U.S. Firms on Foreign (Tax) Holidays

Thursday August 17, 2017

We undertake the first large-sample examination of foreign tax holiday participation among U.S. corporations. Tax holidays are temporary reductions of tax granted by governments, usually in conjunction with new business investment. We find that foreign tax holidays are economically important phenomena and participation in them has increased over time. The percentage of publicly-traded U.S. firms reporting participation in at least one foreign tax holiday increased more than five-fold since the beginning of our sample in 1995. We estimate that the average foreign tax holiday reduces the firm’s effective tax rate by 4.5 percentage points during the holiday period, which is over four times as large as the average effect of having a tax haven subsidiary. We find an unintended consequence of foreign governments granting tax holidays is that, over the long run, they increase the amount of U.S. tax on foreign income. Indeed, our estimates imply that participating in a foreign tax holiday roughly doubles the eventual U.S. tax on foreign income. Until now, research on foreign tax holiday participation has been hampered by a lack of data. We hope that our initial evidence encourages others to investigate these economically important phenomena.