A 2009 change in the taxation of foreign earnings of UK multinationals led to a big increase in dividend repatriations to the UK. But the reform only led to a one-off adjustment and did not have any longer-lasting impact on dividend payments or foreign investments by the firms. These are the central conclusions of a study by Peter Egger and colleagues, published in the December 2015 issue of the Economic Journal.

Radical changes to countries'' tax systems are rare. An obvious reason for this is the inertia in policy-making that seems to be determined by the uncertainty about the effects associated with big reforms – how important the change is on average and, in the extreme, for some taxpayers as well as for the government.

In 2009, the UK instituted such a change by adopting a system of tax exemption of foreign-earned income of firms, moving from a system of tax credit or worldwide taxation as still applied by the United States, for example.

As with any other change to a tax system of similar magnitude, such an event is not only rare but it offers an opportunity to analyse changes in behaviour, given that the incentives for doing so were quite significant. In particular, one would have expected to see reactions in UK multinationals'' dividend repatriation behaviour after the reform: while dividends were taxed on repatriation under the old tax credit system, no such taxation applies under the new exemption system.

Questions of particular interest are: how big was the behavioural change in dividend repatriation directly after the reform? Did the reform change repatriation behaviour in the long run? And did the reform also have indirect effects on the real investments of UK multinationals abroad?

The results of the study suggest that the reform induced firms to pay out significantly more dividends to the UK. The average foreign affiliate of a UK multinational is estimated to have paid out about $2.15 million more in dividends immediately after the reform than it would have done in the absence of the reform.

Moreover, the average UK-owned foreign affiliate cut investment by about $3.05 million in response to the reform associated with the higher payouts to the UK. This suggests that the reform indirectly affected real outcomes via the change in incentives for profit repatriation to the benefit of investment projects in the UK.

It seems, however, that the reform only led to one-time adjustments and did not have any longer-lasting impact, since already by 2010 dividend payments as well as investments had returned to pre-reform levels.

''Consequences of the New UK Tax Exemption System: Evidence from Micro-level Data'' by Peter Egger, Valeria Merlo, Martin Ruf and Georg Wamser is published in the December 2015 issue of the Economic Journal. Peter Egger is at ETH Zurich. Valeria Merlo, Martin Ruf and Georg Wamser are at the University of Tuebingen.