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Trade Credit and Taxes

Mihir A. Desai, C. Fritz Foley and James Hines ()
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Mihir A. Desai: Harvard University and NBER
C. Fritz Foley: Harvard University and NBER

No 631, Working Papers from Research Seminar in International Economics, University of Michigan

Abstract: This paper analyzes the extent to which firms use trade credit to reallocate capital in response to tax incentives. Tax-induced differences in pretax returns encourage the use of trade credit to reallocate capital from firms facing low tax rates to those facing high tax rates. Evidence from the worldwide operations of U.S. multinational firms indicates that affiliates in low-tax jurisdictions use trade credit to lend, whereas those in high-tax jurisdictions use trade credit to borrow: ten percent lower local tax rates are associated with net trade credit positions that are 1.4 percent higher as a fraction of sales. The use of trade credit to get capital out of lowtax, low-return environments is also illustrated by reactions of U.S. firms to the temporary repatriation tax holiday in 2005, when affiliates with positive net trade credit positions were significantly more likely than others to repatriate dividends to parent companies in the United States.

Keywords: trade credit; taxes; multinational firms (search for similar items in EconPapers)
JEL-codes: F23 G31 G32 H25 (search for similar items in EconPapers)
Date: 2012-05
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http://www.fordschool.umich.edu/rsie/workingpapers/Papers626-650/r631.pdf

Related works:
Journal Article: Trade Credit and Taxes (2016) Downloads
Working Paper: Trade Credit and Taxes (2012) Downloads
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