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The fleeting nature of permanent reinvestment: Accounting for the undistributed earnings of foreign subsidiaries
Authors:Thomas D. Schultz  Timothy J. Fogarty
Affiliation:a Department of Accountancy, Farmer School of Business, Miami University, 310 Laws Hall, Oxford, OH 45056, United States
b Department of Accountancy, Weatherhead School of Management, Case Western Reserve University, 10900 Euclid Avenue, Cleveland, OH 44106-7235, United States
Abstract:Over the last decade, an increasing percentage of the profits reported by U.S. corporations were earned by their foreign subsidiaries and retained outside the United States resulting in the deferral of income taxes. The American Jobs Creation Act of 2004 provided a temporary federal tax incentive to remit such earnings, which resulted in the repatriation of $140 billion by the 30 firms comprising the Dow Jones Industrial Average. An analysis of the financial reporting disclosures made by these firms reveals that a tax expense was not fully recognized on a substantial portion of the earnings until repatriation because of an exception for foreign reinvestments deemed to be essentially permanent in duration. The implications of the currently acceptable accounting for undistributed foreign earnings are discussed as well as recommendations to improve the relevancy and reliability of the disclosures required for this exception to comprehensive recognition of deferred taxes.
Keywords:Foreign earnings   Unrecognized deferred income taxes   Repatriations   Financial reporting disclosures
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