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The Effect of Moving to a Territorial Tax System on Profit Repatriation: Evidence from Japan

Author

Listed:
  • Makoto Hasegawa

    (National Graduate Institute for Policy Studies (GRIPS))

  • Kozo Kiyota

    (Keio Economic Observatory, Keio University)

Abstract
In an increasingly globalized world, the design of international tax systems in terms of taxation on foreign corporate incomes has received much attention from policymakers and economists alike. In the past, Japan's worldwide tax system taxed foreign source income upon repatriation. However, to stimulate dividend repatriations from Japanese-owned foreign affiliates, Japan introduced a foreign dividend exemption in 2009 that exempts dividends remitted by Japanese-owned foreign affiliates to their parent firms from home taxation. This paper examines the effect of this dividend exemption on profit repatriations by Japanese multinationals. We find that the response of Japanese-owned affiliates to the dividend exemption was heterogeneous. More particularly, foreign affiliates with a large stock of retained earnings were generally more responsive to the reform and significantly increased dividend payments to their parent firms in response to the enactment of the dividend exemption system. Dividend payments by these affiliates also became more sensitive to withholding tax rates on dividends levied by host countries under the new exemption system.

Suggested Citation

  • Makoto Hasegawa & Kozo Kiyota, 2015. "The Effect of Moving to a Territorial Tax System on Profit Repatriation: Evidence from Japan," Keio-IES Discussion Paper Series 2015-008, Institute for Economics Studies, Keio University.
    • Handle: RePEc:keo:dpaper:2015-008
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Local International taxation; Worldwide tax system; Territorial tax system; Profit repatriation; Dividend exemption;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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