Optimal Taxation of International Mergers & Acquisitions

Abstract

If interest income is subject to tax, the taxation of business income from international mergers & acquisitions as well as international greenfield investments is globally optimal if economic depreciations are permitted as tax-deductible expenses, investors receive a credit for foreign taxes paid (tax credit method), and business income is taxed at the uniform income tax rate. It is nationally optimal with full taxation after deduction.

This optimality result prevails with historical cost depreciation for international greenfield investments, but not for international mergers & acquisitions.

Cash-flow taxation of international mergers & acquisitions and greenfield investment is globally optimal with a tax credit method and nationally optimal with full taxation after deduction.

Keywords: Optimal International Taxation, Mergers and Acquisitions, Foreign Direct Investment, Business Taxation

JEL Classification: H25, H21, F23