Martin A. Sullivan (Tax Analysts), New Insight on Repatriation Holiday Not a Game Changer, 140 Tax Notes 969 (Sept. 2, 2013):
The most common use of the $312 billion of funds repatriated under the provisions of the American Jobs Creation Act of 2004 was for cash acquisitions and not, as widely believed, distributions to shareholders. That is the finding of a new study by professor Thomas J. Brennan of Northwestern University Law School (Where the Money Really Went: A New Understanding of the AJCA Tax Holiday). [See also New York Times DealBook: A Holiday From Taxes, and Often From the Strings Attached, by Vic Fleischer (San Diego)] ...
For years it has been the accepted wisdom that most of the funds unlocked by the provisions of the Jobs Act were used for share repurchases and dividends. That conclusion is largely based on the research of economists Dhammika Dharmapala, Fritz Foley, and Kristin Forbes (Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act, Journal of Finance, 2011, p. 753). In their 2009 study, they estimated that between 60 and 92 percent of repatriated funds were used to make distributions to shareholders in 2005, mostly in the form of share repurchases. ... The main reason why their findings are important is that in most economic models, distributions to shareholders have little of the job-creating macroeconomic stimulus. Therefore, the results strongly suggest that the repatriation holiday failed to achieve its objective. To convince most economists that the funds had a significant effect on employment, the repatriated cash would have had to have been spent on direct hiring, worker training, capital spending, or research and development.
In his study, the first thing Brennan does is prove that the estimated 60 to 92 percent range is too high. ... Next, Brennan develops his own method of estimating the use of repatriated funds. ... Brennan estimates eight categories of uses of funds: cash acquisitions, share repurchases, dividends, research spending, capital expenditures, debt reduction, pension funding, and unexplained spending. (Brennan did not have data for spending on hiring or worker training.) As shown in Table 1, the leading use of repatriated funds was cash acquisitions (39 percent). Share repurchases were a distant second (27 percent). Research spending and capital spending account for only 4 percent and 3 percent, respectively. ...
Under the Jobs Act, share repurchases and dividends were not permitted uses of funds. Acquisitions of firms, as long as their assets were primarily in the United States, were. Brennan's research shows that repatriating companies behaved more in the spirit of the law than previously thought. That may provide consolation in some quarters. ... [N]either the Dharmapala nor the Brennan study indicates any significant increase in domestic capital spending or research. And that is not surprising given that we would expect to see this happen only if firms were cash- or credit-constrained. Most of the repatriated funds were brought home by large, financially secure U.S. firms that would have no trouble financing profitable domestic opportunities.
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