The Fleeting Nature of Permanent Reinvestment: Accounting for the Undistributed Earnings of Foreign Subsidiaries

Advances in Accounting, incorporating Advances in International Accounting, Vol. 25, No. 1, June 2009

Posted: 29 May 2009 Last revised: 1 Jun 2009

See all articles by Thomas D. Schultz

Thomas D. Schultz

Western Michigan University

Timothy J. Fogarty

Case Western Reserve University - Department of Accountancy

Date Written: 2009

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

JEL Classification: M41, H25, K34

Suggested Citation

Schultz, Thomas D. and Fogarty, Timothy J., The Fleeting Nature of Permanent Reinvestment: Accounting for the Undistributed Earnings of Foreign Subsidiaries (2009). Advances in Accounting, incorporating Advances in International Accounting, Vol. 25, No. 1, June 2009, Available at SSRN: https://ssrn.com/abstract=1411193

Thomas D. Schultz (Contact Author)

Western Michigan University ( email )

Kalamazoo, MI 49008
United States
269-387-6064 (Phone)

Timothy J. Fogarty

Case Western Reserve University - Department of Accountancy ( email )

Cleveland, OH 44106-7235
United States
216-368-3938 (Phone)
216-368-4776 (Fax)

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