Multinational Ownership Structures and Anti Tax Avoidance Legislation

Abstract

This study investigates if controlled foreign corporation (CFC) rules influence cross-border merger and acquisition (M&A) activity on a global scale. CFC rules are one main anti-tax avoidance measure and potentially lead to immediate taxation of foreign subsidiaries' income at the parent level, without the necessity of repatriation. Analyzing a large corporate M&A data set and self-compiled detailed CFC rule data from 27 countries using two different econometric perspectives, we show if and how CFC rules distort firm behaviour in global ownership patterns. First, we show that the probability of being the acquirer of a low-tax target decreases if CFC rules may be applicable to this target's income. Second, we show that CFC rules alter the acquirer's choice of targets' location. Altogether, our study shows that for affected acquirer countries, CFC rules lead to less M&A activity in low-tax countries due to potentially reduced incentives to shift income.
However, these effects appear to be rather small in size and decrease over time with CFC rules aligning among countries in recent years. Therefore, our study suggests that CFC rules do not seem to bias M&A markets as lobby groups partially claim and policymakers can be more confident in reaching their goals with this increasingly important anti tax avoidance rule.

Keywords: International Taxation, CFC Rules, Profit Shifting, Mergers and Acquisitions, M&A, Multinational Entities

JEL Classification: F23, G34, H25, H26, H32, H73