The Effects of Imputation Systems on Multinational Investment, Financing, and Income‐Shifting Strategies

The United States is one of a few remaining countries to tax distributed corporate earnings twice—once at the corporate level, and again at the individual level. In contrast, many other countries have adopted imputation systems that refund domestic corporate taxes through dividend tax credits. Consequently, foreign‐source income, which is often relieved from domestic corporate taxation, is generally ineligible for dividend tax credits. The paper develops a model to derive the investment, financing, and crossjurisdictional income‐shifting incentives of imputation‐based multinationals. The model indicates that imputation systems encourage firms to restrict their equity stakes in new foreign investments, and, ultimately, to expand their domestic investments. The results also reveal that imputation systems create incentives for firms to lever highly their foreign operations, use internal debt over equity finance, shift foreign taxable income into home jurisdictions, and to merge with or acquire purely domesti...