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Source versus Residence Based Taxation with International Mergers and Acquisitions

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  • Johannes Becker
  • Clemens Fuest

Abstract

This paper analyses tax competition and tax coordination in a model where capital flows occur in the form of mergers and acquisitions, rather than greenfield investment. In this framework, we show that differences in residence based taxes do not necessarily distort international ownership patterns. Moreover, tax competition yields globally efficient levels of source based corporate income taxes if residence based taxes on capital income are absent. In contrast, in the presence of residence based taxes on dividends, source based corporate income taxes are inefficiently high. The widespread view that tax coordination is less urgent if residence based taxes are available may therefore be misguided.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-11/cesifo1_wp2854.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2854.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2854

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Keywords: corporate taxation; tax competition; mergers and acquisitions;

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References

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  1. Fuest, Clemens & Huber, Bernd, 2004. "Why do countries combine the exemption system for the taxation of foreign profits with domestic double taxation relief?," Journal of International Economics, Elsevier, Elsevier, vol. 62(1), pages 219-231, January.
  2. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 21(3), pages 333-350, November.
  3. Haufler, Andreas & Schulte, Christian, 2007. "Merger Policy and Tax Competition," Discussion Papers in Economics, University of Munich, Department of Economics 2074, University of Munich, Department of Economics.
  4. Devereux, Michael P & Griffith, Rachel, 2003. "Evaluating Tax Policy for Location Decisions," International Tax and Public Finance, Springer, Springer, vol. 10(2), pages 107-26, March.
  5. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, Elsevier, vol. 92(5-6), pages 1210-1235, June.
  6. Gordon, R.H. & Bovenberg, A.L., 1994. "Why Is Capital So Immobile Internationally?: Possible Explanations and Implications for Capital Income Taxation," Working Papers, Research Seminar in International Economics, University of Michigan 358, Research Seminar in International Economics, University of Michigan.
  7. Fuest, Clemens & Huber, Bernd & Mintz, Jack, 2005. "Capital Mobility and Tax Competition," Foundations and Trends(R) in Microeconomics, now publishers, now publishers, vol. 1(1), pages 1-62, December.
  8. Becker, Johannes & Fuest, Clemens, 2011. "Tax competition -- Greenfield investment versus mergers and acquisitions," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 41(5), pages 476-486, September.
  9. Fuest, Clemens & Huber, Bernd, 2004. "Why do countries combine the exemption system for the taxation of foreign profits with domestic double taxation relief?," Munich Reprints in Economics, University of Munich, Department of Economics 20313, University of Munich, Department of Economics.
  10. Johannes Becker & Clemens Fuest, 2010. "Taxing Foreign Profits With International Mergers And Acquisitions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 171-186, 02.
  11. Huizinga, H.P. & Nielsen, S.B., 1995. "Capital income and profits taxation with foreign ownership of firms," Discussion Paper, Tilburg University, Center for Economic Research 1995-82, Tilburg University, Center for Economic Research.
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  13. Erik Devos & Palani-Rajan Kadapakkam & Srinivasan Krishnamurthy, 2009. "How Do Mergers Create Value? A Comparison of Taxes, Market Power, and Efficiency Improvements as Explanations for�Synergies," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(3), pages 1179-1211, March.
  14. Hamilton, Bruce W, 1976. "Capitalization of Intrajurisdictional Differences in Local Tax Prices," American Economic Review, American Economic Association, American Economic Association, vol. 66(5), pages 743-53, December.
  15. Desai, Mihir A. & Hines, James R. Jr., 2004. "Old Rules and New Realities: Corporate Tax Policy in a Global Setting," National Tax Journal, National Tax Association, vol. 57(4), pages 937-60, December.
  16. Huizinga, Harry & Voget, Johannes, 2006. "International Taxation and the Direction and Volume of Cross-Border M&As," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5974, C.E.P.R. Discussion Papers.
  17. Rossi, Stefano & Volpin, Paolo F., 2004. "Cross-country determinants of mergers and acquisitions," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(2), pages 277-304, November.
  18. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(2), pages 103-120, Spring.
  19. Alan J. Auerbach & Joel Slemrod, 1997. "The Economic Effects of the Tax Reform Act of 1986," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 35(2), pages 589-632, June.
  20. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo Group Munich.
  21. Michael P Devereux, 2007. "The Impact of Taxation on the Location of Capital, Firms and Profit: a Survey of Empirical Evidence," Working Papers, Oxford University Centre for Business Taxation 0702, Oxford University Centre for Business Taxation.
  22. Collins, Julie H. & Kemsley, Deen & Shackelford, Douglas A., 1995. "Tax Reform and Foreign Acquisitions: A Microanalysis," National Tax Journal, National Tax Association, vol. 48(1), pages 1-21, March.
  23. Mieszkowski, Peter, 1972. "The property tax: An excise tax or a profits tax?," Journal of Public Economics, Elsevier, Elsevier, vol. 1(1), pages 73-96, April.
  24. Scholes, Myron S & Wolfson, Mark A, 1990. "The Effects of Changes in Tax Laws on Corporate Reorganization Activity," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 63(1), pages S141-64, January.
  25. di Giovanni, Julian, 2005. "What drives capital flows? The case of cross-border M&A activity and financial deepening," Journal of International Economics, Elsevier, Elsevier, vol. 65(1), pages 127-149, January.
  26. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
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Citations

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Cited by:
  1. Sjögren, Anna, 2010. "Graded children – evidence of longrun consequences of school grades from a nationwide reform," Working Paper Series, IFAU - Institute for Evaluation of Labour Market and Education Policy 2010:7, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  2. Andreas Haufler & Christian Schulte, 2011. "Merger policy and tax competition: the role of foreign firm ownership," International Tax and Public Finance, Springer, Springer, vol. 18(2), pages 121-145, April.
  3. Johannes Becker & Marco Runkel, 2010. "Corporate tax regime and international allocation of ownership," Working Papers, Oxford University Centre for Business Taxation 1010, Oxford University Centre for Business Taxation.
  4. Katrin Hohler, 2013. "The introduction of the exemption system for foreign profits and its effects on international acquisitions – the UK and Japan regaining international tax competitiveness?," Journal of Applied Accounting Research, Emerald Group Publishing, Emerald Group Publishing, vol. 14(3), pages 224-247.
  5. Michael Devereux & Clemens Fuest & Ben Lockwood, 2013. "The Taxation of Foreign Profits: a Unified View," Working Papers, Oxford University Centre for Business Taxation 1303, Oxford University Centre for Business Taxation.
  6. Siggelkow, Benjamin Florian, 2013. "Tax Competition and Double Tax Treaties with Mergers and Acquisitions," MPRA Paper 49371, University Library of Munich, Germany.
  7. Norbäck, Pehr-Johan & Persson, Lars & Tåg, Joacim, 2010. "Ownership Efficiency and Tax Advantages: The Case of Private Equity Buyouts," Working Paper Series, Research Institute of Industrial Economics 841, Research Institute of Industrial Economics.

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