W5: Hankins & Petersen (2020)

Question 1

Cash

Answer 1

Provides excellent insurance in times of uncertainty and insulates firms from risk in financial markets, but the reasons for such massive growth in cash holdings are complex. Research suggests 79% of the increase in foreign cash is due to a combination of declining international tax rates and active tax minimisation behaviour by U.S. corporations, particularly those with intellectual property. While global uncertainty may be elevated, precaution does not explain why some corporations are sitting on $100 billion dollars each. Taxes do

Question 2

Transfer prices

Answer 2

The price used for within-firm sales. Appropriate transfer prices should reflect the value of the asset and minimise the tax benefits of shifting income. There is evidence that intellectual property, which is more difficult to value, can be moved more easily to foreign subsidiaries using strategic transfer pricing to facilitate tax minimisation

Question 3

Tax Cuts and Jobs Act of 2017 (TCJA)

Answer 3

Permitted both the transfer of cash between subsidiaries and the parent tax-free and lowered the corporate tax rate to 21%. Cash levels have continued to rise since the law’s passage