Should the Reduced Tax Rate on Dividends Affect an MNCs Capital Structure?

POINT: No. The change in the tax law reduces the taxes that investors pay on dividends. It does not change the taxes paid by the MNC. Thus, it should not affect the capital structure of the MNC.

COUNTER-POINT: A dividend income tax reduction may encourage a U.S.-based MNC to offer dividends to its shareholders, or to increase the dividend payment. This strategy reflects an increase in the cash outflows of the MNC. To offset these outflows, the MNC may have to adjust its capital structure. For example, the next time that it raises funds, it may prefer to use equity rather than debt so that it could free up some cash outflows (the outflows to cover dividend would be less than outflows associated with debt).

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