An increase in the amount of direct investment income repatriated as dividends will have little effect on the current or financial account balances of the U.S. International Transactions Accounts (ITAs). For each account, the net effect is limited to a small change related to foreign taxes withheld on the increased dividends. Much larger, nearly offsetting flows are spread across several different components of the accounts.
Direct investment income receipts recorded in the ITAs consist of U.S. parent companies’ share of the income on equity, or earnings, of their foreign affiliates, plus interest received on debt claims (ITA table 4.1, lines 2 - 9). Earnings are the economic profits of the foreign affiliate. They can be distributed to the U.S. parent company as dividends or reinvested in the foreign affiliate. Therefore, reinvested earnings are the residual of a given period’s earnings less any dividends paid to the U.S. parent company. That is, payment of dividends affects only the form in which direct investment income is received—as distributed or undistributed earnings—and not the total amount. When dividends exceed a given period’s earnings, reinvested earnings are negative, which indicates that dividends are being paid out of accumulated prior earnings. An increase in direct investment dividends, for a given level of earnings, will result in an offsetting decrease in reinvested earnings. Therefore, the only effect on the current account balance is a small decrease related to more foreign taxes withheld on the increased dividends.
Because the reinvested earnings add to the U.S. parent companies' claims on their foreign affiliates, a transaction that reflects the deemed transmission of these funds back to the foreign affiliates for reinvestment is recorded in the financial account of the ITAs as reinvestment of earnings, a component of direct investment equity (ITA table 6.1, line 4). A decrease in reinvested earnings resulting from increased dividends would therefore result in smaller direct investment equity transactions. Depending on the form in which the dividends are repatriated—cash, debt, or other financial instrument—the smaller direct investment equity transactions would be balanced or offset by transactions in one or more of the other financial account components because of the double-entry accounting principles underlying the ITAs.