How do Taxes Affect Cross-Border Acquisitions?

This paper uses firm-level data to investigate the impact of taxes on the location of mergers and acquisitions. Our theoretical framework suggests that there are many ways in which tax can influence such M&A activity. For example, it is possible that a higher tax rate in the country of the target company could make an acquisition of the tax more likely, less likely, or have no effect at all. Another possibility is that the difference between the home and host country tax rates has an effect. We combine financial and ownership data from a large number of companies in the ORBIS database for 2005 with domestic and cross-border acquisitions in the ZEPHYR database between 2006 and 2008. We estimate a model in which acquiring companies choose in which country to acquire a target company. The results suggest that the effects of corporate tax vary considerably across groups of companies: acquirers most sensitive to differences in tax rates across countries are large, previously purely domestic, companies. This is consistent with our theoretical framework which suggests that tax should be most important when the acquirer captures more of the surplus arising from the acquisition, but where the acquirer has limited capacity for shifting profits between countries to avoid tax.