Current U.S. tax laws create an incentive for some U.S. firms to avoid the repatriation of foreign earnings as the U.S. government charges additional corporate taxes upon repatriation of foreign earnings. Under ASC 740, the financial accounting treatment for taxes on foreign earnings exacerbates this effect. It increases the incentive to avoid repatriation by allowing firms to designate foreign earnings as permanently reinvested earnings (PRE) and delay recognition of the deferred tax liability

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... associated with the U.S. repatriation tax resulting in higher after-tax income. Prior research suggests that the combined effect of these incentives leads some U.S. multinational corporations to delay the repatriation of foreign earnings and, as a result hold a significant amount of cash overseas. In this study, we investigate the effect of PRE held as cash on U.S. MNCs foreign acquisitions. Consistent with expectations, we observe firms with high levels of foreign earnings designated as PRE and held as cash make less profitable acquisitions of foreign target firms using cash consideration than firms without high levels of PRE held as cash. The AJCA of 2004 appears to have reduced this effect by allowing firms to repatriate foreign earnings held as cash abroad at a much lower tax cost. We appreciate helpful comments and suggestions from the Arizona State Tax Reading Group,