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This paper analyzes the extent to which tax differences affect the use of trade credit. U.S.-owned affiliates in low-tax countries use trade credit to lend, whereas those in high-tax countries use trade credit to borrow: 10% lower local tax rates are associated with net trade credit positions that are 1.4% higher as a fraction of sales. The use of trade credit to get capital out of low-tax, low-return environments is also illustrated by the temporary repatriation tax holiday in 2005, which was used most intensively by affiliates with positive net trade credit positions.


Reproduced with permission. Desai, Mihir A., C. Fritz Foley & James R. Hines, Jr., “Trade Credit and Taxes,” The Review of Economics and Statistics, 98 (1), © 2016 the President and Fellows of Harvard College and the Massachusetts of Technology, Cambridge, MA: The MIT Press, 132-139. DOI