Repatriation Taxes, Internal Agency Conflicts, and Subsidiary-Level Investment Efficiency

Abstract

Using a global sample of multinational corporations (MNCs) and their foreign subsidiaries, we find that repatriation taxes impair subsidiary-level investment efficiency. Consistent with internal agency conflicts between the central management of the MNC and the manager of the foreign subsidiary being the driver, we show that this effect is concentrated in subsidiaries with high information asymmetry and in subsidiaries that are weakly monitored. Quasi-natural experiments in the UK and Japan establish a causal relationship for our findings and suggest that a repeal of repatriation taxes increases subsidiary-level investment efficiency while reducing the level of investment. Our paper provides timely empirical evidence to inform expectations for the effects of a recent change to the U.S. international tax law that eliminated repatriation taxes from most of the future foreign earnings of U.S. MNCs.

Tax Avoidance and Vertical Interlocks within Multinational Enterprises

“…First, we address the call for further research on the relation between agency issues and taxation (Hanlon and Heitzman, 2010) and underline the relevance of a new dimension, the dimension of internal agency conflicts within MNEs. In this respect, our research can be linked to the recent papers by Amberger et al (2021) and Klassen and Valle Ruiz (2022), which follow a similar line of thinking.…”

“…5 Only very few recent studies consider internal agency conflicts within MNEs with regard to taxation. Using a two-tier agency model described by Scharfstein and Stein (2000), 6 Amberger et al (2021) analyze to what extent non-repatriated earnings are invested inefficiently due to an internal agency conflict between headquarter and subsidiary managers. They find that repatriation taxes exacerbate the agency conflict between head office and subsidiary management.…”

Innovative firms’ cash holdings, tax policies, and institutional environments

“…In contrast, under a territorial tax system, all or part of the foreign-source dividend income is exempted from domestic taxation if certain conditions are satisfied. 11 However, countries with a territorial tax system often impose a tax on foreign earnings to prevent tax-base erosion (Amberger, Markle, & Samuel, 2021). 12 These taxes provide multinationals with an incentive to defer repatriation and retain foreign earnings, which in turn results in high cash holdings.…”

“…Following the approach of Foley et al (2007) and Amberger et al (2021), repatriation tax is calculated as the average difference between the statutory corporate income tax rates in the parent and subsidiary countries in year t (negative values of RepatTax are set to 0). The corporate income tax rate data are available at https://stats.oecd.org/Index.aspx?DataSetCode=CTS_CIT#.…”

The Effect of the Subsidiary on the Ultimate Controller’s Private Benefits: Enlightenment to the Risk Management Challenges for Sustainability of the Corporate

“…Moreover, even one of the motivations of many controllers to hold shares is to obtain private benefits of control currently [1]. The pyramid ownership structure realizes the separation of control and ownership of the ultimate controller of a public company [2][3][4][5], which leads to agency conflicts between large and small shareholders [6,7], resulting in the ultimate controller's behavior of expropriation [8][9][10], in turn, damaging the value of the company and the interests of minority shareholders. Despite the strong interest in ultimate controllers of public firms; we know little about the internal mechanism of the ultimate controller's behavior of expropriation.…”