The Effects of the U.S. Tax Reform on Investments in Low-Tax Jurisdictions – Evidence from Cross-Border M&As

Abstract

This paper examines the effects of the 2017 U.S. tax reform, commonly known as the ‘Tax Cuts and Jobs Act’ [TCJA] on cross-border M&As of U.S. acquirers. The TCJA replaced the U.S. worldwide tax system by a territorial system, albeit with one important exception: the ‘Global Intangible Low-Taxed Income’ [GILTI] provision. We utilize a difference-in-differences type design and compare cross-border M&A patterns of U.S. acquirers to acquirers outside the U.S. before and after the TCJA. Our results suggest that the outbound acquisition pattern changed significantly for those U.S. acquirers that are affected by the new GILTI provision. GILTI-affected firms acquire targets in low-tax countries and tax havens significantly less often after the TCJA. Furthermore, post TCJA, GILTI affected U.S. firms acquire targets that are less profitable. We also provide weak evidence that U.S. firms not affected by the GILTI regime acquire more often targets in low-tax countries and tax havens.

Keywords: Cross-Border M&As, U.S. Tax Reform, International Taxation, Global Intangible Low-Taxed Income

JEL Classification: G34, H26, H32