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Working Paper

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


Accounting | Corporate Finance

Research Areas

Corporate Reporting and Disclosure

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Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.