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The Effect of Moving to a Territorial Tax System on Profit Repatriation: Evidence from Japan

Makoto Hasegawa () and Kozo Kiyota

No 2015-008, Keio-IES Discussion Paper Series from Institute for Economics Studies, Keio University

Abstract: In an increasingly globalized world, the design of international tax systems in terms of taxation on foreign corporate incomes has received much attention from policymakers and economists alike. In the past, Japan's worldwide tax system taxed foreign source income upon repatriation. However, to stimulate dividend repatriations from Japanese-owned foreign affiliates, Japan introduced a foreign dividend exemption in 2009 that exempts dividends remitted by Japanese-owned foreign affiliates to their parent firms from home taxation. This paper examines the effect of this dividend exemption on profit repatriations by Japanese multinationals. We find that the response of Japanese-owned affiliates to the dividend exemption was heterogeneous. More particularly, foreign affiliates with a large stock of retained earnings were generally more responsive to the reform and significantly increased dividend payments to their parent firms in response to the enactment of the dividend exemption system. Dividend payments by these affiliates also became more sensitive to withholding tax rates on dividends levied by host countries under the new exemption system.

Keywords: Local International taxation; Worldwide tax system; Territorial tax system; Profit repatriation; Dividend exemption (search for similar items in EconPapers)
JEL-codes: F23 H25 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2015-07-15
New Economics Papers: this item is included in nep-acc and nep-pbe
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Related works:
Journal Article: The effect of moving to a territorial tax system on profit repatriation: Evidence from Japan (2017) Downloads
Working Paper: The Effect of Moving to a Territorial Tax System on Profit Repatriation: Evidence from Japan (2015) Downloads
Working Paper: The Effect of Moving to a Territorial Tax System on Profit Repatriations: Evidence from Japan (2013) Downloads
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