The Effects of Taxation on Foreign Direct Investment : Evidence from U.S., U.K., and Canadian Acquisitions of U.S. Firms

This paper investigates the effects of corporate taxation on foreign direct investment by examining tax differentials between U.S. and foreign buyers of U.S. firms. Unlike prior literature, the paper simultaneously considers tax codes in both the U.S. and foreign countries as well as tax treaties between the countries-all of which affect the taxation of a buyer of a U.S. firm. Focusing on the U.S., Canada, and the U.K., we show that U.K. buyers had a tax advantage over both U.S. and Canadian buyers due to a Dual Resident Corporation feature. In contrast, Canadian buyers faced essentially the same tax burden as U.S. buyers. Studying a sample of 781 acquisitions of U.S. firms, we find tax advantages available to foreign buyers are linked to higher gains to the shareholders of the companies they purchase. The results demonstrate that identification of tax differences between foreign and domestic buyers requires a global tax perspective looking at tax provisions in both countries. Furthermore, the evidence suggests that these tax differences affect pricing of assets in the acquisitions market. This significant role for taxes does not, however, explain nearly all of the differences in target wealth gains between cross-border and domestic takeovers