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Impact of controlled foreign corporation rules on post-acquisition investment and profit shifting in target firms
Hagen, Dominik von
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Harendt, Christoph
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Document Type:
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Conference presentation
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Year of publication:
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2017
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Conference title:
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2017 ZEW Public Finance Conference: Public Finance and Development
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Location of the conference venue:
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Mannheim, Germany
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Date of the conference:
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8.-9. May 2017
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Publication language:
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English
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Institution:
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Business School > ABWL u. Betriebswirtschaftliche Steuerlehre (Schreiber -2019)
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Subject:
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330 Economics
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Classification:
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JEL:
F23 , G34 , H25 , H26 , H32 , H73,
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Keywords (English):
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International taxation , CFC rules , Profit shifting , Multinational entities , Cross-border mergers and acquisition , Foreign direct investment
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Abstract:
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We investigate investment in formerly domestic target firms once they enter a multinational entity (MNE). We argue that following the acquisition, those targets are tax-optimized in a profit shifting context if they are acquired by MNEs with no CFC rule in their headquarters’ countries. In this case, we hypothesize that MNE-wide profit shifting opportunities decrease high-tax targets’ cost of capital, which may have a positive effect on real investment of these targets. In addition, we hypothesize that financial revenues respectively profits of low-tax targets increase after the acquisition, since they may become destinations of profit shifting themselves. We find evidence for the effects on real investment and financial revenues but not for the profit measure. Further, these effects can no longer be observed in case of existing CFC rules in the acquirer’s headquarters’ country. This finding may suggest that CFC rules effectively mitigate MNE-wide profit shifting which in turn has detrimental investment effects.
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