First, worldwide tax systems usually offer the possibility to defer taxation of foreign-source income until dividends are repatriated. There are several nuances that influence the incentive of MNCs subject to a worldwide tax system to manage taxes in foreign countries. We investigate the tax management behavior of foreign subsidiaries depending on whether they are owned by a parent company located in a country that has a worldwide or territorial tax system (hereafter, worldwide-parent subsidiary versus territorial-parent subsidiary). In contrast, if the parent company of an MNC is subject to a territorial tax system, the tax management behavior of foreign subsidiaries does not affect the parent’s domestic tax liabilities, and the MNC can reap the full benefit of reducing taxes when repatriating foreign earnings. In light of additional home country taxation upon repatriation, the worldwide tax system may reduce the incentive for MNCs to manage taxes in their foreign subsidiaries. When a multinational corporation (MNC) subject to a worldwide tax system reduces taxes in its foreign subsidiaries, the parent company will generally be subject to additional taxes when such foreign earnings are repatriated.
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