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Corporate Tax Policy and International Mergers and Acquisitions – Is the Tax Exemption System Superior?

Listed author(s):
  • Johannes Becker
  • Clemens Fuest

In this paper we ask whether recent claims that the US government should switch from the tax credit system to the exemption system are justified. We study corporate taxation in a model where international capital flows are either greenfield investment projects or acquisitions of existing firms, and where investment is motivated by either cost reduction or market entry reasons. The paper asks how corporate taxation affects the international allocation of capital under different double taxation regimes. We find that the standard view on international taxation only prevails in the case of cost driven greenfield investment. In all other cases the deduction system is no longer optimal from a national perspective and the foreign tax credit system fails to ensure neutrality. However, the desirability of the tax exemption system has to be qualified. We show that the cross border cash flow tax system dominates the exemption system in terms of optimality properties.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-01/cesifo1_wp1884.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1884.

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Date of creation: 2007
Handle: RePEc:ces:ceswps:_1884
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  10. Fuest, Clemens & Huber, Bernd & Mintz, Jack, 2005. "Capital Mobility and Tax Competition," Foundations and Trends(R) in Microeconomics, now publishers, vol. 1(1), pages 1-62, December.
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  12. Martin Feldstein & David Hartman, 1979. "The Optimal Taxation of Foreign Source Investment Income," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 613-629.
  13. Harry P. Huizinga & Johannes Voget, 2009. "International Taxation and the Direction and Volume of Cross-Border M&As," Journal of Finance, American Finance Association, vol. 64(3), pages 1217-1249, 06.
  14. Johannes Becker & Clemens Fuest, 2007. "Quality versus Quantity – The Composition Effect of Corporate Taxation on Foreign Direct Investment," CESifo Working Paper Series 2126, CESifo Group Munich.
  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 937-960, December.
  16. 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.
  17. Hines, James R. Jr., 1999. "Lessons From Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(2), pages 305-322, June.
  18. Michael P Devereux, 2007. "The Impact of Taxation on the Location of Capital, Firms and Profit: a Survey of Empirical Evidence," Working Papers 0702, Oxford University Centre for Business Taxation.
  19. di Giovanni, Julian, 2005. "What drives capital flows? The case of cross-border M&A activity and financial deepening," Journal of International Economics, Elsevier, vol. 65(1), pages 127-149, January.
  20. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
  21. Antoinette Schoar, 2002. "Effects of Corporate Diversification on Productivity," Journal of Finance, American Finance Association, vol. 57(6), pages 2379-2403, December.
  22. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo Group Munich.
  23. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
  24. Desai, Mihir A. & Hines, James R. Jr., 2003. "Evaluating International Tax Reform," National Tax Journal, National Tax Association, vol. 56(3), pages 487-502, September.
  25. Steffen Huck & Kai A. Konrad, 2004. "Merger Profitability and Trade Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(1), pages 107-122, 03.
  26. Andreas Haufler & Søren Bo Nielsen, 2008. "Merger policy to promote 'global players'? A simple model," Oxford Economic Papers, Oxford University Press, vol. 60(3), pages 517-545, July.
  27. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
  28. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
  29. Bond, Eric W & Samuelson, Larry, 1989. "Strategic Behaviour and the Rules for International Taxation of Capital," Economic Journal, Royal Economic Society, vol. 99(398), pages 1099-1111, December.
  30. 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, vol. 62(1), pages 219-231, January.
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