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TAXING FOREIGN PROFITS WITH INTERNATIONAL MERGERS AND ACQUISITIONS*

Authors

  • Johannes Becker,

    1. University of Oxford, U.K.; Max Planck Institute for Intellectual Property, Germany
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  • Clemens Fuest

    1. University of Oxford, U.K.; Max Planck Institute for Intellectual Property, Germany
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    • 1

      The authors would like to thank Charles Horioka and three anonymous referees for very helpful comments and suggestions. The authors also indebted to Alan Auerbach, Roger Gordon, Andreas Haufler, Jim Hines, Kai Konrad, Ray Rees, and participants at research workshops in Berlin, Munich, Oxford, and Seville. The usual disclaimer applies. The authors gratefully acknowledge financial support from Deutsche Forschungsgemeinschaft (DFG), Grant No. FU 442/3-1. Please address correspondence to: Johannes Becker, Department of Public Economics, Max Planck Institute for Intellectual Property, Competition and Tax Law, Marstallplatz 1, 80539 Munich, Germany. Phone: +49-89-24246-5252. E-mail: johannes.becker@ip.mpg.de.


  • *

    Manuscript received 21 October 2008; revised November 2008.

Abstract

A large part of border crossing investment takes the form of international mergers and acquisitions. In this article, we ask how optimal repatriation tax systems look like in a world where investment involves a change of ownership, instead of a reallocation of real capital. We find that the standard results of international taxation do not carry over to the case of international mergers and acquisitions. The deduction system is no longer optimal from a national perspective and the foreign tax credit system fails to ensure global optimality. The tax exemption system is optimal if ownership advantage is a public good within the multinational firm. However, the cross-border cash-flow tax system dominates the exemption system in terms of optimality properties.

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