Navigating the TCJA: The Unintended Impact of the FDII Deduction on U.S. Firms’ International Trade Patterns
Prof. Travis CHOW, Associate Professor in Accounting and Law,
HKU Business School, The University of Hong Kong
Date: 3 September 2025 (Wednesday)
Time: 10:00-11:30
Venue: E22-G010
Host: Prof. Morris LIU, Associate Professor in Accounting
Abstract
To incentivize U.S. firms to keep their intellectual property in the country, the Tax Cuts and Jobs Act (TCJA) of 2017 introduced the Foreign-Derived Intangible Income (FDII) deduction, which lowers the corporate tax rate on foreign-derived intangible income. However, critics argue that the FDII deduction invites gaming strategies, such as round-tripping trades, so firms can classify more domestic income as foreign-derived. Using firm-level shipping container data to measure the export and import volumes and a difference-in-differences approach to identify changes in international trade patterns before and after the TCJA, we find that relative to less exposed firms, U.S. firms exposed to the FDII deduction are significantly more likely to both import from and export to the same jurisdictions in a given year. This positive co-movement between the export and import volume is indicative of round-tripping trades. Our research is the first to provide empirical evidence that U.S. firms’ strategic real response to the FDII deduction involves adjusting their physical trades to exploit tax benefits that lawmakers did not intend.
Speaker
Dr. Travis Chow’s research focuses on how taxes affect corporate and individual decision-making and has appeared in The Accounting Review, Journal of Accounting Research, Contemporary Accounting Research, Management Science, and the Journal of Risk and Insurance. He is a member of the Editorial Board of the Journal of the American Taxation Association. Currently, he teaches Management Control at HKU, and in the past, he has taught taxation and financial accounting at the undergraduate level, as well as an empirical tax research seminar for PhD students at Singapore Management University. Dr. Chow completed his undergraduate and graduate education in Canada after finishing high school in Hong Kong. Before pursuing his doctoral studies, he worked as an economic analyst in Toronto.
All are welcome!
