Abstract

The Effects of Exemption Method on Foreign Dividends －Focus on Subsidiary of Japan and This study analyzes the effect of the revision of the tax law from the credit method to the exemption method for the foreign dividends with domestic subsidiaries of Japan and UK. The exemption method can be expected to have a positive effect of increasing dividends to the resident country and thus stimulating of investment in resident country. On the other hand, there is also a possibility that investment in resident country will shrink due to increase in overseas investment and corporate tax revenue decrease. In the case of Japan, it is reported that the dividend from overseas subsidiaries has increased since the enactment of the law, and both Japan and the UK show a steady decline in the unemployment rate since introducing of exemption method. The ratio of corporate income tax to GDP is steadily increasing in Japan after the revision of the tax law, but the UK has increased until 2011, but has decreased since then. In the case of Japan, foreign direct investment shows a steady increase after the enforcement of the law, but the UK shows an increasing tendency and then declines after 2012.UK in Korea－ In order to examine the effect of amendment of tax law from the credit method to the exemption method on dividend decision of foreign subsidiary, we conducted empirical analysis of domestic subsidiaries of Japan and UK from 2006 to 2013. According to the empirical analysis, first, after the adoption of exemption method, the dividend payout ratio of domestic subsidiaries and dividends to total assets increased. This implies that there was an effect of the amendment of the tax law that it was an increase in dividend remittances to the resident country due to a decrease in the effective tax rate on dividends. Second, the effect of dividend increases due to the revision of the tax law was more affected in the long term than in the short term. This implies that there is a substantial dividend increase rather than a temporary tax strategies. Third, the effect of dividend increases is not differentiated between Japan and UK. This study has different significance in that it examines the effect of the exemption method by macroeconomic variables and analyzes the effect on dividend decision by country and period. The results of this study are expected to provide useful implications for policy makers in Korea.

Keywords

• exemption method
• credit method
• foreign dividends
• tax strategies
• foreign subsidiary

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