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"Basket" Cases: International Joint Ventures After the Tax Reform Act of 1986

Mihir A. Desai and James Hines ()

No 5755, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines the impact of the Tax Reform Act of 1986 (TRA) on international joint ventures by American firms. The evidence suggests that the TRA had a significant effect on the organizational form of U.S. business activity abroad. The TRA mandates the use of separate credits on income received from foreign corporations owned 50% or less by Americans. This limitation on worldwide averaging greatly reduces the attractiveness of joint ventures to American investors, particularly ventures in low-tax foreign countries. Aggregate data indicate that U.S. participation in international joint ventures fell sharply after 1986. The decline in U.S. joint venture activity is most pronounced in low-tax countries, which is consistent with the incentives created by the TRA. Moreover, joint ventures in low-tax countries use more debt and pay greater royalties to their U.S. parents after 1986, which reflects their incentives to economize on dividend payments

JEL-codes: H87 F23 (search for similar items in EconPapers)
Date: 1996-09
Note: PE
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Published as Journal of Public Economics, Vol. 71, no. 3 (March 1999): 379-402.

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