"Basket cases": Tax incentives and international joint venture participation by American multinational firms

This paper examines the impact of the U.S. Tax Reform Act of 1986 (TRA) on international joint ventures by American firms. The TRA mandates the use of separate "baskets" in calculating foreign tax credits on dividends receive d from each foreign corporation owned 50% or less by Americans - which grea tly reduces the attractiveness of joint ventures, especially those in low-t ax foreign countries. Since the effect of the TRA on joint ventures varies with foreign tax rates, the country-level pattern of subsequent joint ventu re activity illustrates the sensitivity of organizational form to tax consi derations. The evidence indicates that American participation in internatio nal joint ventures fell sharply after 1986, particularly in low-tax countri es. Moreover, joint ventures in low-tax countries use more debt and pay gre ater royalties to their American parents after 1986, reflecting their incen tives to economize on dividend payments. (C) 1999 Elsevier Science S.A. All rights reserved. JEL classification: H87; F23; H25; L23.