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Tax Competition and Double Tax Treaties with Mergers and Acquisitions

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  • Siggelkow, Benjamin Florian
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    Abstract

    In a two-period tax competition model with provision of local public goods, we analyze efficiency properties of double taxation reliefs incorporating either the exemption method, the tax credit system or the full taxation after deduction system. Foreign direct investments are presumed to be one-way and characterized by long-term mergers and acquisitions. We find that in case of (i) tax revenue maximization the exemption method implies inefficiently low tax rates, whereas the full taxation after deduction system leads to inefficiently low / efficient / inefficiently high tax rates. In case of (ii) welfare maximization each of these tax rules can be efficient. The (limited) tax credit system, however, is shown to always result in inefficiently low / inefficiently high tax rates. A numerical example reveals that no tax regime per se entails efficiency. In case of (i), a ranking of tax systems subject to the Pareto criterion is shown to depend on the parameters of the production function. Regarding (ii) the exemption method is preferable as it is proven to be the least inefficient tax regime.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49371.

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    Date of creation: 2013
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    Handle: RePEc:pra:mprapa:49371

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    Keywords: tax competition; double taxation relief; tax rules; profit taxation; mergers and acquisitions;

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    1. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, American Economic Association, vol. 83(4), pages 877-92, September.
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    3. 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.
    4. Janeba, Eckhard, 1995. "Corporate income tax competition, double taxation treaties, and foreign direct investment," Journal of Public Economics, Elsevier, Elsevier, vol. 56(2), pages 311-325, February.
    5. Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2006. "The marginal cost of public funds: Hours of work versus labor force participation," Journal of Public Economics, Elsevier, Elsevier, vol. 90(10-11), pages 1955-1973, November.
    6. Johannes Becker & Clemens Fuest, 2009. "Source versus Residence Based Taxation with International Mergers and Acquisitions," CESifo Working Paper Series 2854, CESifo Group Munich.
    7. Bond, E.W. & Samuelson, L., 1988. "Strategic Behavior And The Rules For International Taxation Of Capital," Papers, Pennsylvania State - Department of Economics 3-88-10, Pennsylvania State - Department of Economics.
    8. Feldstein, Martin & Hartman, David, 1979. "The Optimal Taxation of Foreign," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(4), pages 613-29, November.
    9. Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(2), pages 283-98, April.
    10. 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.
    11. Ronald B. Davies, 2003. "The OECD Model Tax Treaty: Tax Competition And Two-Way Capital Flows," 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. 44(2), pages 725-753, 05.
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