Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171999
Authors: 
von Hagen, Dominik
Harendt, Christoph
Year of Publication: 
2017
Series/Report no.: 
ZEW Discussion Papers 17-062
Abstract: 
We investigate real investment, financial revenues and profits in formerly domestic firms once they enter a multinational entity (MNE) through an acquisition. We argue that following the acquisition, those targets are tax-optimized in a profit shifting context if they are acquired by MNEs with no controlled foreign corporation (CFC) rules in their headquarters' countries. In this case, we hypothesize that MNE-wide profit shifting opportunities decrease high-tax targets' cost of capital, which may have a positive effect on real investment of these targets. In addition, we hypothesize that financial revenues respectively profits of low-tax targets increase after the acquisition, since they may become destinations of profit shifting themselves. In line with the effects on real investment, profits of high-tax targets should decline. We find evidence for the effects on real investment. Further, these effects can no longer be observed in case of existing CFC rules in the acquirer's headquarters' country. This finding may suggest that CFC rules effectively mitigate MNE-wide profit shifting which in turn has detrimental investment effects. We also find some evidence for the expected effects for financial revenues but not for the profit measure.
Subjects: 
International taxation
CFC rules
Profit shifting
Multinational entities
Crossborder mergers and acquisitions
Foreign direct investment
JEL: 
F23
G34
H25
H26
H32
H73
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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