"Basket" Cases: International Joint Ventures After the Tax Reform Act of 1986

Mihir A. Desai, James R. Hines, Jr.

NBER Working Paper No. 5755
Issued in September 1996
NBER Program(s):Public Economics

This paper examines the impact of the Tax Reform Act of 1986 (TRA) on international joint ventures by American firms. The evidence suggests that the TRA had a significant effect on the organizational form of U.S. business activity abroad. The TRA mandates the use of separate credits on income received from foreign corporations owned 50% or less by Americans. This limitation on worldwide averaging greatly reduces the attractiveness of joint ventures to American investors, particularly ventures in low-tax foreign countries. Aggregate data indicate that U.S. participation in international joint ventures fell sharply after 1986. The decline in U.S. joint venture activity is most pronounced in low-tax countries, which is consistent with the incentives created by the TRA. Moreover, joint ventures in low-tax countries use more debt and pay greater royalties to their U.S. parents after 1986, which reflects their incentives to economize on dividend payments

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Document Object Identifier (DOI): 10.3386/w5755

Published: Journal of Public Economics, Vol. 71, no. 3 (March 1999): 379-402.

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