Tax Avoidance through Cross-Border Mergers and Acquisitions

Abstract

We investigate 13,307 cross-border, tax-haven mergers and acquisitions (M&A) from 1990 to 2017, totaling $4.1 trillion in deal value, or about 30% of total cross-border M&A volume. $2.4 of the $4.1 trillion is beyond what is predicted based on a gravity model with economic fundamentals. Tax-haven M&A result in $31.6 billion in recurring annual tax avoidance. To illustrate the magnitude, for a US firm with no prior cross- border M&A history, buying an Irish firm worth 5% of its total assets would result in an expected decline in its effective tax rate of 3.56 percentage points. For identification, we use a change in US tax law in 2004. Following haven acquisitions, firms are more likely to relocate their headquarters to havens. Our results document that tax avoidance through havens is a significant determinant of cross-border M&A.

Keywords: tax avoidance, tax havens, mergers and acquisitions, gravity model, capital flows, foreign direct investment, taxation, multinational corporations

JEL Classification: F21, G34, H25, H26, H73, K34