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Repeal of the Deferral Privilege for Earnings from Direct Foreign Investments: An Analysis.

Susan L. Nordhauser¹; John L. Kramer²

¹ Assistant Professor of Accounting, University of Texas at San Antonio. 1 · ² Associate Professor of Accounting, University of Florida. 2

ABSTRACT: This paper examines the likelihood that U.S.-based multinational enterprises (MNEs) will alter their corporate structure in response to changes in U.S. tax policies towards income derived from direct foreign investments. If the deferral privilege is eliminated, it is probable that a number of corporations having foreign subsidiaries will decontrol part or all of their subsidiaries that retain the controlled foreign corporation (CFC) classification in order to avoid the additional U.S. tax burden. The most likely means for decontrolling these subsidiaries is by either selling additional common stock that has not been previously issued or by making a tax-free distribution of the CFC stock under Section 355. For the "average" subsidiary, decontrol will increase the net dividends to shareholders by approximately 20 to 25 percent. Decontrolling is more likely for subsidiaries that are incorporated and/or operating in low tax rate jurisdictions and which reinvest half or more of their earnings. For these decontrolled subsidiaries, the increased dividends available to the shareholders can be nearly six times as large as are the dividends when CFC status is retained following the repeal of the deferral privilege.

DOI

10.2308/tar-4481056

Volume

56 (1)

Pages

54-69

Language

en

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