Taxing Foreign Profits With International Mergers and Acquisitions*

Abstract

A large part of border crossing investment takes the form of international mergers and acquisitions. In this article, we ask how optimal repatriation tax systems look like in a world where investment involves a change of ownership, instead of a reallocation of real capital. We find that the standard results of international taxation do not carry over to the case of international mergers and acquisitions. The deduction system is no longer optimal from a national perspective and the foreign tax credit system fails to ensure global optimality. The tax exemption system is optimal if ownership advantage is a public good within the multinational firm. However, the cross-border cash-flow tax system dominates the exemption system in terms of optimality properties. Copyright (2010) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

The taxation of foreign profits: A unified view

“…This asset may be interpreted as a piece of land or an existing …rm. Following Desai and Hines (2003) and Becker and Fuest (2010), we allow for the multinational to have an ownership advantage relative to the seller i.e. it can produce more output from the asset.…”

The Use of Neutralities in International Tax Policy

“…For example, Becker & Fuest (2010) and Devereux et al (2013) find that CON only holds under specialized assumptions about management capacity to expand when a firm acquires another firm. Desai and Hines themselves agree that CON may not hold when the location of plant, equipment, and other productive factors is mobile between countries in response to tax rate differences.…”

Source versus residence based taxation with international mergers and acquisitions

“…Since P ( j ), as de…ned in (1), is increasing in j , we may conclude that all 4 For a survey of evidence on international tax planning see Devereux (2007).…”

“…the …nancing of foreign acquisitions with debt issued in high tax jursidictions to bene…t from interest deductions. 4 The domestic household's willingness to pay for a domestic target …rm j can be determined as follows. If she acquires the …rm, she pays the acquisition price P ( j ) in period 1.…”