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The Effect of Foreign Dividend Exemption on Profit Repatriation through Dividends, Royalties, and Interest: Evidence from Japan

Makoto Hasegawa () and Michi Kakebayashi

Discussion papers from Graduate School of Economics , Kyoto University

Abstract: Multinational corporations repatriate foreign profits through dividends, royalties, and interest paid by foreign affiliates to their parent firms. International tax rules influence the decisions on profit repatriation, including the choice of repatriation method for these payments. In 2009, Japan introduced a foreign dividend exemption system(or so-called territorial tax system) that exempted dividends received by Japanese firms from their foreign affiliates from home-country taxation. This paper examines the effects of this tax reform on profit repatriation through dividends, royalties, and interest. Under the foreign dividend exemption system, Japanese multinationals can save the tax costs of profit repatriation by repatriating dividends from foreign affiliates located in countries that impose low withholding tax rates on dividends. We find that, in response to the 2009 tax reform, Japanese-owned foreign affiliates subject to lower withholding tax rates on dividends increased dividend payouts, reduced royalties, and did not change interest payments to their parent companies. Overall, these affiliates increased total payments to their parents. These results suggest that affiliates partly switched their means of profit repatriation from royalties to dividends with the enactment of the foreign dividend exemption system.

Keywords: International taxation; Multinational corporations; Profit repatriation; Foreign dividend exemption; Worldwide tax system; Territorial tax system (search for similar items in EconPapers)
JEL-codes: F23 H25 H26 (search for similar items in EconPapers)
Pages: 39
Date: 2020-11
New Economics Papers: this item is included in nep-pbe
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