Foreign Cash Holdings and The Investment and Payout Response of U.S. Multinational Corporations to Provisions of The Tax Cuts and Jobs Act Of 2017

The Tax Cuts and Jobs Act of 2017 (TCJA) provides a novel context in which to examine the effects of U.S. taxation of foreign earnings on the behavior of multi-national corporations (MNCs). Prior to the TCJA, the U.S. levied taxes on an MNC’s worldwide earnings, deferred until firms repatriated the funds to U.S. The worldwide taxation and deferral until repatriation led to firms holding significant amounts of cash offshore. By 2017, there was an estimated $2.8 trillion of repatriatable funds “trapped” offshore. Prior legislation intended to encourage repatriation offered temporary “tax holiday” measures. The TCJA lowered corporate tax rates for all firms and eliminated future U.S. tax on repatriated earnings after payment of a one-time transition tax, creating a “permanent tax holiday” for foreign earnings. I examine the relationship between pre-TCJA foreign cash holdings disclosed by MNCs and their shareholder payout and investment behavior in the two years immediately following enactment of the TCJA. Similar to research into the effects of the temporary tax holidays in prior legislation, I find share repurchases in the post-TCJA period are associated with pre-TCJA foreign cash holdings. I further find that MNCs disclosing pre-TCJA foreign cash holdings increased research and development and capital expenditures in the second year following the TCJA. These findings indicate that the foreign earnings provisions of the TCJA may have had some longer-term effects in line with its legislative intent. This contrasts in some ways with the findings of prior research and should be of interest to policymakers, particularly as the current U.S. administration considers changes to the corporate tax regime, while also providing a basis for future research.