Foreign Holding Companies and the US Taxation of Foreign Earnings: Evidence from TIPRA 2005

Murphy analyzes the use of foreign holding companies in their organizational structure by US multinationals and its implication for internal capital markets. Murphy also analyzes the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) which provides for a look-thru rule which reduces the after-tax cost of foreign intercompany financing transactions. Using the TIPRA as a natural experimental setting to test whether a shift in US tax policy that reduces the cost of moving foreign capital increased firms’ reliance on foreign holding company subsidiaries, he opines that multinational companies responded to TIPRA by creating more foreign holding companies.

Murphy also notes that, consistent with the policy objectives of TIPRA, multinational companies that rely on holding companies gained tax efficiencies in their post-TIPRA foreign internal capital markets, reducing domestic taxation on foreign earnings and easing financial constraints.

Click here to read. Subscription required.