Cross-Border Acquisitions and Taxes: Efficiency and Tax Revenues

We develop a theoretical oligopoly model to study how international differences in profit and capital gains taxes affect incentives for foreign acquisitions. We find that reductions in foreign profit taxes tend to trigger inefficient foreign acquisitions, while reductions in foreign capital gains taxes may trigger efficient foreign acquisitions. Moreover, foreign acquisitions can increase domestic tax revenues. The reason is that in the bidding competition between foreign firms, all benefits from the acquisition, including tax advantages, are competed away and are 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, are also shown to crucially affect the pattern of foreign acquisitions