*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
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Self-judging Essential Security Interest Clauses in IIAs", "Can Host
Countries have Legitimate Expectations?", "The Next Step in Governance: The
Need for Global Micro-regulatory Frameworks", "How International Investment
Agreements can Protect Free Media", "The Evolving International Investment
Law and Policy Regime: Ways Forward", "China's Outward FDI and
International Investment Law", and  "Policy Options for Promoting FDI in
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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 199  May 8, 2017
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Matthew Schroth ([log in to unmask])
*United States corporate tax reform and global FDI flows
Miguel Pérez Ludeña** <#m_-2541305138513598502__edn2>

The US is the largest source of FDI, accounting for 24% of the world’s
outward stock. Now that Congress and the new presidential administration
are putting forward plans for reforming the corporate tax regime, and
especially the way multinational enterprises (MNEs) are taxed on their
foreign earnings, we should consider the effects of these plans on FDI
flows and the behavior of MNEs.

At the moment, US MNEs face income tax liabilities for the profits of their
foreign affiliates, with a deduction for the taxes paid in host countries.
Since payment is deferred until the income is returned to the US—and
because the corporate tax rate in the US (35%) is higher than in most other
countries—companies tend to accumulate earnings abroad to avoid a large tax
bill at home. By the latest estimates, US companies hold US$2.343 trillion
abroad in “reinvested foreign earnings.”[1] <#m_-2541305138513598502__edn3>
Half of these have been reinvested in productive assets, as is common
practice for MNEs anywhere;[2] <#m_-2541305138513598502__edn4> but half of
that sum is estimated to be kept in liquid assets in low-tax territories.[3]

A reform that addresses this distortion should have short-term and
long-term effects on FDI flows. To begin with, there are plans to bring
back the earnings accumulated abroad by substituting the tax liability for
a one-off toll.[4] <#m_-2541305138513598502__edn6> If companies perceive
this offer as time-limited, as it was the case with the American Jobs
Creation Act (AJCA) in 2004, the amounts repatriated could be very high.
For instance, assuming that the final deal only attracts half of the
reinvested foreign earnings kept in liquid assets (or 25% of the total),
the repatriation would be US$600 billion, double the average annual FDI
outflows from the US over the past few years. The reform should try to
spread this repatriation across several years, but the annual US FDI flows
(and those of some other countries) would still be severely distorted.[5]

What will parent companies do with this one-off inflow? The objective of
the reform is to increase investment in the US. But most of the accumulated
foreign earnings are owned by large information technology and
pharmaceutical companies that can already access as much capital as they
want in the US.[6] <#m_-2541305138513598502__edn8> It is more likely that
the funds will be used to reduce debt, pay dividends or engage in large
share buy-backs. It may also increase the appetite for domestic
acquisitions, already high among technology firms. Regulators and market
players should be aware of potential disruptions that a sudden inflow could
create in financial markets.

In the long term, the reform is likely to reduce the incentives to keep
future foreign earnings abroad, bringing the reinvestment rate of US
foreign affiliates in line with those of the rest of the world. This should
affect mostly the type of reinvested earnings kept in liquid assets in
low-tax territories. But even a marginal impact on the decision to reinvest
in productive assets would be felt in some host countries: reinvested
earnings by US MNEs account for 19% of total FDI inflows in Mexico, for
example.[7] <#m_-2541305138513598502__edn9> These effects also may be seen
between two non-US economies, as foreign affiliates of US MNEs have less
capital to invest in other countries.

A second aspect concerns the effect on the global efforts to prevent tax
avoidance by MNEs through profit shifting.  If the reform brings the US
corporate rate more in line with that of other large economies, it will
reduce a significant distortion in the global corporate tax system. But
unless the corporate tax is eliminated, US companies (like those of other
countries) will still have an incentive to shift profits to tax havens.

Overall, US corporate tax reform is likely to generate large FDI flows, as
companies unwind their stocks of reinvested foreign earnings. Lower
corporate tax may increase investments in the US in the long-run, but
little of the repatriated foreign earnings will be invested in productive
capacity However, if it reduces the incentive that US companies shift
profits abroad, this reform could help to harmonize international tax
regulations and discourage aggressive tax planning. The US and other
governments should seize this chance to continue the cooperation on this

* <#m_-2541305138513598502__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
** <#m_-2541305138513598502__ednref2> Miguel Pérez Ludeña (
[log in to unmask]) is an economist at the United Nations Economic
Commission for Latin America and the Caribbean (ECLAC). The author is
grateful to Jennifer Blouin, Gary Hufbauer and Leslie Robinson for their
helpful reviews. *Columbia FDI Perspectives (ISSN 2158-3579) is a
peer-reviewed series.*
[1] <#m_-2541305138513598502__ednref3> *See* Jessica McKeon, “Indefinitely
reinvested foreign earnings still on the rise,” *Audit Analytics*,
[2] <#m_-2541305138513598502__ednref4> *See* UNCTAD, *World Investment
Report 2016 *(Geneva: UNCTAD, 2016), p.7.
[3] <#m_-2541305138513598502__ednref5> Jennifer L. Blouin et al., “The
location, composition, and investment implications of permanently
reinvested earnings,” July 8, 2014,
[4] <#m_-2541305138513598502__ednref6> The previous Administration
suggested a 14% rate for this toll, but the new proposal may be lower. *See
2015 Economic Report of the President* (Washington, D.C.: Council of
Economic Advisors, 2015), p. 219, https://obamawhitehouse.
[5] <#m_-2541305138513598502__ednref7> Repatriated earnings are counted as
negative FDI outflows in home countries (a credit in the financial account
of the balance of payments) and as negative FDI inflows in host countries
(a debit).
[6] <#m_-2541305138513598502__ednref8> In AJCA’s experience, only firms
that were capital constrained used the repatriated funds to increase
investment. *See* Michael W. Faulkender and Mitchell A. Petersen,
“Investment and capital constraints: repatriations under the American Jobs
Creation Act,” NBER Working Paper no. w15248, August 2009,
[7] <#m_-2541305138513598502__ednref9> Secretaría de Economía, Mexico,

*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Miguel Pérez Ludeña, ‘United States corporate
tax reform and global FDI flows,’* Columbia FDI Perspectives, No. 199, May
8, 2017. Reprinted with permission from the Columbia Center on Sustainable
Investment (**
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*. *
For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Matthew Schroth, [log in to unmask]

   - No. 198, Terutomo Ozawa, “How to handle the job-offshoring backlash?”,
   April 24, 2017.
   - No. 197, Ana Arias Urones and Ashraf Ali Mahate, “FDI sectorial
   diversification: the trade-transport-tourism nexus,” April 10, 2017.
   - No. 196, John Gaffney, “The Equal Representation in Arbitration
   Pledge: two comments on its scope of application,” March 27, 2017.

*All previous FDI Perspectives are available at *
*. *

*Other relevant CCSI news and announcements*

   - *In April 2017*, CCSI launched a series of short videos from the
   authors of Rethinking Investment Incentives: Trends and Policy Options
   (published by Columbia University Press in July 2016), summarizing the
   important messages from each chapter. The first 4 videos, featuring Ana
   Teresa Tavares-Lehmann, Sarianna Lundan, Christian Bellak and Philippe
   Gugler have already been posted. New videos will be posted weekly
   use of incentives to attract investment is connected to and impacts the
   most pressing challenges facing us today, including climate change,
   corruption, conditions/availability of employment, harmful competition, and
   inefficient public spending. How, when, where, and why governments use
   incentives to attract, keep and influence investment is therefore
   critically important to whether and how society benefits from investments
   and to other public policy decisions and trade-offs. It is increasingly
   apparent, however, that the use of incentives is not well
   understood—including by the policy makers who use them—which necessitates a
   closer look and, in many cases, a policy response.
   - CCSI, in partnership with the Danish Institute for Human Rights and
   the Sciences Po Law School Clinic recently published a discussion paper on
   a Collaborative Approach to Human Rights Impact Assessments
   (HRIAs) of private sector investment projects. This discussion paper
   sets out a robust model for a collaborative approach to HRIAs that involves
   project-affected people and the company, and potentially other
   stakeholders, in jointly undertaking an HRIA that is considered credible by
   all sides and can help to address the power imbalances that often exist
   between companies and communities. The paper is the result of a two-year
   long project
   supported by The Tiffany & Co. Foundation, and is based on extensive
   desktop research, interviews with 49 people with relevant experience, as
   well as a roundtable that brought together over a dozen stakeholders and
   HRIA experts to provide feedback on the research findings and
   recommendations. The discussion paper is also summarized in this briefing
   - *In March 2017*, CCSI submitted comments
   to the ICSID Secretariat regarding proposed revisions to ICSID's
   arbitration rules. CCSI's submission provided illustrative suggestions for
   amendments to the ICSID arbitration rules regarding a range of issues,
   including: recognizing and safeguarding of the rights and interests of
   non-parties; improving transparency of the dispute resolution process;
   preventing actual and apparent conflicts of interest; addressing concerns
   raised by third-party funding; and ensuring legitimacy of settlement

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