KEO Discussion Paper No. 135

The Eﬀect of Moving to a Territorial Tax System
on Profit Repatriation: Evidence from Japan
Makoto Hasegawa
National Graduate Institute for Policy Studies (GRIPS)
Kozo Kiyota
Keio University

The Effect of Moving to a Territorial Tax System on
Profit Repatriation: Evidence from Japan∗
Makoto Hasegawa†Kozo Kiyota‡

June 2015

Abstract
In an increasingly globalized world, the design of international tax systems in termsof taxation on foreign corporate incomes has received much attention from policymakers and economists alike. In the past, Japan’s worldwide tax system taxed foreignsource income upon repatriation. However, to stimulate dividend repatriations fromJapanese-owned foreign affiliates, Japan introduced a foreign dividend exemption in2009 that exempts dividends remitted by Japanese-owned foreign affiliates to theirparent firms from home taxation. This paper examines the effect of this dividend exemption on profit repatriations by Japanese multinationals. We find that the responseof Japanese-owned affiliates to the dividend exemption was heterogeneous. More particularly, foreign affiliates with a large stock of retained earnings were generally more
responsive to the reform and significantly increased dividend payments to their parent firms in response to the enactment of the dividend exemption system. Dividend
payments by these affiliates also became more sensitive to withholding tax rates on
dividends levied by host countries under the new exemption system.
Keywords: International taxation; Worldwide tax system; Territorial tax system; Profit
repatriation; Dividend exemption
JEL classification: H25; F23∗

This paper is part of the research project “Determinants of the Productivity Gap among Firms inJapan,” undertaken at the Research Institute of Economy, Trade and Industry (RIETI). Hasegawa is especially grateful to his dissertation committee, Joel Slemrod (Chair), James Hines, Stephen Salant, andJagadeesh Sivadasan, for their invaluable advice, encouragement, and mentoring. The authors also appreciate the helpful comments and suggestions of David Albouy, Christian Gillitzer, Masaki Hotei, Arjan Lejour,
Kevin Markle, Kiyoshi Matsubara, Hisahiro Naito, Tom Neubig, Kazuki Onji, Masanori Orihara, Eiji Tajika,
Ryuhei Wakasugi and the participants at the University of Michigan Public Finance Seminar, the 2013 National Tax Association Annual Meeting and the 2014 Annual Congress of the International Institute of Public
Finance. Hasegawa gratefully acknowledges the financial support of the Nakajima Foundation, the Nomura
Foundation, the University of Michigan, the National Graduate Institute for Policy Studies (GRIPS), andthe Japan Society for the Promotion of Science Grant-in-Aid for Young Scientists (B), Grant No. 26780172.
Kiyota acknowledges the financial support from the Japan Society for the Promotion of Science (S), Grant
No. 26220503 and (B), Grant No. 26285058. The usual disclaimers apply.
†
National Graduate Institute for Policy Studies (GRIPS). E-mail: m-hasegawa@grips.ac.jp.
‡
Keio Economic Observatory, Keio University and RIETI. E-mail: kiyota@sanken.keio.ac.jp

1

Introduction

In an increasingly globalized world, the design of international tax policies, in terms ofwhether and how corporate incomes earned in foreign countries by multinational firms aretaxed has received much attention from policymakers and economists alike. While taxing
foreign source income would certainly raise revenue, international tax rules significantly influence the business activities of multinational corporations, including the location of foreign
direct investment, income reallocation (income shifting) through transfer pricing, and profit
repatriation. For instance, the U.S. taxes foreign income upon repatriation, allowing foreign
tax credits for corporate income taxes and other related taxes paid to foreign governments
under the so-called worldwide income tax system. In contrast to a worldwide income tax
system, a territorial tax system exempts foreign income from home taxation, with such systems employed by many developed countries, including Australia, Belgium, Canada, France,
Germany, Italy, the Netherlands, and the U.K..1 There is a longstanding debate in the U.S.
on the merits of moving from the present worldwide tax system to a territorial tax system.
Japan, the focus of this study, used a worldwide income tax system until the end of March
2009.2 At that time, the Japanese government was concerned that under the existing system,
Japanese multinational corporations kept a large portion of the profits earned by their foreign
affiliates abroad, and did not repatriate them back to Japan. Japanese firms arguably
had incentive to do so because foreign incomes were taxed at high rates (as high as 40%)
upon repatriation.3 As a means of stimulating dividend repatriation, Japan introduced aforeign dividend exemption system in April 2009 that exempted dividends remitted by foreign
affiliates to their Japanese parent firms from home taxation. Thus, with the introductionof the dividend exemption system, the Japanese corporate tax system effectively moved
to a territorial tax system. Because this reform drastically changed the way in which theJapanese government taxed the foreign profits of Japanese corporations, the reform would
significantly affect the business activities of multinational corporations, including decisions
on foreign direct investment, income shifting, and profit repatriation.
This paper examines the effect of moving to a territorial tax system (dividend exemption)
on profit repatriation by Japanese multinationals. One compelling motivation is that few
studies have empirically examined the actual outcomes of the change in the regime from a1

As of 2012, 28 of the 34 OECD countries employed territorial tax systems, while only the remaining
six countries (the U.S., Chile, Ireland, Israel, South Korea, and Mexico) used worldwide tax systems (PwC,
2013).
2
In Japan, the fiscal year runs from April 1 to March 31.
3
In 2009, the corporate income tax rate in Japan was the highest among the OECD member countries(OECD, 2010).

1

worldwide tax system to a territorial tax system.4 Tajika et al. (2014), which is publishedin Japanese, investigate the impact of Japan’s dividend exemption on dividends received by
Japanese parent firms from their foreign subsidiaries using parent firm-level data from 2008
to 2009.5 They find that more parent firms, especially those facing greater demand for cash,
increased dividends received from their foreign affiliates in response to the enactment of thedividend exemption in 2009. However, their analysis does not take into account either thelocation of foreign affiliates owned by Japanese parent firms or the tax rates of the hostcountries. Elsewhere, Egger et al. (forthcoming) examine the foreign dividend exemption
enacted under a U.K. tax reform in 2009 and find that foreign affiliates owned by U.K.
multinational firms responded to the tax reform by increasing dividend payments to theirowners. However, there are two limitations regarding their data. First, they are unable toobserve dividend payments directly and thus rely on an approximate measure of dividend
payments.6 Second, because they calculate dividend payments using the balance sheet, they
are unable to identify the recipients.
Using unique confidential survey data for Japanese multinational corporations, this paper
provides the first evidence concerning the behavioral response of Japanese-owned foreign
affiliates to the adoption of a territorial tax system. As detailed later, each foreign affiliate
faced a different tax cost as a result of paying dividends to its parent firm in Japan before
and after the tax reform, depending on the corporate tax rate and the withholding tax rate
on dividends imposed by the host country. In other words, the tax benefit (or cost) fromthe switch to the territorial tax system depends on the location of the foreign affiliates. The
contribution of our study is to identify the differential impacts of the tax reform on dividend
repatriations using detailed information on foreign affiliates and the tax rates of the hostcountries. In addition, the use of affiliate-level panel data from 2006 to 2011 enables us toevaluate the effect of the tax reform over a longer period.
We use the micro database of the annual survey conducted by the Ministry of Economy,
Trade and Industry of Japan (METI), the Survey of Overseas Business Activities. This survey provides information on the financial and operating characteristics of Japanese-owned
4The extant literature utilizes cross-country differences in international tax systems to examine the effectof corporate taxes under the two tax regimes on foreign direct investment (Slemrod, 1990; Hines, 1996;
Altshuler and Grubert, 2001; Bénassy-Quéré, Fontagné, and Lahrèche-Révil, 2005). Desai and Hines (2004)
estimate a tax burden on foreign income of $50 billion per year under the U.S. worldwide income tax system.
5
Some studies also examine the impact of the Japanese dividend exemption on firm value. Sakurada andNakanishi (2011) and Bradley et al. (2014) examine investor reactions to news of the dividend exemption
during fiscal year 2008 using an event study methodology. However they do not investigate the actual
consequences of the transition to the dividend exemption system after the 2009 tax reform.
6
Dividend payments in 2009 are calculated as the difference between the shareholder funds available
for distribution after current profits in 2008 and shareholder funds available for distribution before current
profits in 2009.

2

foreign affiliates, including dividends paid to Japanese investors. Using another METI survey, the Basic Survey of Japanese Business Structure and Activities, containing financial
information on parent firms, we construct affiliate-level panel data that includes parent firm
information and analyze the period from 2006 to 2011. Unlike Egger et al. (forthcoming),
the key advantage of our data is that we can directly observe dividends paid by foreign
affiliates to their Japanese parent firms.
We find that the response of Japanese multinationals to the dividend exemption washeterogeneous. Foreign affiliates with a large payout capacity for dividends (the top 10% of
firms in terms of the stock of retained earnings divided by sales in the previous year) weremore responsive to the tax reform and significantly increased their dividend payments totheir parent firms than other affiliates. Dividend payments by these affiliates also became
more responsive to withholding tax rates on dividends because the withholding taxes on
dividends were no longer creditable under the new exemption system. We also find that themagnitude of this response increases with the magnitude of the stock of retained earnings.
We also expected that foreign affiliates in low-tax jurisdictions would exhibit a stronger
response to the tax reform because the tax costs for dividend repatriation from these affiliates
were higher under the worldwide tax system. However, we find no evidence that the change
in dividend payments was positively associated with the grossed-up tax rate differential
between Japan and other countries.
The rest of the paper is organized as follows. Section 2 describes the background and theprovisions for dividend exemption enacted in Japan. Section 3 calculates the tax costs ofremitting profits from foreign subsidiaries to their parent firms in Japan through dividends,
royalties, or interest, and shows how the dividend exemption changed the tax costs of profit
repatriation. Section 4 describes the data, while Section 5 presents the empirical results froma preliminary analysis of the response of Japanese multinationals to the dividend exemption.
Section 6 extends the empirical model in Section 5 to analyze the heterogeneous responses
to the dividend exemption depending on the magnitude of the stock of retained earnings in
the foreign affiliates. Section 7 provides robustness checks of the results in Section 6. Section
8 concludes.

2

The Dividend Exemption System Enacted in Japan
in 2009

In May 2008, a subcommittee on international taxation at the METI began to discuss theintroduction of a dividend exemption in the corporate tax reform slated for 2009. This was3

publicly known because newspaper articles reported this development at the time.7 In August
2008, the subcommittee released an interim report and proposed introducing a dividend
exemption (METI, 2008a). In the report, the METI estimated that the stock of retained
earnings of Japanese-owned foreign affiliates in 2006 was some 17 trillion Japanese yen.8
Their concern was that an excessive amount of profit was retained in foreign countries toavoid home-country taxation in Japan, which distorted the decisions of Japanese corporations
on the timing of profit repatriation and reduced domestic R&D investment that could be
financed from foreign source income.9 As for the expected effects of the dividend exemption,
METI (2008a) argued that the dividend exemption system would help to: (1) stimulate
dividend repatriation with the removal of the tax burdens on repatriated dividends, (2)increase domestic capital investment and R&D investment financed by repatriated foreign
profits, and (3) reduce tax compliance costs by simplifying the international tax system.10
Following the release of the METI’s interim report, tax reform plans containing the
adoption of a territorial tax regime were sequentially released by the Government Tax Commission, the Liberal Democratic Party (the ruling party in the Japanese House of Representatives), the Ministry of Finance, and the Cabinet from November 2008 to January 2009.
Finally, this regime change was included in the legislation for the 2009 tax reform. The
legislation passed into law on March 27, 2009 and came into effect on April 1, 2009.11
The dividend exemption system that was introduced permits Japanese resident corporations to deduct 95% of dividends received from foreign affiliates from their taxable incomein accounting years commencing on or after April 1, 2009. The remaining (5%) of dividends
are regarded as expenses incurred by parent firms in earning the dividends and are added tothe calculation of their taxable incomes in Japan.12 In order to qualify for dividend exemp7

This discussion of the foreign dividend exemption largely draws on Aoyama (2009) and Masui (2010).
Equating to 146 billion U.S. dollars at the 2006 exchange rate of 1 USD = 116.299 JPY (UNCTAD,
2012).
9The subcommittee also examined the possibility of introducing a one-time dividend exemption similar
to the American Jobs Creation Act of 2004, limiting the use of dividends exempted from home taxation.
However, the subcommittee concluded that a one-time dividend exemption would only stimulate dividend
repatriations during the period under the exemption rule, and would have an aftereffect that would counteract
the effect of the dividend exemption. They were also concerned that limiting the use of exempted dividends
would distort the managerial decisions and undermine the managerial efficiency of Japanese corporations(METI, 2008a).
10
To claim foreign tax credits under the worldwide tax system, Japanese multinationals were required tosubmit numerous evidential documents to prove tax payments by their foreign affiliates and to calculate theamount of foreign tax credits. Therefore, the foreign tax credit system imposed large tax compliance costs
on Japanese multinationals. the METI thus expected the dividend exemption to help reduce tax compliancecosts by abolishing the foreign tax credits for repatriated dividends (METI, 2008a).
11
Bradley et al. (2014) provide additional details on the development of the dividend exemption legislation.
12
The expenses corresponding to 5% of the repatriated dividends are assumed to be deducted from thetaxable incomes of parent firms when they invest in their subsidiaries, and thus would not be exempted upon
repatriation under the new exemption system.
84

tion, a parent firm must have held at least 25% of the shares of its affiliate for at least six
months prior to the dividend declaration date.13 While dividend exemption would reduce
corporate tax liabilities on repatriated dividends in Japan, foreign tax credits no longer apply
to withholding taxes on repatriated dividends imposed by host countries. The new systemis still quite distant from purely source-based taxation. As the term “dividend” exemption
suggests, it only exempts foreign income in the form of paid dividends, and does not apply toother types of foreign source income, including royalties, interest payments, income earned
by foreign branches, and capital gains. Japanese multinationals can continue to claim foreign
tax credits for foreign taxes paid on these incomes.
Finally, because this tax reform concerns a foreign dividend exemption, the difference
between Japan’s dividend exemption enacted under the 2009 tax reform and the dividend
tax deduction enacted in the U.S. under the American Jobs Creation Act of 2004 (AJCA)
is also noteworthy.14 First, while the AJCA provides U.S. multinational corporations with a
special one-time deduction of 85% of dividends received from their foreign affiliates, Japan’s
dividend exemption is permanent. Second, under the AJCA, the 85% exemption applies only
to “extraordinary dividends,” which are defined as dividend payments exceeding average
repatriations over a five-year period ending before July 1, 2003, after excluding the years
with the highest and lowest repatriations.15 Therefore, the exemption is limited to only
part of the dividends paid (extraordinary dividends), and U.S. multinationals could claim
dividend tax reductions only if they received foreign dividends that exceeded the average.
On the other hand, Japan’s dividend exemption applies to 95% of all dividends as long as
the conditions described above are satisfied.16 Thus, we note that the exemption permitted
under the new tax system in Japan is quite different from and arguably much more generous
than the dividend tax reduction implemented under the AJCA in the U.S..
13

The 25% minimum shareholding requirement is reduced under bilateral tax treaties with several countries. For example, the minimum shareholding is set at 10% for foreign affiliates in the U.S., Brazil, Australia,
and Kazakhstan, and at 15% for those in France (Aoyama, 2009).
14
Several studies investigate the effects of the one-time dividend deductions permitted by the American
Jobs Creation Act of 2004 on the profit repatriations, domestic investment and employment, market values,
and income shifting behavior of U.S. multinational corporations (Oler et al., 2007; Blouin and Krull, 2009;
Redmiles, 2009; Bradley, 2011; Dharmapala et al., 2011).
15
In addition, to be eligible for the dividends-received deduction, dividends must be paid in cash andinvested in approved activities in the U.S., although this requirement may not be binding for U.S. multinationals (Blouin and Krull, 2009; Dharmapala et al., 2011).
16
METI (2008b) estimates that given the requirements described above, more than 95% of foreign affiliates
would be eligible for dividend exemption.

5

3

How Dividend Exemption Affects the Profit Repatriation of Japanese Multinationals

Hartman (1985) demonstrated that under certain conditions, repatriation taxes do not affectthe decisions on marginal investment and dividend payments made by “mature” subsidiaries
financing their marginal investment out of their own retained earnings. However, this result
depends on the assumption that repatriation tax rates are constant over time. This assumption may not hold because, as we show below, the repatriation tax rates on dividends maychange depending on the foreign tax credit positions of the parent firms under a worldwide
income tax system and the definition of taxable income (tax bases) in the host countries,
and also when the corporate tax rate of a home country changes.17 In addition, repatriation
tax rates also vary because of changes in the international tax regime, as was the case forJapan in 2009.
In what follows, we calculate the tax costs of remitting profits from foreign subsidiaries
to their parent firms in Japan through dividends, royalties, or interest given their decisions
on foreign direct investment, and show how the dividend exemption has changed the tax
costs of profit repatriation. We then make predictions for our empirical analysis based onthese changes in repatriation tax costs.
To consider the tax liabilities on foreign dividends under Japan’s worldwide tax system(i.e. that before April 2009) and the new exemption system (i.e. that after April 2009), we
calculate the tax costs of remitting an additional dollar of foreign income to Japan throughdividends, royalties, or interest. Let Yijct denote the pretax profit of affiliate i operating incountry c owned by parent j in year t and Tijct denote the foreign corporate income tax paid
by affiliate i. We define the average affiliate tax rate as τ̂ijct = Tijct /Yijct and denote thestatutory corporate tax rates of Japan and country c in year t by τHt and τct , respectively.
We denote withholding tax rates on dividends, royalties, and interest payments in country cDRI
and year t by wct, wct, and wct
, respectively.
Under the worldwide tax system operating in Japan prior to April 2009, the tax liabilityof parent j to receive one dollar of additional dividends from its affiliate i in country cdepends on the excess foreign tax credit position of parent j: that is, whether the parent
is in the situation of an excess limit or an excess credit. A parent firm whose foreign tax
payments are less than the foreign tax credit limit, where the foreign tax credit limit iscalculated as the total foreign taxable income multiplied by the Japanese corporate tax rate,
17

There is evidence that repatriation taxes discourage dividend payouts by U.S. corporations (Hines andHubbard, 1990; Grubert, 1998; Desai et al., 2001). In contrast, using Japanese affiliate-level data, Tajika
and Nakamura (2008) find no evidence of the significant effect of corporate taxes on dividend repatriation
by Japanese multinationals.

6

is referred to as being in excess limit. In contrast, if the foreign tax payments are greaterthan the foreign tax credit limit, the parent is referred to as being in excess credit, and canthen use excess foreign tax credits (the difference between the foreign tax payments and theforeign tax credit limit) to reduce its Japanese tax obligations on foreign source income overthe following three years.
Suppose parent firm j is in excess limit. It could then claim foreign tax credits for thetaxes paid to host country c when affiliate i remits one additional dollar of dividends. The
dollar of dividends would be deemed as 1/(1 − τ̂ijct ) dollars of taxable income in Japan (thegross-up formula), which yields the corporate tax liability of τH /(1 − τ̂ijct ). Parent j also has
D
to pay withholding taxes on the dividend wct
to country c. Thus, the total tax payment toD
receive one additional dollar of dividends is τHt /(1 − τ̂ijct ) + wct. Parent j can also claim
foreign tax credits for the taxes paid to country c, which include the corporate tax paymentDτ̂ijct /(1 − τ̂ijct ) and the withholding tax on the dollar of dividends wct. Therefore, the net
tax payment of parent j to receive one dollar of dividends from its affiliate i in country c inyear t can be written as Pijct such that 
τ̂ijctτHt − τ̂ijct
τHtDD+ wct −+ wct =,
Pijct ≡
1 − τ̂ijct
1 − τ̂ijct
1 − τ̂ijct

which is the difference between the Japanese statutory tax rate and the subsidiary averagetax rate grossed up by the subsidiary average tax rate.
If parent j is in a position of excess credit, the parent can use the excess foreign tax
D.
credits to remove its Japanese corporate tax liability.18 Then, the net tax payment is wct
In sum, the tax costs of remitting one dollar of dividends can be written as(

Pijct = (τHt − τ̂ijct )/(1 − τ̂ijct )D
wct

if parent j is in excess limit;
if parent j is in excess credit.

(1)

Following the introduction of the dividend exemption system (after April 2009), parent
j can exclude 95% of the dividends from its taxable income, and thus only has to include
5% of the dividends in its taxable income. On the other hand, the parent firm must incurDwithholding tax on the dollar of dividends, wct. Thus, the net tax payment to receive thedollar of dividends from affiliate i, or the repatriation tax rate under the new exemption
system, isD
0.05τHt + wct
.
(2)
18

Even when parent j is in an excess credit position, the foreign tax credit that parent j can claim islimited up to the Japanese tax liability on the dollar of dividends (τHt /(1 − τ̂ijct )).

7

Therefore, if parent j is in an excess limit position under the worldwide tax system, thedividend exemption system eliminates almost all its corporate tax liability in Japan (except
for the withholding tax payment).19 The repatriation tax cost of repatriating dividends
decreases from (τHt − τ̂ijct )/(1 − τ̂ijct ) to 0.05τHt when controlling for the withholding tax
D 20
rate on dividends wct. On the other hand, because withholding taxes on dividends areD
no longer creditable under the dividend exemption system, parent i has to pay wct, whichwould have been creditable under the worldwide tax system before 2009.
D), which is the
When the repatriation tax costs decrease to 0.05τHt (controlling for wct
same for all firms, foreign affiliates would increase dividend payments under the new exemption system as long as the repatriation taxes are a binding constraint on their dividend
payout decisions. In addition, Japanese multinationals face different repatriation tax costs
depending on their foreign tax credit positions and the corporate tax policies of the hostcountries. Because dividend exemption eliminates Japanese corporate tax liability on repatriated dividends (Pijct ), dividend payments should become less sensitive to (i.e. less affectedby) the difference between the Japanese statutory tax rate and the average tax rate of thesubsidiary grossed up by the subsidiary average tax rate (Pijct ) after 2009. In other words,
under the exemption system, foreign affiliates in lower-tax countries (higher Pijct ) should pay
more dividends than before the tax reform. As we detail later, to control for firm size andthe appreciation of the Japanese yen, we measure dividend payments as the share of affiliate
sales in our regression analysis. We then expect the following effects of dividend exemption
on dividend payment scaled by affiliate sales to Japanese investors:
H1: Dividend repatriations from foreign affiliates increase when controlling for withholding
tax rates on dividends.
H2: Dividend payments become less sensitive to the tax rate differentials between Japanand foreign countries (Pijct ).21
H3: Dividend payments become more sensitive to withholding tax rates on dividends leviedby host countries.
19

Because of the relatively high corporate tax rate in Japan, it was highly likely that the foreign
 tax
τ̂ijctτHtD
liability on a dollar of dividends was lower than the tax liability in Japan 1−τ̂+w≤ct
1−τ̂ijct . In
ijctfact, using the data from 2007 to 2011, we find that this holds for 87.9% of all foreign affiliates. Thus, it
is reasonable to assume that most parent firms were in excess limit situations or that even if they were inexcess credit, they did not have substantial excess foreign tax credits.
20
In this section, we assume Pijct = (τHt − τ̂ijct )/(1 − τ̂ijct ) > 0.05τHt . In the data from 2007 to 2011,
90.4% of foreign affiliates satisfy this condition.
21
In other words, foreign affiliates in lower-tax countries (higher Pijct ) should increase dividends as scaledby sales more than other affiliates after 2009.

8

While the dividend exemption system substantially changes the tax costs of repatriating
foreign dividends, it does not change the tax treatment of repatriated royalties and interest
payments at all. Consider the tax costs of remitting one additional dollar of a royalty orinterest from affiliate i to its parent j. Because they are deductible payments, remitting adollar as a royalty or interest will reduce the corporate tax payment in country c by τct . The
corporate tax liability on the dollar of deductible payments is τHt . Parent j also has to remitRor on ato the government of country c the withholding tax on one dollar of a royalty wct
RI. The total tax payment for the dollar of royalty is (τHt − τct ) + wct
dollar of interest wct
I
while that for the dollar of interest is (τHt − τct ) + wct.
If parent j is in excess limit, it would claim a foreign tax credit for the withholding tax
RI
on the dollar of royalty or interest, (wctor wct). The net tax payment of remitting one dollar
of deductible payments is (τHt − τct ). If parent j is in an excess credit position, excess foreign
tax credits would reduce the tax liability in Japan by up to τHt , and the net tax costs wouldRI− τct for the royalty payment and wct− τct for the interest payment.
be wctIn summary, regardless of the introduction of the dividend exemption system, the net
tax costs of remitting one additional dollar of a royalty can be written as(

τHt − τct
R
wct
− τct

if parent j is in excess limit;
if parent j is in excess credit.

(3)

The net tax costs of remitting one additional dollar of interest payments can be writtenas(τHt − τct
I
wct
− τct

if parent j is in excess limit;
if parent j is in excess credit.

(4)

As Grubert (1998) shows, those tax costs could affect dividend repatriations to the extent
that royalties and interest payments substitute or complement dividends as an alternativemeans of profit repatriation. In the following sections, we empirically examine how the response of dividend payments by Japanese-owned foreign affiliates to the repatriation tax costschanged because of the introduction of the dividend exemption regime and test hypotheses
H1–H3.

4

Data

We use the micro database of the annual survey conducted by the METI, the Survey ofOverseas Business Activities. The main purpose of this survey is to obtain basic informationon the business activities of the foreign subsidiaries of Japanese firms. The survey covers all

9Japanese firms (except those in the finance, insurance, and real estate industries) that owned
affiliates abroad as at the end of the fiscal year (March 31). A foreign affiliate of a Japanese
firm is defined as a firm that is located in a foreign country and of which the Japanese firmowns directly or indirectly at least a 10% equity share, covering up to second-tier subsidiaries.
The survey provides data on the financial and operating characteristics of Japanese firms
operating abroad, including dividends and royalties paid to Japanese investors.22
To control for parent firm characteristics, we use another METI survey, the Basic Surveyof Japanese Business Structure and Activities. This survey covers all firms with 50 or more
employees and capital or investment funds of at least 30 million yen, for both manufacturing
and non-manufacturing industries. The survey provides data on the financial and operating
characteristics of Japanese parent firms.
We merge these two annual cross-sectional surveys to develop a longitudinal (panel) data
set for foreign subsidiaries from 2006 to 2011. Each subsidiary is traced throughout theperiod using the parent and affiliate IDs as a key.23 The merged panel data from the METI
surveys contains 50,667 observations for foreign affiliates in the sample from 2007 to 2011
with information on dividend payments available, while another 22,124 observations between
2007 and 2011 have missing values for dividend payments, and thus are not available for ouranalysis.24
Table 1 provides summary statistics of the dividend payments by foreign affiliates inmillions of yen for each year from 2007 to 2011. Notably, both the sum and mean of dividend
payments in 2009, the first year of the dividend exemption system, are larger than in 2007
and 2008. The total amount of dividend payments decreased by 16% from 2007 to 2008 andincreased by 43.6% from 2008 to 2009. There is a similar trend in the mean of dividend
payments. However, it is worth noting that the increase in the total amount of dividends in2009 results from a relatively small number of foreign affiliates. Although the sum and meanof dividends are larger in 2009 than in 2007 and 2008, the dividend payments at the 75th,
90th, and 95th percentiles in 2009 are smaller than those in 2007 and 2008. This implies
22

There are many missing values for the dividend information because the respondents (parent firms) left
the question on dividends blank when no dividends were paid. We also found that the number of observations
with missing values for dividends increased from 2010, while the number of observations with zero dividends
decreased to almost the same extent. We speculate that zero dividends were recorded as missing values
for these affiliates in 2010 and 2011. We replaced missing values for dividends in 2010 or 2011 or in both
years by zero only if an affiliate reported dividend payments in all of the years before 2009 when the affiliate
appeared in the sample.
23
The parent ID is from the Basic Survey of Japanese Business Structure and Activities. We also used
the information on location and establishment year to trace each subsidiary.
24
Before 2007, the METI survey collected dividend payments to Japanese investors every four years, andthus the information on dividends is unavailable for 2006. We collect the survey information for 2006 to use
the lagged values of retained earnings of foreign affiliates and pretax profit, total assets, and total debt of
the parent firms in our regression analysis.

10that dividend payments above the 99th percentile in 2009 were much larger than those in2007 and 2008. As a result, the total dividend payments and the mean of the dividends paid
by affiliates are larger in 2009 than the previous two years.25 The mean of dividends in 2011is higher than under the worldwide tax system in 2007 and 2008, while that in 2010 is thelowest among the five years in the sample. We also note the dividend payment distribution
is heavily skewed to the left, signifying that most foreign affiliates paid no dividends (asdetailed in Table 3).
=== Table 1 ===There is a caveat when we look at dividend payments measured in Japanese yen. The
Japanese yen consistently appreciated over the entire data period. Thus, without normalization, the increase in dividend repatriation could be undervalued, as measured by Japaneseyen.26 Table 2 provides summary statistics of the dividend payments by foreign affiliates
scaled by sales to control for the size of the affiliates and for the changes in the foreignexchange rates. In 2008, the mean value of the dividend payments as a share of sales is lowest (0.0241), possibly because of the financial crisis triggered by the bankruptcy of Lehman
Brothers, which severely affected the Japanese economy in 2008. Except for 2008, the meanof the dividend payments as a share of sales remains between 0.040 and 0.048 and does notshow a clear increase after the tax reform compared with that in 2007. However, we notethat dividend payments scaled by sales are larger for each year after 2009 than before 2008
at the 90th percentile and above. Table 3 details the number of foreign affiliates that paid no
dividends, the number of affiliates paying dividends to Japanese investors, and the proportion of affiliates paying dividends in each year from 2007 to 2011. Strikingly, the proportionof foreign affiliates paying dividends is lowest in 2009 (25.9%), is relatively stable over time
between 25.9% and 30.2%, and does not clearly increase after the tax reform in 2009.
=== Tables 2 and 3 ===In summary, while dividend payments scaled by sales at the 90th percentile and above
increased after 2009, the proportion of foreign affiliates paying dividends did not increase.
This is suggestive of the heterogeneous response of Japanese multinationals to dividend exemption. Although the dividend exemption system may not stimulate dividend repatriations
from most foreign affiliates that had not paid dividends under the worldwide tax system, a
25

To maintain confidentiality, we are unable to provide the maximum and minimum values.
The exchange rates between U.S. dollars and Japanese yen during the data collection period are as
follows: 1 USD = 117.8 JPY in 2007, 103.4 JPY in 2008, 93.6 JPY in 2009, 87.8 JPY in 2010, and 79.8 JPY
in 2011 (UNCTAD, 2012)26

11

small portion of firms that had paid large amounts of dividends under the worldwide tax
system may increase dividends further as a result of dividend exemption. These observations motivate our regression analysis in the following sections by taking into account thepossibility that the response of foreign affiliates to dividend exemption varies depending on
the payout capacity for dividends, as measured by the stock of retained earnings.
Finally, Tables A1, A2, and A3 provide the number of foreign affiliates, the total amountof dividends paid by these affiliates to Japanese investors, and the mean of the affiliate
average tax rates for each country in each year, respectively.27 We note that the locations ofJapanese-owned foreign affiliates favor the U.S., China, and other Asian countries, including
Thailand, Hong Kong, Singapore, Taiwan, Malaysia, South Korea, and Indonesia.

5Preliminary Analysis: Before-and-After Comparison

To test hypotheses H1–H3, we examine how the dividend exemption system affected therepatriation behavior of Japanese multinational corporations and changed the responsivenessof repatriated dividends to repatriation taxes (corporate taxes and withholding taxes) after
2009.28 As a preliminary analysis of dividend repatriation patterns before and after the tax
reform, our identification strategy in this section employs a version of a before-and-after
comparison using a post-reform dummy variable (set equal to one only if t ≥ 2009 and zerootherwise) in our regression analysis described below.29
We attempt to capture the causal effects of the dividend exemption with the post-reform
dummy variable and its interaction terms while controlling for confounding factors that
potentially affect dividend payments (measured in Japanese yen), such as macroeconomic
conditions, foreign exchange rates, the tax policies of the host countries, and parent firm
characteristics, as follows. First, we scale dividend payments by affiliate sales to control
for affiliate size and for the purpose of normalization robust to the appreciation of theJapanese yen. Second, we include country and industry fixed effects to control for systematicdifferences in dividend payments across different industries and countries, which are possibly
because of different industry-specific and country-specific economic conditions over the entire
27

In these tables, we focus on the 41 countries where there are at least 50 observations in total from 2006
to 2011.
28
One limitation in our data set is that it does not include information on the foreign tax credit positionof the parent firms (i.e. excess limit or excess credit). Thus, we cannot identify the tax costs of remitting
dividends for each affiliate based on its parent’s credit position. However, as Grubert (1998) and Desai etal. (2001) point out, because companies are uncertain about their long-run credit positions and foreign tax
credit positions are endogenous with respect to repatriation behavior, adjusting the repatriation tax costs
depending on the parent’s foreign tax credit position would also be problematic.
29
Blouin et al. (2004) and Chetty and Saez (2005) employ a before-and-after comparison approach to
examine the effects of the 2003 dividend tax cut in the U.S. on dividend payments to individual investors.

12

data period. We also include a set of year dummies whenever possible. Third, we include
foreign exchange rates between Japanese yen and the local currencies and real GDP growth
rates of the host countries to control for exchange gains upon repatriation and reinvestment
opportunities, respectively. Finally, to reflect the demand for internal cash by parent firms,
we control for the profitability and total debt of the parent firms.
We estimate the following equation in the spirit of Grubert (1998):
IR
D+ α5 τct+ α4 wct+ α3 wct(Dividend/Sales)ijct = α0 + α1 Pijct + α2 wctDR+β0 DEt + β1 (DEt ∗ Pijct ) + β2 DEt ∗ wct+ β3 DEt ∗ wct
I+β4 DEt ∗ wct+ β5 (DEt ∗ τct ) + γXijct + µc + νij + uijct , (5)where (Dividend/Sales)ijct is the dividend payments of affiliate i located in country c to its
Japanese parent j divided by affiliate sales, in year t. The dummy variable DEt is equal to
one if t ≥ 2009, and zero otherwise. As defined in the previous section, Pijct is the grossed-up
tax rate differential between Japan and country c.30 The withholding tax rates of country cIRD, respectively.31, and wct
, wct
in year t on dividends, royalties, and interest payments are wct
The statutory tax rate of country c in year t is τct .32 The post-reform year dummy DEt andthe interaction terms of DEt with these tax variables are intended to capture the changes
in dividends paid and the responsiveness of dividends to the tax variables, respectively.
The vectors of other control variables are denoted as Xijct , including the nominal exchange
rate between Japanese yen and the local currency in country c normalized to one at the 2005
level, annual real GDP growth rates, lagged parent net profit scaled by total assets, lagged
parent total debt scaled by total assets, year dummies, and industry dummies for two-digit
industry codes. Country dummies are included and denoted as µc . Affiliate fixed effects aredenoted as νij and included in some specifications. To mitigate the influence of outliers, wewinsorize all the firm-level variables used in the analysis at the top and bottom 1%. Tables
30

To bound the average affiliate tax rates (τ̂ijct = Tijct /Yijct ) between 0 and 1 and apply the gross-up
calculation to Pijct = (τHt − τ̂ijct )/(1 − τ̂ijct ) appropriately, we dropped observations with negative corporate
tax payments (Tijct < 0) and those with non-positive pretax profits but positive tax payments (Yijct ≤ 0
and Tijct > 0). The average affiliate tax rate is set to 0 if Tijct = 0 and Yijct ≤ 0 to bound the average tax
rate from zero. Foreign tax credits applied to up to 50% (35% from 2011) of foreign taxable income underJapanese tax law. To consider this provision, and also to mitigate the influence of extreme average tax rates,
we replace τ̂ijct = Tijct /Yijct with 0.5 if τ̂ijct = Tijct /Yijct > 0.5 when calculating Pijct .
31
We collect information on withholding tax rates on dividends, royalties, and interest from Ernst & Young
Worldwide Tax Summaries (2006–2011), the documents released by Japan’s National Tax Agency thatsummarize the revisions of tax treaties between Japan and its partner countries (“Summary of the Revisionof Withholding Tax Rates”), PricewaterhouseCoopers Worldwide Tax Summaries, and also the database of
the Japan External Trade Organization (JETRO), J-FILE (http://www.jetro.go.jp/world/search/cost/).
32
We obtain data on statutory corporate income tax rates from the KPMG Corporate and Indirect Tax
Survey 2011. The statutory tax rates include sub-central (statutory) corporate income tax rates.

13

4 and 5 provide the definitions and the summary statistics, respectively, for all of thesevariables after the winsorization.
=== Tables 4 and 5 ===From the hypotheses proposed in the previous section, we expect the signs of the key
parameters to be as follows. If the dividend exemption system uniformly stimulated dividend
repatriations by foreign affiliates of Japanese multinational firms, the coefficients on DEt
should be positive (β0 > 0), as hypothesized in H1. The coefficient on Pijct is expected to be
negative (α1 < 0) because higher repatriation tax costs would discourage dividend payments
under the worldwide tax system. If dividend payments became less sensitive to the tax
rate differential between Japan and foreign countries under the new exemption system as
hypothesized in H2, the estimated coefficient on (DEt ∗ Pijct ) would be positive (β1 > 0).
Another interpretation of H2 is that if dividend repatriations from lower-tax countries (highPijct ) were discouraged under the worldwide tax system (α1 < 0), foreign affiliates in thesecountries should increase dividends (as scaled by sales) more than other affiliates when
dividend exemption substantially eliminates the repatriation tax burden.
D
We expect the coefficient on wct
to be insignificant or possibly negative (α2 < 0) becauseD) if a parent firm is in excess limit,
the tax price of dividends does not depend on (wctwhich would be the case for most Japanese multinationals, while the tax price equals theDwithholding tax rate on dividends (wct
) if a parent firm is in excess credit. If Japanese
corporations care more about the tax costs of withholding taxes on dividends under the
new exemption system and thus their dividend repatriations becomes more sensitive to thewithholding tax rates on dividends, as hypothesized in H3, the estimated coefficient onD(DEt ∗ wct) would be negative (β2 < 0). The signs of the coefficients on the withholding
tax rates on royalties and interest, and the statutory tax rates will depend on how strongly
dividends substitute for royalties or interest as alternative means of profit repatriation.
As for the estimation methods, we follow the previous literature (Grubert, 1998; Deasiet al., 2001; Tajika and Nakatani, 2008) and estimate the equations using either a Tobit
or ordinary least squares (OLS) procedure. We employ a Tobit procedure because many
affiliates (72% of all affiliates in the sample) pay zero dividends, and thus the dependent
variable in equation (5) can be considered as a left-censored variable. In the Tobit estimation,
we include country and industry fixed effects to control for systematic differences in dividend
payments across industries and countries, and hence use across-affiliate variations to identify
the parameters.33 We also estimate the equation using fixed-effects OLS. The fixed-effects
33

We do not include affiliate fixed effects in the Tobit models because of the incidental parameters problem,
which renders estimators in nonlinear panel data models with fixed effects inconsistent and biased. This
would be an especially serious problem in a short panel like ours (Greene, 2007).

14

OLS estimation uses within-affiliate variations to identify the parameters controlling for thetime-invariant characteristics of each affiliate.
Table 6 presents the estimation results. Columns 1 and 2 report the coefficients estimatedby a Tobit procedure. The point estimates are marginal effects on the latent dependent variable, which can be interpreted as the “desired” amount of dividend payments.34 Columns 3
and 4 report the results from the fixed-effects OLS specifications.35 The estimated coefficienton DEt is positive in all specifications and significant at the 5% and 10% levels in columns
3 and 4, respectively. The OLS estimates imply that, holding affiliate sales fixed, dividend
payments are higher than the level in 2007 by 0.5% of affiliate sales after 2009. This result
is mildly consistent with hypothesis H1.36=== Table 6 ===The estimated coefficient on the tax price of dividends (Pijct ) is negative and statisticallydifferent from zero at the 1% level in the Tobit models, while it is not estimated precisely
in the OLS fixed-effects model possibly because of the lack of variations in Pijct within
affiliates over time. This suggests that the Japanese worldwide tax system significantly
discouraged dividend repatriation from foreign affiliates in low-tax countries because it would
trigger an additional tax liability proportional to the difference between the Japanese andforeign tax rates under the worldwide tax system. However, the estimated coefficient on(DEt ∗ Pijct ) is negative in all specifications, though mostly insignificant. This is inconsistent
with hypothesis H2, and suggests that dividend payments did not become less sensitive tothe tax rate differential between Japan and foreign countries following the enactment of
the dividend exemption system. In other words, foreign affiliates in lower-tax countries did
not increase dividend payments to their parents significantly more than other affiliates. The
D
coefficient on (DEt ∗wct
) is estimated to be negative in all specifications and significant at the
1% or 5% level in the fixed-effects OLS specifications. This is consistent with hypothesis H3,
but may not be strongly convincing because the Tobit results do not support the hypothesis.
34

In our analysis, the key parameters of interest are the interaction terms for DEt and the other tax
variables. As Ai and Norton (2003) show, the interaction effect on a dependent variable in nonlinear models
differs from the marginal effect of the interaction term. Therefore, in the estimation of our empirical models
using the Tobit procedure, the marginal effect of the interaction terms on the observed dividend payments(conditional on positive dividend payments) cannot be calculated in the usual manner. Thus, we focus on themarginal effects on the latent variable for dividend payments, which is a linear function of the independent
variables.
35
In the fixed-effects specifications, we do not include either the industry or country dummies because
they are almost completely absorbed by the affiliate fixed effects. Nonetheless, we have confirmed that theinclusion of industry and country dummies in the fixed-effects OLS model does not affect our results.
36
We obtain similar results when we include the post-reform year dummies (2009–2011) separately insteadof DEt . The estimated coefficients on the post-reform year dummies are positive in all specifications andsignificant in the fixed-effects OLS specifications.

15

In summary, from the preliminary analysis we obtain some evidence that foreign affiliates
increased dividend payments when scaled by sales and that the repatriation of dividends
became more sensitive to withholding tax rates on dividends following the adoption of theterritorial tax system. However, we find no evidence that dividend payments became lesssensitive to the tax rate differential between Japan and the foreign countries. In otherwords, there was no strong response from foreign affiliates in low-tax countries. There aresome caveats for interpreting these estimation results. First, relying on the post-reform year
dummy variables to measure the average change in the level of dividend payments might
falsely capture cyclical and sectoral macroeconomic effects after 2009 on profit repatriations(in spite of our attempt to control for those confounding factors with the various control
variables). Second, as Tables 1 and 2 imply, the response of foreign affiliates to dividend
exemption may be heterogeneous. Foreign affiliates that have a larger dividend payout
capacity than other affiliates, for example, those with a larger stock of retained earnings,
may have responded more flexibly to the dividend exemption system by increasing dividend
payments to their parent firms or changing their dividend payouts depending on the foreign
corporate tax rates and the dividend withholding tax rates of the host countries.

6

Heterogeneous Response to Dividend Exemption: By
Stock of Retained Earnings

As discussed in Section 2, one of the main goals of dividend exemption is to stimulate dividend
repatriations from foreign affiliates that had retained and accumulated large foreign profits
to avoid home taxation in Japan. It would be worthwhile to consider how these affiliates
responded to dividend exemption. Moreover, foreign affiliates that had retained a large
amount of profits would be able to flexibly change (increase) dividend payments in responseto the tax reform because dividends are from after-tax profits and the stock of retained
earnings. We also observe from Table 2 that dividend payments as a proportion of sales
increase at the 90th percentile and above in each year after 2009. This suggests that asmall portion of foreign affiliates with large dividend payout capacity exhibited a stronger
response to dividend exemption. To examine this issue, we investigate the possibility thatthe heterogeneous response to dividend exemption depends on the magnitude of the retained
earnings of the foreign affiliates and examine whether foreign affiliates with a large stock ofretained earnings changed dividend payments in a manner consistent with hypotheses H1–
H3.
We use information on the stock of retained earnings at the end of each fiscal year and16

construct a dummy variable equal to one if the stock of retained earnings when scaled bysales is greater than the value at the 90th percentile in the previous year’s sample.37 Denotethe dummy variable by Rijct , where i is the index for the affiliate owned by parent firm j.
We first select the threshold at the 90th percentile because we observe in Table 2 that the
distribution of dividends scaled by sales increases at the 90th percentile and above in eachyear after 2009.
To consider the heterogeneity of the response to dividend exemption in the regression
equation, we estimate equation (5) including the dummy variable Rijct and the interactionDD
terms of the dummy variable with each of DEt , Pijct , wct, (DEt ∗ Pijct ), and (DEt ∗ wct) as
independent variables. We also include year dummies for 2009 to 2011 instead of the postreform dummy DEt itself to capture common yearly changes in dividends for all affiliates
after 2009. We specify a set of observations where Rijct = 1 as a treatment group andconduct a version of difference-in-differences estimation.
Table 7 presents the estimation results. As in Table 6, columns 1 and 2 report thecoefficients estimated by the Tobit procedure and columns 3 and 4 report the results from thefixed-effects OLS.38 The coefficient on Rijct is positive for all specifications and significant at
the 1 % level in the Tobit models.39 In addition, the coefficient on (Rijct ∗DEt ) is significantly
positive at the 5% level in all four specifications. These results suggest that a foreign affiliate
with a larger stock of retained earnings in the previous year paid a larger amount of dividends
under the worldwide tax system and increased dividend payments further after the dividend
exemption system was enacted in 2009. This is consistent with hypothesis H1. The OLS
estimates indicate that, after 2009, a foreign affiliate within the top 10% of retained earnings
relative to sales in the previous year paid a larger amount of dividends by about 1% of its
sales than other affiliates holding affiliate sales fixed.
=== Table 7 ===D
The coefficients on (Rijct ∗ DEt ∗ wct) are negative and statistically significant at the
1% level in all specifications. This suggests that a foreign affiliate with a larger stock ofretained earnings in the previous year cares more about the tax costs of withholding taxes
on dividends after 2009 than other affiliates, which is consistent with hypothesis H3. The
fixed-effects OLS estimates imply that if the withholding tax rate on dividends is 1 percentage
37

In the survey, the stock of retained earnings is defined as “Proprietary capital − Capital − Capitalreserve.”38
For the reason described in footnote 34, we focus on the marginal effect on the latent dependent variable(the desired amount of dividend payments) in the Tobit estimation.
39
We cannot precisely estimate the coefficient on Rijct when including affiliate fixed effects, possibly
because the composition of foreign affiliates within the top 10% of retained earnings scaled by sales is stable
over time, and thus there is little within-affiliate variation in Rijct .

17

point higher, a foreign affiliate with a large stock of retained earning reduces its dividend
payout by 0.08% of sales relative to other affiliates after 2009 while holding affiliate sales
fixed. The coefficients on (DEt ∗ Pijct ) and (Rijct ∗ DEt ∗ Pijct ) are not estimated statisticallysignificantly positive in any of the specifications, which is still inconsistent with hypothesis
H2.
These findings are obscured when we define the dummy variable Rijct at a lower thresholdfor the stock of retained earnings. We estimate the same equation after redefining Rijct as adummy variable equal to one if the stock of retained earnings scaled by sales is greater thanthe median value in the previous year’s sample. Table 8 provides the estimation results.
The estimated coefficient on (Rijct ∗ DEt ) loses its significance, although remains positive,in the Tobit specifications. In the fixed-effects OLS specifications, the estimated coefficient
is significantly positive (0.003) but smaller than that in Table 7 (0.01). We observe a similar
D 40).
tendency for the estimated coefficient on (Rijct ∗ DEt ∗ wct=== Table 8 ===In the above specifications, the value of Rijct could change over time for each affiliate
depending on the size of retained earnings in year t − 1. We also try defining the dummy
variable based on the stock of retained earnings relative to sales in 2007. More precisely, wedefine dummy variable Rijc,2007 , which takes a value of one if the stock of retained earnings
scaled by sales is larger than a specific percentile value (the 90th percentile or the medianvalue) in the sample for 2007, otherwise zero. Then, the value of Rijc,2007 is fixed over timefor each affiliate and the foreign affiliates in the sample are split into two groups on the basisof the dummy variable Rijc,2007 . We find that the estimation results shown in Tables 7 and
8 do not qualitatively change at all when using Rijc,2007 instead of Rijct . This implies thatthe foreign affiliates that showed a stronger response to the tax reform are those that had alarge stock of retained earnings even before the adoption of a territorial tax regime started to
be seriously discussed in 2008.41 This also suggests that the composition of foreign affiliateswith a large stock of retained earnings (Rijct = 1) is stable throughout the data collection
period.
In summary, the response of Japanese-owned affiliates to dividend exemption was heterogeneous depending on the magnitude of the stock of retained earnings. A small portion40

We also try setting the threshold for Rijct at the 95th and 75th percentile values. We find that as thethreshold level increases from the median to the 75th, 90th, and 95th percentile values, the absolute valuesDof the estimated coefficients on (Rijct ∗ DEt ) and (Rijct ∗ DEt ∗ wct) become larger. This also confirms that
foreign affiliates with a larger stock of retained earnings in the previous year were more responsive to thetax reform.
41
The estimation results are available upon request from the authors.

18

of foreign affiliates that had a sufficiently large payout capacity responded to dividend exemption in a manner consistent with our hypotheses H1 and H3. The top 10% of foreign
affiliates in terms of retained earnings showed a stronger response to the tax reform because
they had sufficient capacity to flexibly change dividends paid from their retained earnings.
These affiliates increased their dividend payouts and became more sensitive to withholding
tax rates on dividends after 2009. However, we find no evidence that the change in dividend
payments is positively associated with the grossed-up tax rate differentials between Japanand foreign countries. This may imply a lack of tax aggressiveness on the part of Japanese
corporations.42 The Japanese government was concerned that adopting a territorial tax system would facilitate tax avoidance by multinational corporations shifting foreign income to
low-tax countries. Our results possibly suggest that Japanese parent firms did not respondto dividend exemption by reallocating their foreign profits to their foreign affiliates in low-tax
countries, thereby increasing dividend repatriations from these affiliates after 2009, and thus
may alleviate at least this concern of the Japanese government.

7

Robustness Checks

In this section, we describe the results of robustness checks to see how sensitive the resultspresented in the previous section are to different specifications. First, it is possible that
because dividend payout capacity increases as the profits of foreign affiliates increase, thesignificant positive coefficient on (Rijct ∗DEt ) may result from an increase in the profitabilityof foreign affiliates with a large stock of retained earnings after 2009 and not the enactment
of dividend exemption. To investigate this, we estimate the same set of regression equations
as in Table 7 after replacing the dependent variable with pretax profits scaled by affiliate
sales.43
Table 9 presents the estimation results. The estimated coefficients on the post-reform
year dummy variables (2009, 2010, and 2011) and the interaction term (Rijct ∗ DEt ) arenegative. This suggests that although the profitability of foreign affiliates with a large stockof retained earnings decreased or was unchanged after 2009, they significantly increased theirdividend payments scaled by sales, as shown in Table 7. These results imply that the positive
42

Takashima (2009) argues that; (i) many Japanese corporations lack a full awareness of the importance ofinternational tax and accounting strategies, and thus tend to bear extra tax costs that they could otherwise
save, (ii) Japanese companies tend to assume that taxes are unavoidable and are to be paid to the government,
while US and European companies regard taxes as costs that they should manage and reduce, and (iii)
Japanese corporations lack sufficient human resources for tax planning.
43
Unlike the estimation equation for dividend payments, there is no issue with the right censoring of thepretax profits of foreign subsidiaries. Thus, we employ ordinary least squares to estimate the pretax profit
equation.

19effect of dividend exemption on dividend payments by foreign affiliates with a large stockof retained earnings does not result from the improvement in the profitability of the foreignsubsidiaries.44=== Table 9 ===Second, there could be concerns that the entry and exit of foreign affiliates into and outof the data affect our results. The panel data used for the regression analysis is heavily
unbalanced because parent firms do not necessarily report affiliate information in every yearof the study period and because, as we explained, there are many missing values for dividend
payments. When we restrict foreign affiliates in the sample to only those that consistently
appear in the data and report dividend payments in all years from 2007 to 2011, only 4,720
affiliates remain in each year.
This creates more balanced panel data consisting of these 4,720 affiliates. We then estimate the same regression equations as shown in Table 7. Table 10 presents the estimation
results using the balanced panel data. Although the sample size is less than half that of
the original sample, the results for the key parameters are qualitatively similar to those in
Table 7. The estimated coefficient on (Rijct ∗ DEt ) is statistically significantly positive inD
all specifications. The estimated coefficient on (Rijct ∗ DEt ∗ wct) is negative in all specifications, though not statistically significant in the fixed-effects models, possibly because of thecontraction of the sample size.
=== Table 10 ===8Discussions and Conclusion

In April 2009, Japan introduced permanent dividend exemption and moved to a territorial
tax system. Using confidential survey data for Japanese multinational corporations from2006 to 2011, we provide the first evidence concerning the behavioral responses of Japaneseowned foreign affiliates to the transition from a worldwide income tax system to a territorial
tax system. We find that the response of Japanese-owned affiliates to dividend exemption washeterogeneous, whereby foreign affiliates that retained a large stock of retained earnings in
the previous year significantly increased dividend payments to their parent firms in response
to Japan’s adoption of a territorial tax regime. This implies that dividend exemption helped
fulfill its primary aim of stimulating dividend repatriation from foreign affiliates that had
amassed large amounts of foreign profits.
44

We also confirm that the estimation results do not change when controlling for affiliate pretax profit
scaled by sales in the estimation equations presented in Table 7.

20

We also examined the changes in the responsiveness of dividends to foreign tax rates,
withholding tax rates on dividends, and corporate tax rates in the host countries. Dividend
payments by affiliates with a large reserve of retained earnings became more sensitive towithholding tax rates on dividends levied by host countries because Japanese multinationals could no longer claim foreign tax credits for withholding tax payments on repatriateddividends under the new exemption system. This suggests that under the new exemption
system, lowering withholding tax rates through revision of existing tax treaties or concluding
new tax treaties to lower withholding tax rates on dividends would be a more effective way
to stimulate dividend repatriation than before. On the other hand, we found no evidence
that the responsiveness of dividend repatriations to foreign corporate tax rates changed withthe enactment of dividend exemption. More precisely, the change in dividend payments was
not positively associated with the grossed-up tax rate differentials between Japan and theforeign countries after the tax reform.
Our results should be informative for international corporate tax policy debate in the
U.S. as well as in other countries that have recently enacted or are contemplating similarreforms. Our findings may be especially relevant to the U.S. because of the similarity between
the U.S. and Japanese worldwide tax systems, and given that the two countries have thehighest corporate tax rates in the OECD. However, attempts to extend our findings toother countries need to consider carefully the differences in international tax systems andpossible differences in cultural attitudes toward tax compliance and general tax morale.45
Nonetheless, our findings on the heterogeneous response depending on the stock of retained
earnings are worth noting.
45

One notable difference between the U.S. and Japan (before 2009) in the worldwide tax system is that
the U.S. tax system requires multinational firms to calculate their foreign tax credits for foreign taxes on
passive and active incomes separately, while the Japanese worldwide tax system did not. Another differenceis that, unlike the U.S., Japan has tax-sparing agreements with several countries (Bangladesh, Brazil, China,
the Philippines, Sri Lanka, Thailand, and Zambia as of June 2012) under bilateral tax treaties, which would
serve to reduce the repatriation tax costs for foreign affiliates in these countries.

21

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[21] Ministry of Economy, Trade and Industry of Japan (METI). 2008a. Repatriations ofForeign Profits by Japanese Enterprises: Toward the introduction of a dividend exemption regime (Wagakuni Kigyo no Kaigairieki no Kanryu nitsuite). August 22,(In Japanese).
[22] Ministry of Economy, Trade and Industry of Japan (METI). 2008b. On the 2009 Tax
Reform (Heisei 21 Nendo Zeiseikaisei nitsuite). December, (In Japanese).
[23] Oler, Mitchell, Terry Shevlin, and Ryan Wilson. 2007. “Examining Investor Expectations concerning Tax Savings on the Repatriations of Foreign Earnings under theAmerican Jobs Creation Act of 2004.” Journal of the American Taxation Association
29(2), 25–55.
[24] Organisation for Economic Co-operation and Development (OECD). 2010. OECD Tax
Database, Paris: OECD.

23

[25] PricewaterhouseCoopers (PwC). 2013. “Evolution of Territorial Tax Systems in theOECD.” Prepared for The Technology CEO Council.
[26] Redmiles, Melissa. 2008. “The One-Time Received Dividend Deduction.” Statistics ofIncome Bulletin, 102–114.
[27] Sakurada, Joe and Yoshiyuki Nakanishi. 2011. “The Stock Market Reaction to theAnnouncement Regarding Japan’s Foreign Dividend Exemption (Gaikoku Kogaisha
Rieki no Kokunai Kanryu ni kansuru Zeiseikaisei to Shijo no Hanno).” Working
Paper, Hokkaido University. (In Japanese).
[28] Slemrod, Joel. 1990. “Tax Effects on Foreign Direct Investment in the United States:
Evidence From a Cross-Country Comparison,” in Assaf Razin and Joel Slemrod(eds.), Taxation in the Global Economy, Chicago, IL: University of Chicago Press,
79–117.
[29] Tajika, Eiji, Masaki Hotei, and Keiko Shibata. 2014. “The Effects of DividendExemption Method on Repatriation of Income from Abroad: The Case of 2009
Japanese Tax Reform (Zeisei to Kaigai Kogaisha no Rieki Sokin: Honsha Shikin
Juyo Karamita 2009 Nendo Kaisei no Bunseki).” Economic Analysis (Keizai Bunseki). (In Japanese).
[30] Tajika, Eiji and Ryota Nakatani. 2008. “Welcome Home to Japan: Repatriation of
Foreign Profits by Japanese Multinationals.” Discussion Paper No. 2008-04, Hitotsubashi University.
[31] Takashima, Kennichi. 2009. “The Basics of International Tax and Accounting Strategies:
The Importance of International Tax and Accounting Strategies for Business Operation (Kokusai Zeimu Senryaku no Kiso: Keiei Senryaku niokeru Kokusai Zeimu no
Juyousei),” (in Japanese), available at http://www.kpmg.com/Jp/ja/knowledge/
article/tax/Documents/200907_2.pdf.
[32] United Nations Conference on Trade and Development (UNCTAD). 2012. UNCTADStat
Database, http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx.

24

Table 1: Dividend Payments by Foreign Affiliates (in million yen)
year
2007
2008
2009
2010
2011
Total

sum
1214686
1020855
14660629916751472833
6166111

mean
129
100
146
97
136
122

sd
1480
882
2283
868
2886
1878

p50
0
0
0
0
0
0

p75
12
6
2
5
9
6

p90
138
105
94
99
125
111

p95
350
302
257
293
340
310

p99
2178
1624
1643
1694
1883
1808

N
9399
10178
10048
10224
10818
50667

Table 2: Dividend Payments by Foreign Affiliates as a Proportion of Sales
year
2007
2008
2009
2010
2011
Total

Year
2007
2008
2009
2010
2011
Total

mean
.0465
.0241
.0404
.0425
.0483
.0403

sd
1.24
.711
1.32
1.29
1.47
1.24

p50
0
0
0
0
0
0

p75
.00546.00419.00258.00476.00699
.0049

p90
.032
.0312
.0361
.0329
.0391
.0339

p95
.0623
.0638
.0768
.0651
.0744
.0682

p99
N
.213 8985.219 9675.295 9506.247 9343.276 9915.253 47424

Table 3: Proportion of Foreign Affiliates Paying Dividends
Dividend > 0 Dividend = 0 Total Number of Affiliates Proportion
2836
6563
9399
30.2 %
2881
7297
10178
28.3 %
2604
7444
10048
25.9 %
2834
7390
10224
27.7 %
3207
7611
10818
29.6 %
14362
36305
50667
28.3 %

25

Table 4: Definitions of Variables
Definition
Subsidiary operating revenues without including non-operating income(Dividend/Sales)ijct
Subsidiary dividend payments scaled by sales
Pijct
Grossed-up difference between Japanese
statutory tax rate and the subsidiary average tax rate
D
Withholding tax rate on dividends
wctR
Withholding tax rate on royalties
wct
I
wct
Withholding tax rate on interestτ̂ijctAverage subsidiary tax rate, which is definedas the corporate tax payment divided by thepretax profit of subsidiary iτct
Statutory corporate tax rate
Foreign Exchange Ratect
Exchange rate between Japanese yen and local currency, which is normalized to one in2005
Real GDP Growthct
Real GDP Growth Rate
(Parent Net Profit/Assets)ijct Parent net profit scaled by total assets(Parent Debt/Assets)ijct
Parent total debt (total current and fixed liabilities) scaled by total assets
Retained Earningsijct
Fiscal year-end balance of retained earnings,
which is defined as “Proprietary capital −Capital − Capital reserve”(Retained Earnings/Sales)ijct Subsidiary retained earnings at the end of theaccount year scaled by sales(Profit/Sales)ijct
Subsidiary pre-tax profit divided by sales
Notes: The subscripts i, j, c, and t indicate the subsidiary, its parent firm,
the country where the subsidiary is located, and the year, respectively.
Variable
Salesijct26

Table 5: Descriptive Statistics
variablemean
sd
p25 p50 p75
N(Dividend/Sales)ijct.0122 .0361
00 .0049 47424
Pijct.257 .165.166 .298 .407 52197
D.0686 .0658
0.1.1 86573
wct
R
wct.0886 .0592.0525.1.1 86573
I
wct.103 .0459.1.1.1 86573
τ̂ijct.219 1.56
0 .156 .289 52197
τct.286 .0712.25.28.33 86590
Foreign Exchange Ratect
1.05 .184.922 1.03 1.15 86560
Real GDP Growthct
5.1 4.59
1.85 5.04
9.2 86278(Parent Net Profit/Assets)ijct.0152 .0478 .00409 .0187 .0377 86338(Parent Debt/Assets)ijct.57 .215.408 .592 .746 86600(Retained Earnings/Sales)ijct.0418.95 -.00796 .0844 .268 62353(Profit/Sales)ijct.0147 .289 .00309 .0357 .092 70416
Notes: The subscripts i, j, c, and t indicate the subsidiary, its parent firm, thecountry where the subsidiary is located, and the year, respectively. See Table
4 for the definition of each variable.

27

Table 6: Regressions of the Dividend Equation
(1)
DEt
Pijct
DEt ∗ Pijct
D
wct
D
DEt ∗ wct
R
wct
R
DEt ∗ wctI
wctI
DEt ∗ wct

τct
DEt ∗ τct
Foreign Exchange Ratect
Real GDP Growth Ratect
Year 2008

0.0020(0.0068)-0.1064***(0.0051)-0.0048(0.0058)-0.0537(0.0464)-0.0196(0.0216)-0.0535(0.0422)0.0135(0.0363)0.0440(0.0742)-0.0177(0.0395)-0.0378(0.0270)0.0012(0.0214)0.0188***(0.0060)
0.0003*(0.0002)-0.0010(0.0016)

Lagged (Parent Net Profit/Assets)ijct
Lagged (Parent Debt/Assets)ijct
Constant-0.0478**(0.0211)(Dividend/Sales)ijct(2)(3)
0.0044(0.0074)-0.1012***(0.0056)-0.0070(0.0064)-0.0698(0.0500)-0.0188(0.0231)-0.0447(0.0449)-0.0005(0.0389)0.0433(0.0714)0.0006(0.0424)-0.0171(0.0290)0.0091(0.0230)
0.0097(0.0066)
0.0000(0.0002)0.0003(0.0017)0.0862***(0.0153)-0.0158***(0.0041)-0.0355(0.0232)

0.0050**(0.0025)
0.0023(0.0017)-0.0040**(0.0019)0.0030(0.0230)-0.0196**(0.0084)-0.0319**(0.0157)
0.0115(0.0125)-0.0170(0.0515)-0.0035(0.0143)0.0035(0.0102)-0.0089(0.0079)
0.0039*(0.0023)-0.0002**(0.0001)-0.0003(0.0006)

0.0118*(0.0065)(4)0.0049*(0.0028)0.0019(0.0019)-0.0019(0.0022)0.0079(0.0259)-0.0276***(0.0095)-0.0455**(0.0197)
0.0093(0.0139)-0.0311(0.0532)
0.0129(0.0156)
0.0023(0.0114)-0.0117(0.0087)
0.0032(0.0026)-0.0002***(0.0001)-0.0002(0.0007)0.0014(0.0065)
0.0061(0.0040)0.0124*(0.0074)

Country and Industry Dummies
Yes
Yes
No
No
Affiliate Fixed Effects
No
No
Yes
Yes
Tobit or OLS
Tobit
Tobit
OLS
OLS
Observations
42,181
34,81942,181
34,819R-squared
0.00310.0042
Notes: Robust standard errors clustered by affiliate in parentheses. *** p<0.01,** p<0.05, * p<0.1. See Table 4 for the definitions of independent variables.

28

Table 7: Dividend Equation Including the Stock of Retained Earnings (the 90th
percentile threshold)(Dividend/Sales)ijct
(2)
(3)

(1)
Year 2009

0.0069(0.0076)0.0043(0.0076)
0.0129(0.0079)
0.0286***(0.0067)
0.0183**(0.0077)-0.1020***(0.0055)-0.0031(0.0063)
0.0725***(0.0227)-0.0465*(0.0265)-0.0466(0.0495)-0.0034(0.0237)0.0777*(0.0467)-0.1314***(0.0497)-0.0784*(0.0438)
0.0027(0.0394)-0.0521(0.0751)
0.0112(0.0424)0.0157(0.0299)-0.0039(0.0232)-0.0055(0.0080)0.0004(0.0002)0.0032*(0.0019)-0.0377(0.0233)
No
Yes
No
Tobit
32,8290.0050*0.0055*(0.0030)(0.0030)
Year 2010
0.00410.0044(0.0030)(0.0030)
Year 2011
0.0060*0.0064**(0.0032)(0.0032)
Rijct
0.00080.0009(0.0037)(0.0037)
Rijct ∗ DEt
0.0095**0.0096**(0.0043)(0.0044)
Pijct
0.00080.0008(0.0018)(0.0018)
DEt ∗ Pijct
0.00020.0004(0.0020)(0.0021)
Rijct ∗ Pijct0.00180.0023(0.0112)(0.0114)
Rijct ∗ DEt ∗ Pijct-0.0033-0.0033(0.0143)(0.0145)D
wct
0.01530.0167(0.0238)(0.0239)D
DEt ∗ wct-0.0161*-0.0183*(0.0094)(0.0096)
D
Rijct ∗ wct
0.0560*0.0520*(0.0291)(0.0291)
D
Rijct ∗ DEt ∗ wct-0.0774***-0.0791***(0.0297)(0.0298)
R
wct-0.0455**-0.0465**(0.0201)(0.0202)R
DEt ∗ wct
0.00650.0069(0.0145)(0.0146)I
wct-0.0360-0.0368(0.0551)(0.0555)I
DEt ∗ wct
0.01550.0151(0.0159)(0.0161)
τct
0.00780.0071(0.0121)(0.0122)DEt ∗ τct
-0.0120-0.0127(0.0090)(0.0091)
Foreign Exchange Ratect-0.0017-0.0019(0.0034)(0.0034)
Real GDP Growth Ratect-0.0001-0.0001(0.0001)(0.0001)
Year 2008
0.00100.0010(0.0008)(0.0008)
Constant
0.0174**0.0152*(0.0073)(0.0078)
Parent Controls
No
YesCountry and Industry Dummies
No
No
Affiliate Fixed Effects
Yes
Yes
Tobit or OLS
OLS
OLS
Observations
32,82932,565R-squared
0.00770.0080Notes: Robust standard errors clustered by affiliate in parentheses. *** p<0.01, **p<0.05, * p<0.1. Rijct : dummy variable equal to one if the stock of retained earnings
scaled by sales is greater than the 90th percentile value in the previous year’s sample.
See Table 4 for the definitions of independent variables.

29

0.0090(0.0076)
0.0053(0.0076)
0.0124(0.0079)
0.0281***(0.0068)
0.0181**(0.0078)-0.1011***(0.0056)-0.0027(0.0063)
0.0720***(0.0227)-0.0447*(0.0266)-0.0513(0.0494)-0.0053(0.0239)0.0737(0.0467)-0.1311***(0.0497)-0.0747*(0.0439)0.0022(0.0395)-0.0534(0.0747)
0.0125(0.0425)
0.0119(0.0300)-0.0011(0.0232)-0.0045(0.0081)0.0004(0.0002)0.0032*(0.0019)-0.0316(0.0236)
Yes
Yes
No
Tobit
32,565(4)

Table 8: Dividend Equation Including the Stock of Retained Earnings (the medianthreshold)(1)
Year 20090.0043(0.0078)0.0005(0.0078)0.0090(0.0081)0.0360***(0.0037)
0.0034(0.0042)-0.1176***(0.0070)-0.0101(0.0083)
0.0968***(0.0101)
0.0008(0.0121)-0.0233(0.0516)-0.0027(0.0315)0.0152(0.0281)-0.0450(0.0318)-0.0745*(0.0442)0.0216(0.0389)-0.0773(0.0701)-0.0077(0.0420)0.0270(0.0301)
0.0045(0.0230)-0.0028(0.0079)0.0004(0.0002)0.0025(0.0019)-0.0483**(0.0225)
No
Yes
No
Tobit
32,829(Dividend/Sales)ijct(2)(3)

0.00360.0041(0.0029)(0.0029)
Year 2010
0.00230.0026(0.0029)(0.0029)
Year 2011
0.00420.0046(0.0031)(0.0031)
Rijct
0.00230.0019(0.0015)(0.0015)
Rijct ∗ DEt
0.0029*0.0031**(0.0016)(0.0016)
Pijct-0.0016-0.0015(0.0016)(0.0017)DEt ∗ Pijct-0.0014-0.0011(0.0017)(0.0017)
Rijct ∗ Pijct
0.00370.0036(0.0037)(0.0037)
Rijct ∗ DEt ∗ Pijct
0.00540.0053(0.0047)(0.0048)
D
wct
0.00200.0020(0.0242)(0.0244)D
DEt ∗ wct-0.0110-0.0123(0.0093)(0.0094)
D
Rijct ∗ wct
0.0287**0.0300**(0.0145)(0.0148)
D
Rijct ∗ DEt ∗ wct-0.0244**-0.0261**(0.0120)(0.0121)R
wct-0.0441**-0.0449**(0.0203)(0.0204)R
DEt ∗ wct
0.00520.0053(0.0147)(0.0148)I
wct-0.0389-0.0397(0.0547)(0.0551)I
DEt ∗ wct
0.01310.0127(0.0162)(0.0164)
τct
0.00850.0077(0.0122)(0.0122)DEt ∗ τct
-0.0094-0.0101(0.0090)(0.0091)
Foreign Exchange Ratect-0.0011-0.0015(0.0034)(0.0034)
Real GDP Growth Ratect-0.0001-0.0001(0.0001)(0.0001)
Year 2008
0.00090.0009(0.0008)(0.0008)
Constant
0.0164**0.0142*(0.0074)(0.0079)
Parent Controls
No
YesCountry and Industry Dummies
No
No
Affiliate Fixed Effects
Yes
Yes
Tobit or OLS
OLS
OLS
Observations
32,82932,565R-squared
0.00970.0098Notes: Robust standard errors clustered by affiliate in parentheses. *** p<0.01, **p<0.05, * p<0.1. Rijct : dummy variable equal to one if the stock of retained earnings
scaled by sales is greater than the median value in the previous year’s sample. See
Table 4 for the definitions of independent variables.

30

0.0058(0.0078)0.0010(0.0079)
0.0083(0.0081)0.0358***(0.0037)
0.0037(0.0042)-0.1171***(0.0070)-0.0094(0.0083)
0.0963***(0.0101)
0.0002(0.0122)-0.0257(0.0516)-0.0073(0.0318)0.0130(0.0281)-0.0409(0.0319)-0.0718(0.0442)0.0211(0.0390)-0.0779(0.0702)-0.0068(0.0422)0.0233(0.0302)
0.0077(0.0231)-0.0022(0.0080)0.0004(0.0002)0.0025(0.0019)-0.0491**(0.0228)
Yes
Yes
No
Tobit
32,565(4)

Table 9: Regressions of Profit-Sales Ratios(1)
Year 2009(Profit/Sales)ijct
(2)
(3)

(4)

-0.070***-0.065***-0.0718***-0.0714***(0.017)(0.018)(0.0176)(0.0177)
Year 2010-0.040**-0.036**-0.0537***-0.0527***(0.017)(0.018)(0.0179)(0.0180)
Year 2011-0.048***-0.046**-0.0632***-0.0621***(0.018)(0.018)(0.0187)(0.0188)Rijct
0.130***
0.130***
0.01780.0182(0.014)(0.014)(0.0129)(0.0130)
Rijct ∗ DEt-0.011-0.012-0.0553***-0.0566***(0.015)(0.015)(0.0116)(0.0117)
Pijct-0.260***-0.254*** -0.0842***-0.0826***(0.013)(0.013)(0.0108)(0.0108)DEt ∗ Pijct
0.044***
0.040***
0.0675***0.0651***(0.015)(0.015)(0.0138)(0.0138)
Rijct ∗ Pijct-0.010-0.014-0.0140-0.0161(0.061)(0.061)(0.0442)(0.0446)
Rijct ∗ DEt ∗ Pijct-0.075-0.067-0.0358-0.0290(0.069)(0.069)(0.0568)(0.0573)Dwct-0.213-0.205-0.1135-0.1134(0.131)(0.132)(0.1080)(0.1087)D
DEt ∗ wct-0.022-0.031-0.0648-0.0695(0.054)(0.054)(0.0443)(0.0445)
D
Rijct ∗ wct
0.120
0.114
-0.0232-0.0261(0.105)(0.105)(0.0918)(0.0923)
D
Rijct ∗ DEt ∗ wct-0.028-0.0120.2270**0.2309**(0.127)(0.127)(0.0951)(0.0955)
R
wct-0.008-0.010-0.0826-0.0846(0.087)(0.087)(0.0960)(0.0964)R
DEt ∗ wct0.134*
0.131*
0.1599**0.1614**(0.079)(0.079)(0.0734)(0.0738)I
wct-0.045-0.052-0.0722-0.0688(0.118)(0.119)(0.0886)(0.0915)I
DEt ∗ wct-0.019-0.014-0.0351-0.0350(0.078)(0.078)(0.0653)(0.0658)
τct-0.183***-0.183***-0.1623***-0.1610***(0.069)(0.069)(0.0580)(0.0584)
DEt ∗ τct
0.053
0.055
0.06110.0598(0.048)(0.048)(0.0459)(0.0463)
Foreign Exchange Ratect
0.053***
0.053***
0.0584***0.0587***(0.019)(0.019)(0.0201)(0.0201)
Real GDP Growth Ratect-0.001-0.001*-0.0004-0.0004(0.001)(0.001)(0.0004)(0.0004)
Year 2008-0.023***-0.023***-0.0246***-0.0247***(0.004)(0.004)(0.0041)(0.0042)
Constant
0.073
0.089*
0.0939***0.0741***(0.057)(0.053)(0.0244)(0.0270)
Parent Controls
No
Yes
No
Yes
Country and Industry Dummies
Yes
Yes
No
No
Affiliate Fixed Effects
No
No
Yes
Yes
Observations
36,511
36,22036,511
36,220R-squared
0.102
0.103
0.01280.0129Notes: Robust standard errors clustered by affiliate in parentheses. *** p<0.01, **p<0.05, * p<0.1. Rijct : dummy variable equal to one if the stock of retained earnings
scaled by sales is greater than the 90th percentile value in the previous year’s sample.
See Table 4 for the definitions of independent variables.

31

Table 10: Dividend Regression Equation using the Balanced Panel Data
(1)
Year 20090.0044(0.0084)
0.0039(0.0084)
0.0119(0.0088)
0.0263***(0.0088)0.0188**(0.0093)-0.1083***(0.0076)
0.0099(0.0081)0.0875***(0.0296)-0.0551*(0.0321)0.0016(0.0540)-0.0344(0.0261)
0.0336(0.0568)-0.0995*(0.0558)-0.1108**(0.0496)-0.0110(0.0440)-0.2520**(0.1234)
0.0445(0.0456)
0.0056(0.0345)-0.0074(0.0247)-0.0043(0.0096)0.0002(0.0003)
0.0029(0.0023)-0.0200(0.0331)
No
Yes
No
Tobit
19,377(Dividend/Sales)ijct(2)(3)

0.00410.0047(0.0033)(0.0034)
Year 2010
0.00270.0030(0.0033)(0.0034)
Year 2011
0.00530.0057(0.0035)(0.0036)
Rijct-0.0011-0.0007(0.0041)(0.0041)
Rijct ∗ DEt
0.0126***0.0122**(0.0048)(0.0049)
Pijct-0.0001-0.0002(0.0024)(0.0024)DEt ∗ Pijct
0.00200.0021(0.0024)(0.0025)
Rijct ∗ Pijct
0.01510.0144(0.0130)(0.0131)
Rijct ∗ DEt ∗ Pijct-0.0241-0.0230(0.0161)(0.0163)D
wct-0.0035-0.0030(0.0261)(0.0262)D
DEt ∗ wct-0.0195*-0.0211*(0.0106)(0.0108)
D
Rijct ∗ wct
0.0683**0.0670*(0.0340)(0.0342)
D
Rijct ∗ DEt ∗ wct-0.0510-0.0493(0.0325)(0.0327)R
wct-0.0467**-0.0477**(0.0229)(0.0230)R
DEt ∗ wct
0.00660.0075(0.0157)(0.0158)
I
wct-0.0997**-0.1019**(0.0463)(0.0469)I
DEt ∗ wct
0.00940.0078(0.0175)(0.0178)τct
0.00220.0015(0.0146)(0.0146)DEt ∗ τct
-0.0060-0.0063(0.0097)(0.0098)
Foreign Exchange Ratect-0.0032-0.0034(0.0041)(0.0041)
Real GDP Growth Ratect-0.0001-0.0001(0.0001)(0.0001)
Year 2008
0.00130.0013(0.0010)(0.0010)
Constant
0.0303***0.0281***(0.0073)(0.0079)
Parent Controls
No
YesCountry and Industry Dummies
No
No
Affiliate Fixed Effects
Yes
Yes
Tobit or OLS
OLS
OLS
Observations
19,377
19,242R-squared
0.00940.0095
Notes: Robust standard errors clustered by affiliate in parentheses. *** p<0.01, **p<0.05, * p<0.1. Rijct : dummy variable equal to one if the stock of retained earnings
scaled by sales is greater than the 90th percentile value in the previous year’s sample.
See Table 4 for the definitions of independent variables.

32

0.0061(0.0084)0.0046(0.0084)
0.0119(0.0088)0.0259***(0.0088)0.0180*(0.0093)-0.1076***(0.0076)0.0105(0.0081)0.0874***(0.0297)-0.0558*(0.0323)0.0017(0.0538)-0.0360(0.0263)
0.0320(0.0569)-0.0938*(0.0561)-0.1102**(0.0497)-0.0124(0.0442)-0.2545**(0.1214)0.0449(0.0460)
0.0003(0.0346)-0.0054(0.0248)-0.0045(0.0097)0.0003(0.0003)
0.0029(0.0023)-0.0087(0.0334)
Yes
Yes
No
Tobit
19,242(4)

Table A1: Number of Foreign Affiliates in Each Country
Country
Argentina
Australia
Austria
BelgiumBrazilCanadaCayman Islands
Chile
China
Czech Republic
Denmark
FranceGermany
Hong Kong SAR, China
Hungary
India
Indonesia
Ireland
Italy
Korea, Rep.
Malaysia
MexicoNetherlands
New Zealand
PanamaPhilippines
PolandPortugal
Russian Federation
Singapore
South Africa
Spain
SwedenSwitzerland
TaiwanThailandTurkeyUnited Arab Emirates
United Kingdom
United States
Vietnam

2007
11
153
17
54
97
97
16
15
2481
36
9
107
272
537
17
88
310
19
60
324
340
79
145
29
71
172
26
12
17
477
13
54
23
23
450
795
13
18
278
1350
165

2008
10
147
17
58
108
107
15
19
2793
34
10
121
275
578
19
114
316
17
51
329
352
72
138
36
110
192
29
12
23
487
14
54
22
20
474
855
8
23
279
1473
193

33

2009
14
168
18
58
117
111
10
20
2767
35
9
119
272
560
20
126
324
15
51
319
346
84
132
32
99
204
30
9
22
452
18
53
23
20
454
850
9
25
279
1397
209

2010
13
172
19
58
120
100
6
17
2852
36
10
117
262
568
17
141
321
17
58
343
356
76
138
37
96
221
26
12
28
469
19
54
24
14
471
863
10
25
274
1389
197

2011
15
169
20
53
121
111
7
19
3015
32
12
119
279
596
24
153
374
10
57
377
360
91
162
39
94
217
29
10
24
510
25
52
24
21
497
903
11
27
282
1486
221

Total
63
809
91
281
563
526
54
90
13908
173
50
583
1360
2839
97
622
1645
78
277
1692
1754
402
715
173
470
1006
140
55
114
2395
89
267
116
98
2346
4266
51
118
1392
7095
985

Table A2: Total Amount of Dividends Paid by Foreign Affiliates in Each Country(in million yen)Country
Argentina
Australia
Austria
BelgiumBrazilCanadaCayman Islands
Chile
China
Czech Republic
Denmark
FranceGermany
Hong Kong SAR, China
Hungary
India
Indonesia
Ireland
Italy
Korea, Rep.
Malaysia
MexicoNetherlands
New Zealand
PanamaPhilippines
PolandPortugal
Russian Federation
Singapore
South Africa
Spain
SwedenSwitzerland
TaiwanThailandTurkeyUnited Arab Emirates
United Kingdom
United States
Vietnam

2007
254
38244
254
8776
35218
18852
518
4260
248459
350
190
5066
34338
46324
577
17593
24676
616
2536
26135
21628
7807
39743
1792
586
14504
5988
206
3160
78733
1970
3054
443
172
49086
119165
939
2765
21514
296499
12064

2008
537
22975
198
4599
43693
14856
1199
2621
211405
1482
151
6766
27969
70797
897
16755
40795
488
1844
21806
21223
8199
61971
1361
675
6980
9507
98
1355
64094
1287
1272
855
504
48256
121239
405
1710
40955
106868
15290

34

2009
111
41609
820
18376
19733
4591
291
3684
385069
856
78
5565
19091
44868
10
52336
80289
403
6034
19930
25392
3816
13088
1030
1014
7561
1370
138
119
33862
1054
2467
293
87
34007
228040
6082
2890
29258
333878
12410

2010
263
72241
818
13545
16239
8016
1075
1227
199826
1318
19
2765
19166
50724
94
4536
19855
390
3870
32626
17592
4295
27433
1070
3165
12972
1473
442
106
78670
1138
561
1815
13
27483
148002
383
2138
12516
175940
6143

2011
178
75737
286
15229
28952
7775
1919
1841
226115
1150
34
6673
15994
55562
1287
4531
65098
336
6314
27684
23080
5994
64468
509
2356
20492
1355
293
174
92116
1441
7931
258
697
35684
138639
392
2104
18058
490869
9709

Total
1343
2508062376
60525
143835
54090
5002
13633
1270874
5156
472
26835
1165582682752865
95751
2307132233
20598
12818110891530111
206703
5762
7796
62509
19693
1177
4914
347475
6890
15285
3664
1473
1945167550858201
11607
122301140405455616

Table A3: Mean of Affiliate Average Tax Rates in Each Country
Country
2007 2008 2009 2010 2011
Argentina
0.292 0.294 0.314 0.210 0.256
Australia
0.212 0.196 0.216 0.206 0.269
Austria0.110 0.104 0.135 0.229 0.168
Belgium
0.233 0.215 0.174 0.184 0.224
Brazil
0.273 0.290 0.244 0.256 0.289
Canada0.256 0.231 0.223 0.239 0.238
Cayman Islands
0.000 0.014 0.000 0.000 0.150
Chile
0.095 0.109 0.165 0.117 0.159
China
0.094 0.102 0.105 0.153 0.177
Czech Republic
0.106 0.123 0.080 0.097 0.127
Denmark0.186 0.180 0.140 0.118 0.184
France0.242 0.263 0.222 0.219 0.256
Germany0.290 0.248 0.231 0.246 0.239
Hong Kong SAR, China 0.123 0.107 0.090 0.119 0.132
Hungary0.130 0.128 0.165 0.218 0.095
India
0.278 0.260 0.212 0.239 0.206
Indonesia
0.323 0.294 0.273 0.263 0.261
Ireland0.088 0.078 0.049 0.068 0.116
Italy
0.518 0.393 0.373 0.400 0.453
Korea, Rep.
0.189 0.167 0.136 0.158 0.177
Malaysia
0.196 0.184 0.161 0.175 0.179
Mexico0.263 0.203 0.261 0.298 0.330
Netherlands
0.208 0.174 0.163 0.152 0.152
New Zealand
0.257 0.192 0.241 0.404 0.196
Panama0.009 0.007 0.002 0.022 0.007
Philippines
0.230 0.224 0.196 0.211 0.227
Poland0.147 0.137 0.119 0.192 0.245
Portugal
0.163 0.151 0.381 0.340 0.355
Russian Federation
0.268 0.176 0.316 0.226 0.290
Singapore
0.143 0.154 0.124 0.136 0.112
South Africa
0.261 0.206 0.200 0.272 0.245
Spain
0.242 0.159 0.196 0.184 0.202
Sweden0.198 0.207 0.145 0.134 0.207
Switzerland
0.129 0.112 0.124 0.183 0.173
Taiwan0.235 0.238 0.234 0.194 0.178
Thailand
0.180 0.167 0.153 0.192 0.205
Turkey0.213 0.154 0.130 0.159 0.102
United Arab Emirates
0.000 0.016 0.003 0.000 0.001
United Kingdom
0.212 0.193 0.198 0.212 0.205
United States
0.263 0.230 0.214 0.245 0.252
Vietnam
0.053 0.040 0.044 0.076 0.097
Notes: To bound the average affiliate tax rates between 0 and 1,
we dropped observations with negative corporate tax payments
and those with non-positive pretax profits but positive tax payments. We also set the average affiliate tax rate equal to 0 if thetax payment is 0 and the pretax profit is non-positive to boundthe average tax rates from zero. The average affiliate tax rates
are also winsorized at the top and bottom 1% to mitigate theinfluence of outliers.

35