Controlled foreign corporation rules and M&A activity

Hagen, Dominik von ; Prettl, Axel

Document Type: Conference presentation
Year of publication: 2018
Conference title: 2018 ZEW Public Finance Conference: The Future of Fiscal Coordination in Europe
Location of the conference venue: Mannheim, Germany
Date of the conference: 23.-24. April 2018
Publication language: English
Institution: Business School > ABWL u. Betriebswirtschaftliche Steuerlehre (Schreiber 1999-2019)
Subject: 330 Economics
Classification: JEL: F23 , G34 , H25 , H26 , H32 , H73,
Keywords (English): International taxation , CFC rules , Mergers and acquisitions , Ownership structure , Multinational entities
Abstract: We investigate the influence of controlled foreign corporation (CFC) rules on cross-border merger and acquisition (M&A) activity on a global scale. CFC rules are one main anti tax avoidance measure and potentially lead to immediate taxation of foreign subsidiaries’ income at the parent level, without the necessity of repatriation. Analyzing a large corporate M&A data set using three econometric methods, we show how CFC rules distort global ownership patterns. First, we show that the probability of being the acquirer of a low-tax target decreases if CFC rules may be applicable to this target’s income. Second, we show that CFC rules alter the acquirer’s choice of targets’ location. Third, we show that CFC rules negatively affect the probability of being the acquirer in cross-border M&As. Altogether, our study shows that for affected acquirer countries, CFC rules lead to less M&A activity in low-tax countries due to a reduced ability to shift income. This behavior change could result in an increase in global corporate tax revenue.

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