Academic journal article Global Business and Management Research: An International Journal

Exchange Rate Fluctuations and Dividend Repatriation Decision of Multinational Corporations

Academic journal article Global Business and Management Research: An International Journal

Exchange Rate Fluctuations and Dividend Repatriation Decision of Multinational Corporations

Article excerpt

Introduction

The exchange rate fluctuation is one of the leading issues facing by the multinational corporations. It can affect the future cash flows, profitability, and firm value (Eiteman, Stonehill and Moffett, 2012). For instance, if the cost and revenues of the MNCs are in different currencies then fluctuations in exchange rate between the currencies will affect the cash flows of the firm. The foreign subsidiaries operating in different countries with different currencies are exposed to exchange rate risk. Dividend repatriation from a foreign subsidiary to the parent company is one of the examples of foreign exchange risk for the MNCs. Since dividend repatriation from a foreign subsidiary to parent company needs conversion of the host currency into home currency at the current exchange rate. Consequently, exchange rate fluctuations may have a favorable and unfavorable impact on the amount of dividend paid by a foreign subsidiary depending on the movement of the host country currency against the home country currency. If the host country currency appreciates against the home country currency at the time of dividend repatriation, it will result in higher amount to the parent company and vice versa. It suggests the impact of exchange rate fluctuations on the dividend repatriation policy.

Hartman (1985) assumed constant repatriation tax rate overtime and proposed that repatriation taxes will have no impact on the dividend repatriation decision of the mature foreign subsidiaries financing investment projects from the retained earnings. He used trapped equity model of King (1977), Auerbach (1979) and Bradford (1981) which is related to dividend payouts to diffuse shareholders. He argues that if a foreign subsidiary has more investment opportunities and less internally generated funds then parent company will inject equity in such foreign subsidiary. However, mature foreign subsidiaries have less investment opportunities and more free cash flows. The equity is trapped in such foreign subsidiaries and these foreign subsidiaries repatriate excess free cash flows to parent company. It suggests that permanent tax rate has no effect on repatriation decision of foreign subsidiaries. Nevertheless, repatriation tax rates are not constant overtime and can vary from time to time depending on the parent company's foreign tax credit position, corporate tax rate changes of the host and home country and foreign income tax regime of the home country (Hasegawa and Kiyota, 2017). The empirical studies by Hines and Hubbard (1990), Altshuler, Newlon and Slemrod (1993), Altshuler (1995), Grubert (1998), Desai, Foley and Hines, (2001), Desai, Foley and Hines (2007), Moore (2011) and Egger, Merlo, Ruf and Wamser (2015) provide evidence for relevance of changes in repatriation taxes on the dividend repatriation policy.

In the similar vein, Dodonova and Khoroshilov (2007) propose theoretical model that explains the impact of transitory repatriation tax changes triggered by the exchange rate fluctuations on the dividend repatriation of the U.S. MNCs' foreign subsidiaries. They argue that the U.S. taxation system is encouraging the U.S. MNCs to time their dividend repatriation based on exchange rate fluctuations. Since the U.S. taxation system translates dividend payments into U.S. dollar at the time of repatriation but foreign tax credits are translated at the exchange rates when the foreign taxes were paid. It provides the opportunity to time the dividend repatriation depending on the movement of the host country currency against the U.S. dollar. They propose that if the foreign currency is depreciation against the home currency the repatriation tax rate will be low and firms prefer to repatriate more dividends to avoid foreign tax credit losses. However, foreign tax credits carry forwards for 10 years and backward for 1 years under U.S. taxation system weakens this argument. In addition, permanently reinvested earnings option in U. …

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