Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 663: Cross-Border Acquisitions and Corporate Taxes: Efficiency and Tax Revenues

Pehr-Johan Norbäck (), Lars Persson () and Jonas Vlachos ()
Additional contact information
Pehr-Johan Norbäck: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Lars Persson: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Jonas Vlachos: Stockholm Institute of Transistion Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: We find that reduced foreign corporate taxes may lead to inefficient foreign acquisitions if complementarities between foreign and domestic assets are low, and to efficient foreign acquisitions if such complementarities are high. Moreover, with large complementarities, foreign acquisitions can increase domestic tax revenues. The reason is that in the bidding competition between the foreign firms, all benefits from the acquisition, including tax advantages and evaded taxes, are competed away and captured by the domestic seller which, in turn, pays capital gains tax on the proceeds. Technical issues in the tax code, such as the treatment of goodwill deductibility, is also shown to crucially affect the pattern of foreign acquisitions.

Keywords: Tax Competition; Ownership; Tax Revenues; FDI; M&As

JEL-codes: F23

36 pages, March 9, 2006

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