 1 (Continued): Statutory Corporate Tax Rates
Country
Germany
Gibraltar
Greece
Guatemala
Guernsey
Honduras
Hong Kong SAR, China
Hungary
Iceland
India
Indonesia
Ireland
Isle of Man
Israel
Italy
Jamaica
Japan
Jersey
Kazakhstan
Kenya
Korea, Rep.
Kuwait
Latvia
Liechtenstein
Lithuania
Luxembourg
Macao SAR, China
Macedonia, FYR
Malawi
Malaysia
Malta
Mauritius
Mexico
Mozambique
Namibia
Netherlands
New Zealand
Nigeria
2003
0.40
0.35
0.25
0.16
0.18
0.18
0.37
0.30
0.13
0.15
0.36
0.38
0.42
0.30
0.30
0.15
0.28
0.34
0.34
0.33
-
2004
0.40
0.35
0.25
0.17
0.16
0.18
0.36
0.30
0.13
0.15
0.36
0.37
0.42
0.30
0.30
0.15
0.28
0.33
0.34
0.33
-
2005
0.38
0.32
0.30
0.17
0.16
0.18
0.37
0.30
0.13
0.15
0.34
0.37
0.33
0.41
0.30
0.28
0.15
0.15
0.30
0.12
0.28
0.35
0.25
0.30
0.32
0.31
0.33
-
2006
0.38
0.35
0.29
0.31
0.00
0.30
0.17
0.16
0.18
0.34
0.30
0.13
0.00
0.31
0.37
0.33
0.41
0.00
0.30
0.28
0.55
0.15
0.15
0.30
0.12
0.15
0.28
0.35
0.25
0.29
0.32
0.30
0.33
0.30
2007
0.38
0.35
0.25
0.31
0.00
0.30
0.17
0.16
0.18
0.34
0.30
0.13
0.00
0.29
0.37
0.33
0.41
0.00
0.30
0.28
0.55
0.15
0.15
0.30
0.12
0.12
0.27
0.35
0.22
0.28
0.32
0.25
0.33
0.30
2008
0.30
0.33
0.25
0.31
0.00
0.30
0.17
0.16
0.15
0.34
0.30
0.13
0.00
0.27
0.31
0.33
0.41
0.00
0.30
0.28
0.55
0.15
0.15
0.30
0.12
0.10
0.26
0.35
0.15
0.28
0.32
0.25
0.30
0.30
2009
0.29
0.27
0.25
0.31
0.00
0.30
0.17
0.16
0.15
0.34
0.28
0.13
0.00
0.26
0.31
0.33
0.41
0.00
0.20
0.24
0.15
0.15
0.20
0.29
0.12
0.10
0.25
0.35
0.15
0.28
0.32
0.25
0.30
0.30
2010
0.29
0.22
0.24
0.31
0.00
0.25
0.17
0.19
0.18
0.34
0.25
0.13
0.00
0.25
0.31
0.33
0.41
0.00
0.20
0.24
0.15
0.15
0.15
0.29
0.12
0.10
0.25
0.35
0.15
0.30
0.32
0.25
0.30
0.30
2011
0.29
0.10
0.20
0.31
0.00
0.35
0.17
0.19
0.20
0.32
0.25
0.13
0.00
0.24
0.31
0.33
0.41
0.00
0.20
0.22
0.15
0.15
0.13
0.15
0.29
0.12
0.10
0.25
0.35
0.15
0.30
0.32
0.34
0.25
0.28
0.30
2012
0.29
0.10
0.20
0.31
0.00
0.35
0.17
0.19
0.20
0.32
0.25
0.13
0.00
0.25
0.31
0.33
0.38
0.00
0.20
0.30
0.24
0.15
0.15
0.13
0.15
0.29
0.12
0.10
0.30
0.25
0.35
0.15
0.30
0.32
0.34
0.25
0.28
0.30
This table presents the highest statutory marginal corporate tax rate rounded to two decimal places by year, for each country in the sample in which
a U.S. parent has a Controlled Foreign Corporation (CFC) and for which data are available. Source: Dowd, Landefeld, and Moore (2017).
p. 45
Appendix Table 1 (Continued): Statutory Corporate Tax Rates
Country
Norway
Oman
Pakistan
Panama
Papua New Guinea
Paraguay
Peru
Philippines
Poland
Portugal
Qatar
Romania
Russian Federation
Saudi Arabia
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Taiwan
Tanzania
Thailand
Trinidad and Tobago
Tunisia
Turkey
Uganda
Ukraine
United Kingdom
United States
Uruguay
Vanuatu
Venezuela, RB
Vietnam
Zambia
Zimbabwe
2003
0.28
0.35
0.30
0.30
0.30
0.27
0.32
0.27
0.33
0.25
0.24
0.22
0.25
0.38
0.35
0.35
0.28
0.24
0.25
0.30
0.33
0.30
0.30
0.35
0.35
0.34
0.25
-
2004
0.28
0.35
0.30
0.30
0.30
0.30
0.32
0.19
0.28
0.25
0.24
0.22
0.19
0.38
0.35
0.35
0.28
0.24
0.25
0.30
0.33
0.25
0.30
0.35
0.35
0.34
0.25
-
2005
0.28
0.12
0.35
0.30
0.30
0.30
0.32
0.19
0.28
0.16
0.24
0.20
0.19
0.25
0.38
0.35
0.32
0.28
0.21
0.25
0.30
0.35
0.30
0.25
0.30
0.35
0.30
0.34
0.28
0.35
-
2006
0.28
0.12
0.35
0.30
0.30
0.10
0.30
0.35
0.19
0.28
0.35
0.16
0.24
0.20
0.20
0.19
0.25
0.37
0.35
0.32
0.28
0.21
0.25
0.30
0.35
0.20
0.30
0.25
0.30
0.35
0.30
0.00
0.34
0.28
0.35
0.31
2007
0.28
0.12
0.35
0.30
0.30
0.10
0.30
0.35
0.19
0.25
0.35
0.16
0.24
0.20
0.20
0.19
0.23
0.37
0.32
0.35
0.28
0.21
0.25
0.30
0.30
0.20
0.30
0.25
0.30
0.35
0.30
0.00
0.34
0.28
0.35
0.31
2008
0.28
0.12
0.35
0.30
0.30
0.10
0.30
0.35
0.19
0.25
0.35
0.16
0.24
0.20
0.18
0.19
0.22
0.35
0.30
0.35
0.28
0.19
0.25
0.30
0.30
0.20
0.30
0.25
0.30
0.35
0.25
0.00
0.34
0.28
0.35
0.31
2009
0.28
0.12
0.35
0.30
0.30
0.10
0.30
0.30
0.19
0.25
0.35
0.16
0.20
0.20
0.18
0.19
0.21
0.35
0.30
0.35
0.26
0.19
0.25
0.30
0.30
0.30
0.20
0.30
0.25
0.28
0.35
0.25
0.00
0.34
0.25
0.35
0.31
2010
0.28
0.12
0.35
0.28
0.30
0.10
0.30
0.30
0.19
0.25
0.10
0.16
0.20
0.20
0.17
0.19
0.20
0.35
0.30
0.35
0.26
0.19
0.17
0.30
0.30
0.30
0.20
0.30
0.25
0.28
0.35
0.25
0.00
0.34
0.25
0.35
0.26
2011
0.28
0.12
0.35
0.25
0.30
0.10
0.30
0.30
0.19
0.25
0.10
0.16
0.20
0.20
0.17
0.19
0.20
0.35
0.30
0.28
0.26
0.18
0.17
0.30
0.30
0.30
0.20
0.30
0.25
0.26
0.35
0.25
0.00
0.34
0.25
0.35
0.26
2012
0.28
0.12
0.35
0.25
0.30
0.10
0.30
0.30
0.19
0.25
0.10
0.16
0.20
0.20
0.17
0.19
0.18
0.35
0.30
0.28
0.26
0.18
0.17
0.30
0.23
0.25
0.30
0.20
0.30
0.21
0.24
0.35
0.25
0.00
0.34
0.25
0.35
0.26
This table presents the highest marginal corporate tax rate rounded to two decimal places by year, by country, for each country in the sample in
which a U.S. parent has a Controlled Foreign Corporation (CFC) and for which data are available. Source: Dowd, Landefeld, and Moore (2017).
p. 46