Tax Policies, Tax Treaties, and Financing Strategies for U.S. MNEs

This paper describes the financing patterns, equity flows, reinvested earnings, and inter-company debt, used by U.S. MNEs.  A gravity model is used to explain bilateral differences in these financing patterns, extending it to capture measures of financial depth, changes in the U.S. tax code, the presence and age of tax treaties, and tax differentials. We show that financial depth in the host market is associated with higher levels of equity flows and retained earnings, and that tax treaties affect U.S. MNEs by reducing the reliance on reinvested earnings to finance FDI in favor of increased equity flows to finance FDI.