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ABSTRACT
Due to the high taxation of domestic corporate income, Japanese multinational enterprises have avoided to repatriate foreign profits to Japan for quite some time. As a consequence, the Japanese government introduced a new taxation system in 2009 – the so called dividend exemption system – which was aimed at reducing the effective tax burden of foreign dividends of Japanese multinational companies in order to increase tax revenue and stimulate economic growth. Applying a theoretical framework which allows comparing the repatriation incentive of the old and new Japanese tax systems, we find that in the long-run the tax regime change fails to incentivize foreign subsidiaries to repatriate foreign profits. Especially subsidiaries with high leverage located in countries with low corporate taxes and low dividend taxes might reinvest rather than distribute their earnings in the dividend exemption method.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 A report from the US President’s Economic Recovery Advisory Board (Citation2010, 90), for instance, estimated that the move from a worldwide (credit) tax system to a territorial (dividend exemption) tax system would cost the US government roughly $130 billion over a 10-year budget window.
2 OECD countries with worldwide tax systems are Chile, Ireland, Israel, Mexico, South Korea, and the United States.
3 The Japanese corporate tax rate is one of the highest among the OECD countries (OECD Citation2013). All effective corporate tax rates in this article apply for large corporations located in Tokyo and other metropolitan areas.
4 Prime Minister of Japan and His Cabinet (Citation2008, 7).
5 This ratio excludes shares held by the foreign company itself. For the purpose of calculating the ratio, different Japanese companies which belong to the same consolidated tax group, may be aggregated. If Japan has agreed on a tax treaty with another country, the more generous rule may apply.
6 JCTL = Japanese Corporate Tax Law.
7 Even if these withholding taxes could be credited against the Japanese company tax on 5% of the received dividends, there would still be a significant amount of non-creditable (and therefore definitive) foreign dividend withholding taxes.
8 Most tax regimes require the subsidiary to withhold dividend taxes and pay it to the government.
9 E.g. Canada and the United States.
10 E.g. Austria, Belgium, China, Denmark, Germany, India, Italy and Switzerland.
11 E.g. New Zealand and Russia.
12 The new tax treaty between Japan and the Netherlands (signed on 25 August 2010) provides a full exemption from withholding tax paid to a parent company that directly or indirectly owns shares representing at least 50% of the voting power of the subsidiary.
13 It is assumed that the absolute amount of the earnings before taxes of the subsidiary is not influenced by its leverage.
14 The notation for the conditional expected value has been dropped for ease of notation.
15 The assumption of constant leverage ratios is a realistic approximation (Arzac and Glosten Citation2005).
16 The statement is only based on purely tax related argumentation. For a subsidiary, there might still exist other motives to be debt financed, e.g. the agency costs of debt (Jensen and Meckling Citation1976).
17 A detailed calculation can be found in Appendix 1 of this article.
18 A detailed calculation can be found in Appendix 2 of this article.
19 The derivation of the reinvested earnings ratio can be found in Appendix 3 of this article.
20 It is important to note that the level of debt depends on the change in equity.
21 A detailed calculation can be found in Appendix 4 of this article.
22 The calculation is analogue to the former calculation under the CTM.
23 METI statistics database (Citation2013): Survey of Overseas Business Activities.
24 KPMG (Citation2014): Corporate tax rates table 2013.
25 Deloitte (Citation2014), Deloitte International Tax Source: Compare tax treaty rates. It is assumed that the parent company holds at least 50% of the shares of the subsidiary.
26 The ratios were calculated based on data from the METI database ‘Basic Survey of Overseas Business Activities’. Unfortunately, no data on dividends distributed to Japanese investors was available for the years 2003, 2005 and 2006.