Working Paper: NBER ID: w18107
Authors: Mihir A. Desai; C. Fritz Foley; James R. Hines Jr.
Abstract: This paper analyzes the extent to which firms use trade credit to reallocate capital in response to tax incentives. Tax-induced differences in pretax returns encourage the use of trade credit to reallocate capital from firms facing low tax rates to those facing high tax rates. Evidence from the worldwide operations of U.S. multinational firms indicates that affiliates in low-tax jurisdictions use trade credit to lend, whereas those in high-tax jurisdictions use trade credit to borrow: ten percent lower local tax rates are associated with net trade credit positions that are 1.4 percent higher as a fraction of sales. The use of trade credit to get capital out of low-tax, low-return environments is also illustrated by reactions of U.S. firms to the temporary repatriation tax holiday in 2005, when affiliates with positive net trade credit positions were significantly more likely than others to repatriate dividends to parent companies in the United States.
Keywords: No keywords provided
JEL Codes: F23; G31; G32; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax rate differences (H29) | Trade credit practices (L14) |
| Ten percent lower local tax rates (H71) | Net trade credit positions that are 14 percent higher as a fraction of sales (F19) |
| Low-tax jurisdictions (H26) | Greater net working capital accumulation (D25) |
| Tax rates (H29) | Trade credit practices among wholly-owned affiliates (L14) |
| Tax rates (H29) | Trade credit practices among affiliates with high levels of trade with related parties (L14) |
| Affiliates with positive net trade credit positions (L14) | More likely to repatriate dividends to parent companies in the US (G35) |