Who bears the burden of international taxation? Evidence from cross-border M&As
Harry Huizinga a, b,, Johannes Voget c, Wolf Wagner a, d
a
a r t i c l e
i n f o
Article history:
Received 14 September 2010
Received in revised form 16 February 2012
Accepted 20 February 2012
Available online 27 February 2012
JEL classication:
F23
G34
a b s t r a c t
Cross-border M&As can trigger additional taxation of the target's income in the form of non-resident dividend withholding taxes and acquirer-country corporate income taxation. This paper nds that this additional
international taxation is fully capitalized into lower takeover premiums. In contrast, acquirer excess stock
market returns around the bid announcement date do not appear to reect additional taxation of the target's
income. These ndings suggest that international taxation is considered to be burdensome and that the incidence of this taxation is primarily on target-rm shareholders.
2012 Elsevier B.V. All rights reserved.
Keywords:
International taxation
Takeover premium
Cross-border M&As
1. Introduction
A subsidiary of a multinational rm may face higher income taxation than a domestically owned rm located in the same country. A
foreign subsidiary, specically, may have to pay a non-resident dividend withholding tax on dividends distributed to the parent rm,
and this parent potentially has to pay corporate income tax in its
country of residence on any received dividend income.
The additional income taxation stemming from foreign ownership
potentially discourages multinational rm formation and capital investment by the multinational rm in the foreign country. The extent
of the distortions created by additional international taxation triggered by foreign ownership depends importantly on whether this international taxation can easily be evaded or avoided.
In practice, multinational rms can attempt to reduce the burden of
international taxation in a variety of ways. These include international
prot shifting from high-tax countries to low-tax countries, additional
debt nance in high-tax countries, and the use of conduit companies in
third countries with favorable tax regimes. These evasion and avoidance techniques should serve to reduce a multinational's overall tax
See also Jensen and Ruback (1983) and Jarrell et al. (1988) for early surveys.
187
studies tend to lack ownership information (and thus the relative ownership by, say, highly-taxed and lowly-taxed individuals).
Using information on purely domestic US M&As, Ayers et al.
(2003) have examined the capitalization of individual capital gains
taxation in the takeover premium, nding a positive pass-through
as selling shareholders need to be compensated by a higher takeover
premium because capital gains taxes are brought forward by the
transaction. In the capital gains tax setting, shareholders thus are
compensated for the fact that capital gains taxation can no longer
be postponed (until realization) rather than for the fact that new
taxes are imposed as in the cross-border M&A setting. 2 This paper extends a considerable literature on how rm and deal characteristics
affect takeover premiums and excess returns of acquiring and target
rms around bid announcements to include international taxation.
Our evidence that international double taxation affects the pricing
of cross-border takeovers is consistent with studies that show its impact on the organizational form of multinational enterprises. Huizinga
and Voget (2009) examine the parent-subsidiary structure of multinational rms resulting from cross-border M&As, nding that the actual
parent rms created in such deals face lower international tax burdens
than the counterfactual parents. Desai and Hines (2002) argue that international double taxation imposed by the US can explain inversions
of existing US multinationals, whereby the original US parent becomes
a subsidiary and the earlier foreign subsidiary becomes the new parent
rm. In addition, Voget (2011) nds that a multinational is more likely
to relocate its headquarters abroad, if it is located in a parent country
with high taxation of foreign-source income. In contrast, Blonigen
and Davies (2004) nd that bilateral tax treaties, which serve to reduce
double taxation, have no signicant effect on US FDI activity.
International tax rules potentially affect the relative attractiveness of
the multinational rm mode of operation, and hence should be one of
the determinants of multinational rm activity. Feldstein and Hartman
(1979) show that a home country, that maximizes national income, optimally subjects multinational rm, foreign-source income to domestic taxation, leading to international double taxation. International double
taxation can be expected to discourage the formation of multinational
rms. Consistent with this, Huizinga and Voget (2009) provide evidence
that the frequency and valuation of aggregate M&A transactions on a bilateral national basis are negatively affected by international double
taxation.3
So far the theory of the multinational rm and of cross-border M&As
has largely ignored international taxation.4 As an exception, Bucovetsky
2
Servaes (1991) shows that target, bidder and total returns are larger when targets
have low q ratios and bidders have high q ratios. Dong et al. (2006) construct measures
of acquiring and target rm overvaluation, such as the price-to-book ratio, to nd that
a higher acquiring rm price-to-book ratio is related to a higher bid premium, while a
higher target rm price-to-book ratio is related to a lower bid premium. Rau and
Vermaelen (1998) nd that low book-to-value acquiring rms have a relatively poor
long-term performance after mergers. Moeller et al. (2005) show that low-book-tomarket rms have made relatively many large-loss deals in the 19982001 period.
Moeller et al. (2004) nd that the announcement return is higher for small acquirers.
Stock nance appears to create relatively small (negative) returns for acquirers (see,
for instance, Andrade et al. (2001)). Comment and Schwert (1995), Cotter et al.
(1997) and Moeller (2005) examine anti-takeover measures such as poison pills, independent directors and indices of shareholder control, respectively.
3
Di Giovanni (2005) nds that a country's real gross M&A inows are negatively related to its average statutory corporate tax rate without considering international double taxation.
4
The eclectic theory of the multinational rm of Dunning (1977) explains that multinational rms can exist on account of ownership, location and internalization advantages. An extensive theory formalizes under what circumstances multinational rms
endogenously arise. As an example, Ethier and Markusen (1996) consider a rm's
choice between exporting, licensing, and acquiring a subsidiary abroad on the basis
of exporting cost and technology parameters. Grossman et al. (2006) extend the theory
of the multinational rm to allow for complex integration strategies that go beyond
horizontal and vertical integration. Nocke and Yeaple (2007) analyze when FDI optimally takes the form of M&As or greeneld investments in a model where rms are
heterogeneous in their endowments of mobile and immobile capabilities. Head and
Ries (2008) present a model of cross-border M&As that arise as the acquiring rm aims
to exploit an ownership advantage in the form of a superior management.
188
and Hauer (2008) present a model where countries may optimally offer
preferential tax treatments to multinational rms, as this improves the
outcome of subsequent international tax rate competition, yielding governments additional tax revenue. A preferential tax treatment of multinational rms encourages the formation of multinational rms.
The remainder of this paper is organized as follows. Section 2 discusses the international tax implications of cross-border M&As, and it presents a framework for estimating the capitalization of this international
taxation in the takeover premium. Section 3 describes the M&A data
used in this study. Section 4 presents the empirical results, and
Section 5 concludes.
For Eastern European countries, data are only available from 1990.
The OECD model treaty, which summarizes recommended practice, gives countries
the choice between an exemption and a foreign tax credit as the only two ways to relieve double taxation (OECD, 1997).
6
Table 1
Tax regimes of individual countries in 2004.
Country of
residence
Austria
Belgium
Bulgaria
Croatia
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Latvia
Lithuania
Luxembourg
Netherlands
Norway
Poland
Portugal
Romania
Slovak Rep
Spain
Sweden
Switzerland
UK
US
Branch taxation
With recent Without
tax treaty
tax treaty
(1)
(2)
(3)
(4)
(5)
34.0
34.0
19.5
20.0
28.0
30.0
0.0
29.0
35.4
38.3
35.0
17.7
18.0
12.5
37.3
42.0
15.0
15.0
30.4
34.5
28.0
19.0
27.5
25.0
19.0
35.0
28.0
24.0
30.0
40.0
Exemption
Exemptiona
Credit
Exemption
Credit
Exemption
Credit
Exemption
Exemptiona
Exemptiona
Credit
Exemption
Exemption
Credit
Exemptiona
Credit
Exemption
Exemption
Exemption
Exemption
Exemption
Credit
Exemptione
Credit
Exemption
Exemption
Exemption
Exemption
Credit
Credit
Exemption
Exemptiona
Creditc
Exemption
Deduction
Exemption
Credit
Creditc
Exemptiona
Exemptiona
Credit
Exemption
Exemption
Credit
Exemptiona
Credit
Exemption
Exemption
Exemption
Exemption
Exemption
Credit
Exemptione
Credit
Exemption
Credit
Exemption
Exemption
Credit
Credit
Exemption
Exemption
Exemption
Deductionb
Credit
Credit
Credit
Credit
Deduction
Credit
Exemption
Credit
Credit
Credit
Credit
Deduction
Credit
Credit
Credit
Credit
Creditd
Exemption
Credit
Credit
Credit
Credit
No relief
Credit
Credit
Exemption
Credit
Credit
Credit
Credit
Credit
Credit
Exemption
Exemption
Credit
Exemption
Credit
Credit
Credit
Credit
Credit
Exemption
Exemption
Credit
Credit
Credit
Credit
Credit
Credit
Exemption
Credit
Credit
Notes: The rst column lists the corporate income tax rates including average state and
municipal taxes where applicable with respect to retained earnings. The second
column lists the countries' method for tax relief that applies to dividend income in
presence of a tax treaty. The third column provides the same information in absence
of a tax treaty. Note that the method of tax relief for dividend income does not vary
among different tax treaties because it is always determined by the domestic tax
code. Double tax treaties have no authority over dividend taxation by the receiving
country. However, the provisions of the domestic tax code are often conditional on
the presence of a tax treaty. The parent rm is assumed to hold a majority in the
dividend-paying subsidiary such that participation exemptions take effect. The fourth
column lists the method for tax relief that applies to foreign branch income in the presence of a tax treaty. The method for tax relief in the presence of a tax treaty can vary
among treaties, in which case no unique applicable tax regime can be indicated. The
fourth column indicates the method of tax relief for foreign branch income only if a
country has consistently applied the same method in all tax treaties becoming effective
in the year 2000 or later. The last column lists the method for tax relief that applies to
foreign branch income in the absence of a tax treaty.
a
Only 95% of the dividend is exempted.
b
Belgium only charges 25% of the standard tax rate if the deduction regime applies
in order to reduce double taxation.
c
Only withholding taxes are credited but not the underlying corporate income tax.
d
In case of excess foreign tax credits, Luxembourg allows a deduction of the excess
foreign tax taxes as expenses.
e
Only dividend income from EU sources is exempted. Other dividend income is
taxed. Tax credits are provided for withholding taxes.
The foreign tax credit can be indirect in the sense that it applies to
both the dividend withholding tax and the underlying subsidiarycountry corporate income tax. Alternatively, the foreign tax credit is
direct and it applies only to the withholding tax. In either case,
foreign tax credits in practice are limited to prevent the domestic
tax liability on foreign-source income from becoming negative. In
an indirect credit regime, the multinational effectively pays no additional tax in the parent country on account of the foreign tax credit,
if the parent country tax rate ti is less than tj + (1 tj)wij. Similarly,
Table 2
Withholding tax rates in 2004.
No treaty
Aus
Austria
Belgium
Bulgaria
Croatia
Czech Rep
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Latvia
Lithuania
Luxembourg
Netherlands
Norway
Poland
Portugal
Romania
Slovak Rep
Spain
Sweden
Switzerland
UK
USA
25
25
15
15
15
28
26
29
25
21
0
20
15
20
27
20
10
10
0a
25
25
19
25
15
0
15
0
35
0
0b
0
0
0
10
0
15
0
0
0
0
10
15
0
0
10
10
10
0
0
0
10
0
15
0
0
0
0
0
0
Bel
Bul
Cro
Cze
Den
Est
Fin
Fra
Ger
Gre
Hun
Ice
Ire
Ita
Jap
Lat
Lit
Lux
Neth
Nor
Pol
Por
Rom
Slvk
Spa
Swe
Swi
UK
USA
0
15
0
5
5
10
5
10
5
0
0
5
5
15
15
15
15
5
5
5
0
0
0
5
5
0
15
0
0
5
5
10
0
5
0
0
0
15
15
5
0
15
0
0
0
0
10
5
15
0
26
0
0
0
10
10
10
5
5
5
15
15
5
5
0
25
5
15
15
5
0
5
0
5
5
0
20
0
0
5
5
5
0
15
0
0
0
0
5
5
0
0
10
10
15
0
5
0
0
0
0
10
15
0
10
5
10
15
10
0
26
10
0
15
0
10
15
0
10
25
15
15
5
5
5
15
15
5
5
0
20
5
0
27
20
25
5
15
5
5
5
15
15
5
5
0
20
5
0
5
20
0
0
0
5
15
5
0
26
0
0
0
0
5
5
0
0
5
10
10
0
0
5
0
0
0
15
0
0
0
0
5
0
0
0
5
5
5
0
5
5
15
15
5
0
0
0
0
0
0
10
0
0
15
5
5
5
0
0
10
5
10
5
5
5
15
15
5
5
0
10
5
0
10
10
5
5
0
5
5
0
0
10
15
15
0
15
0
0
0
0
15
10
0
0
20
10
10
0
0
0
15
15
5
10
5
10
10
26
5
10
5
0
5
15
0
10
10
10
10
0
0
10
5
10
10
15
10
5
5
15
26
15
10
5
0
5
5
0
15
10
10
10
0
0
5
5
15
10
0
0
5
15
5
0
15
0
0
0
0
5
5
0
0
10
10
5
0
0
0
5
0
10
0
0
0
10
5
0
0
15
0
0
0
0
0
0
0
0
5
5
5
0
0
0
5
0
10
0
0
0
10
5
5
5
0
0
5
0
0
0
10
5
0
15
10
5
5
0
0
5
5
10
10
0
10
0
0
0
10
5
5
0
15
0
0
0
0
5
5
0
0
10
5
5
0
0
0
5
0
10
0
0
0
5
5
5
15
15
5
0
0
5
5
5
0
5
5
0
5
10
5
5
0
5
15
5
5
10
0
10
0
5
0
10
5
5
0
15
0
0
0
0
10
5
0
0
10
5
5
0
0
0
5
0
5
0
0
0
10
0
0
5
10
5
26
10
5
15
0
10
15
0
10
10
10
10
0
5
15
10
10
10
0
5
0
5
0
0
5
5
5
5
5
15
0
5
15
0
10
20
5
5
0
0
15
5
25
5
0
15
0
5
0
0
15
15
15
10
5
0
5
5
0
15
10
5
5
0
0
5
5
15
10
0
5
0
5
0
0
15
0
0
0
0
5
0
0
0
10
5
5
0
0
0
0
0
10
0
0
0
0
0
0
15
5
5
0
5
5
0
5
20
5
0
0
5
5
5
15
15
0
5
0
5
0
0
0
0
0
5
0
0
0
10
5
5
0
0
0
5
0
5
0
0
0
5
0
0
0
0
5
5
0
0
0
5
5
0
0
0
5
0
10
0
0
0
0
0
0
0
5
5
0
0
10
5
5
0
0
0
5
0
5
0
0
0
0
0
0
10
15
0
0
20
10
10
0
0
0
19
0
15
0
0
0
5
0
0
15
0
10
10
10
10
0
5
10
10
15
5
0
5
0
10
0
0
0
27
20
5
5
0
0
0
5
10
15
0
5
0
5
0
0
0
10
5
5
0
0
0
0
0
3
0
0
0
10
0
0
10
10
5
0
0
0
10
0
10
0
0
0
15
0
0
10
10
0
5
5
10
25
10
0
10
0
10
0
0
0
0
5
5
5
10
10
0
15
0
5
0
0
0
5
5
5
10
10
0
5
0
5
0
0
0
0
5
0
5
0
0
0
0
0
0
0
5
0
0
0
0
0
0
0
0
5
10
10
0
15
0
5
0
0
10
5
0
5
0
5
0
0
10
0
0
0
10
0
0
0
10
0
10
0
0
5
0
5
0
0
0
10
0
0
0
0
0
0
0
Source country
Notes: The No treaty column lists the withholding tax rates that apply to dividend payments to non-resident corporations in the absence of a tax treaty or any domestic regulation with regard to the EU Parent-Subsidiary Directive.
Minimum participation exemptions are taken into account. The remaining part of the table list the applicable withholding tax rate on a bilateral basis where the source countries are listed on the left and the receiving countries at the
top. The table contains data for January 1st 2004.
a
The zero withholding tax does not apply to all types of Luxembourg corporations. For some types it is 20% if there are no reductions due to tax treaties.
b
Withholding tax is not imposed on dividends paid to foreign corporations if the dividends are effectively connected to the conduct of a trade or business in the US.
189
190
7
Firm j then will not be subject to a non-resident dividend withholding tax, if we assume the target's shareholders to be local. Dividends paid to local shareholders may be
subject to a resident dividend withholding tax, but this tax is generally a (partial) prepayment of the personal income tax on dividends. The analysis of this paper is restricted to business-level income taxation.
8
A foreign takeover by a rm from a particular country is taken to be a lowprobability event so that the expectation of such a takeover does not materially affect
target rm pricing before a foreign bid announcement.
191
Table 3
Information on transactions by acquirer and target nations.
By acquirer nation
By target nation
Number
Value of
transactions
Mean
premium
Mean net
double tax rate
Percent positive
net double tax rate
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Iceland
Ireland
Italy
Japan
Luxembourg
Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
UK
US
7
32
27
15
100
87
2
2
20
38
35
7
82
5
1
14
49
52
202
171
0.761
18.965
6.391
17.123
130.226
162.836
3.139
0.116
6.270
26.819
24.095
0.982
79.099
1.690
0.022
16.145
23.717
76.796
541.489
131.109
0.41
0.46
0.49
0.50
0.56
0.44
0.34
1.00
0.45
0.52
0.56
0.34
0.45
0.35
0.31
0.25
0.47
0.48
0.45
0.47
2.86
2.54
1.11
0
2.21
2.12
3.57
0
1.90
4.36
20.65
0
0.06
5.60
0
0.71
0.61
1.25
1.21
11.07
28.6
100
22.2
0
100
69
50
0
25
92.1
100
0
1.2
20
0
7.1
8.2
17.3
11.9
100
Total
948
1267.791
0.47
3.95
51.4
Austria
Belgium
Croatia
Czech Rep.
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Japan
Latvia
Lithuania
Luxembourg
Netherlands
Norway
Poland
Portugal
Slovenia
Spain
Sweden
Switzerland
UK
US
Total
Number
Value of
transactions
Mean
premium
Mean net
double tax rate
Percent positive
net double tax rate
7
17
1
2
5
2
10
87
30
4
3
11
10
12
2
2
1
31
27
24
3
1
8
32
6
221
389
948
12.439
27.089
0.405
1.199
6.854
0.080
15.278
48.839
222.442
2.208
0.130
6.136
1.875
5.623
0.085
0.120
1.789
36.357
12.953
1.466
0.798
0.134
4.248
55.668
3.082
228.338
572.159
1267.791
0.40
0.36
0.09
0.47
0.67
0.46
0.39
0.44
0.35
0.16
0.20
0.42
0.41
0.32
0.16
0.44
0.41
0.43
0.44
0.18
0.34
0.39
0.35
0.48
0.25
0.50
0.53
0.47
3.23
1.35
16.15
5.91
7.56
21.50
2.09
2.09
2.06
0
10.71
14.40
3.46
8.21
5.00
5.00
0
2.03
4.37
7.06
3.95
6.82
2.73
6.26
6.33
6.77
2.20
3.95
57.1
58.8
100
100
60
100
40
56.3
43.3
0
100
81.8
60
100
100
100
0
54.8
55.6
91.7
66.7
100
37.5
65.6
100
70.6
31.6
51.4
Notes: Value of transactions is in billions of US dollars. The premium is computed as a share. The net double tax rate is the additional double tax rate as a % of income net of the target-country
corporate income tax (minimum participation exemptions regarding withholding taxation are taken into account).
database does not inform us whether the target rm becomes a subsidiary or branch of the new multinational rm. As discussed, this
choice potentially has international tax implications. To proceed, we
assume that the target rm becomes a foreign subsidiary, but in the
empirical work we also consider the alternative scenario where the
target rm becomes a foreign branch as a robustness check.
Summary information on our sample of transactions from both acquiring and target-country perspectives is provided in Table 3. The
bid premium is based on the bid price relative to the market price
of the target four weeks prior to the bid announcement, adjusted
for the overall market price movement in the target country in the
four intervening weeks. 10 As in Ofcer (2003), we discard observations with a negative takeover premium or a takeover premium exceeding 2. This yields an average takeover premium for the overall
sample of 0.47. The average net double tax can be seen to be 3.95%.
Both average takeover premiums and double taxes differ substantially across countries. The table further shows the percentage of observations per acquiring and target country with a positive value of the
net double tax rate. The share of observations with a positive value
of the net double tax in the overall sample is 51.4%.
Table 4 provides summary statistics for the premium and tax variables and the control variables used in the subsequent empirical
work. A rst control is the log of the market value of the target as a
measure of the target's size. Larger targets are expected to command
a smaller premium. Next, the book-to-market variable is the ratio of
the target's book value to market value. A relatively large book-tomarket ratio suggests that the target is undervalued, and hence
10
Premiums are calculated relative to prices 4 weeks prior to the bid announcement
because the literature on M&A premiums (see Ofcer (2003), for example) has found
evidence of a run-up period in which insider trading drives up the stock price in anticipation of the bid announcement. The results are robust to variations in the duration of
the run-up period.
192
Table 4
Summary statistics of premium, tax and control variables.
Premium
Net double tax rate
Market value
Book-to-market
Leverage
Equity
Hostile
Poison
Tender
Cleanup
Acquirer GDP
Target GDP
Number of
observations
Average
Standard
derivation
Minimum
Maximum
948
948
943
783
789
948
948
946
946
948
948
948
0.47
3.95
5.28
0.69
0.58
0.07
0.05
0.01
0.73
0.16
27.7
28.3
0.34
6.19
1.78
0.71
0.26
0.25
0.21
0.10
0.44
0.36
1.39
1.51
0.00
0
0.21
1.87
0.01
0
0
0
0
0
22.9
22.5
1.98
28.18
11.26
7.29
2.25
1
1
1
1
1
29.99
29.99
Notes: The premium is computed as a share. The net double tax rate is the overall
additional double tax as a share of income net of the target-country corporate
income tax in % (minimum participation exemptions regarding withholding taxation
are taken into account). Market value is the log of the market value of the target in
millions of US dollars. Book-to-market is the ratio of the book and market values of
the target. Leverage is the ratio of the liabilities and assets of the target. Equity is
dummy variable signaling an all equity transaction. Hostile is a dummy variable signaling the offer is not supported by the board of the target. Poison is a dummy variable
signaling the presence of a poison pill. Tender is a dummy variable signaling there is
a tender offer for all shares. Cleanup is a dummy variable signaling the acquisition of
a remaining interest with initial interest exceeding 50%. Acquirer GDP is the logarithm
of acquirer-country GDP in constant 2000 US dollars. Target GDP is the logarithm of
target-country GDP in constant 2000 US dollars.
4. Empirical results
This section presents evidence on the relationship between international taxation on the one hand and takeover bid premiums and
excess stock market returns of acquiring rms on the other, with
basic regressions reported in Table 5. All regressions in the table contain acquirer-country, target-country and year xed effects, and
errors are clustered at the target-country level.
Regression 1 relates the bid premium to the net double tax and to
several controls. The net double tax variable obtains a coefcient of
0.677 that is signicant at the 1% level, suggesting that targetrm shareholders receive 68 cents less for each dollar of net double
tax triggered by the cross-border takeover.
Among the controls, the premium is negatively and signicantly
related to target market value as an index of target size, while it is
positively and signicantly related to the book-to-market value to
suggest that rms with a high book-to-market ratio are undervalued.
Target leverage enters the regression with a positive and signicant
coefcient to suggest that highly leveraged targets can benet from
the availability of additional capital as a result of the takeover. We
see that the bid premium is positively and signicantly related to
the equity variable. An explanation for this is that equity deals provide less certainty for target shareholders. The tender offer variable
obtains a positive and signicant coefcient, while the cleanup variable receives a negative and signicant variable, conrming earlier
results in Ofcer (2003) and Rossi and Volpin (2004).
As in Ofcer (2003), we have restricted the sample to bid premiums between 0 and 2. Prospective acquirers generally have to
offer positive bid premiums for a takeover attempt to be meaningful.
The requirement of mainly positive bid premiums suggests that our
sample is truncated from below. Such a truncation is expected to introduce an attenuation of the parameter estimates for our tax variable. 12
To correct for this, regression 2 applies the truncated regression
technique with a lower truncation limit of 0 to regression 1. The
net double tax variable now obtains a more negative coefcient of
-1.061 that is signicant at the 1% level, which suggests that the coefcient on the net double tax variable in regression 1 is biased towards zero, and that controlling for truncation is appropriate. The
estimated coefcient of 1.061 is not signicantly different from
1, indicating that the net double tax burden triggered by a crossborder takeover appears to be fully reected in lower takeover
premiums.
The estimation of regression 2 is robust to different choices regarding the clustering of the errors, and in particular to clustering at
the country-pair level, the country-industry level, and the countryyear level (unreported). Alternatively, excluding target-country
xed effects has little impact on the estimated effect of the net double
tax variable on the takeover premium (unreported). However, the net
double tax variable obtains coefcients that are smaller in absolute
value and statistically insignicant if we exclude acquirer-country
xed effects or both acquirer-country and target-country xed effects
(unreported). 13
The sample of regression 2 includes three targets that already are
subsidiaries of multinational rms before the bid announcement,
and hence may be subject to international double taxation prior to
the transaction. Excluding these three observations from the sample
leaves the estimated impact of the net double tax on the takeover
premium essentially unchanged (unreported). Further, the negative
estimated relationship between the takeover premium and the net
double tax is robust to extensions or reductions of the time interval
over which the takeover premium is computed by a day or a week
(unreported). Also, this relationship is robust to including 76 observations with negative takeover premiums (unreported). Negative
takeover premiums can arise due to negative news regarding the
target rm during the time interval over which the premium is computed, or because of prior investor expectations of a higher bid
premium.
The net double tax variable in regressions 1 and 2 is potentially
endogenous to variation in the takeover bid premium. This is because,
say, high synergy gains stemming from M&As on a bilateral basis,
giving rise to high takeover premiums, may equally well affect the determination of double taxation on a bilateral basis. High synergy gains
between any two countries, for instance, may prompt these countries
12
On top of this (uniform) truncation at zero, one could think of various forms of incidental truncation. For example, some potential M&As are not observed because they
are (or would be) obstructed by competition authorities. Intuitively, the probability of
deal obstruction and the size of the premium that an acquirer is willing to pay may be
positively correlated for other reasons than the explanatory variables. Then, the OLS
coefcient of double taxation is biased towards negative values if double taxation
has a positive effect on the probability of deal obstruction, and vice versa.
13
Although the coefcient estimates are now subject to an omitted variable bias, these results are valuable as they demonstrate the importance of controlling for countryspecic effects. In the cross-section, the negative effect of double taxation on premiums
is not apparent as it is offset by country-specic characteristics. The relationship materializes once unobserved country-specic effects are controlled for, and then it is identied by time and bilateral variation. One implication is that the results with country
xed effects should not be taken as evidence of a general absence of tax avoidance or
tax evasion.
193
Table 5
The impact of double taxation on premiums and acquirer excess returns.
No
truncation
Truncation
Instrumental
variables
(1)
(2)
(3)
(4)
(5)
(6)
0.677***
(0.192)
0.033***
(0.008)
0.061***
(0.014)
0.099***
(0.026)
0.125**
(0.053)
0.041
(0.024)
0.291
(0.179)
0.091***
(0.008)
0.117**
(0.050)
0.064
(0.140)
0.223
(0.295)
1.061***
(0.284)
0.0621***
(0.0139)
0.0779***
(0.0142)
0.169***
(0.0442)
0.224***
(0.0773)
0.0649
(0.0485)
0.421*
(0.226)
0.170***
(0.0222)
0.240***
(0.0846)
0.0725
(0.237)
0.524
(0.527)
0.957***
(0.343)
0.033***
(0.008)
0.060***
(0.020)
0.099**
(0.045)
0.126**
(0.058)
0.044
(0.060)
0.294**
(0.147)
0.091***
(0.027)
0.119***
(0.038)
0.089
(0.314)
0.272
(0.400)
0.926***
(0.338)
0.033***
(0.007)
0.060***
(0.012)
0.099***
(0.024)
0.125**
(0.049)
0.043*
(0.022)
0.294*
(0.170)
0.091***
(0.007)
0.119***
(0.046)
0.087
(0.137)
0.267
(0.222)
781
n/a
781
0.23
0.52
646
3.62 (0.16)
781
0.23
0.56
461
3.19 (0.07)
0.261
(0.218)
0.005
(0.003)
0.009
(0.008)
0.001
(0.025)
0.006
(0.021)
0.050**
(0.018)
0.065***
(0.012)
0.007
(0.007)
0.014
(0.018)
0.213***
(0.045)
0.137
(0.235)
0.000
(0.000)
475
0.17
9.872
(16.055)
0.419
(0.289)
1.485
(1.016)
1.474***
(0.503)
1.464
(1.438)
0.080
(1.902)
0.873
(1.255)
2.960
(1.722)
0.037
(1.317)
3.155
(9.104)
19.754
(13.708)
0.032
(0.006)***
475
0.28
Relative size
N
781
R2
0.23
1st stage partial R2
1st stage F-statistic
Robust score statistic (p value)
Notes: The dependent variable in columns 1-4 is the target premium, while in columns 5 and 6 it is the excess return of the acquirer. The net double tax is the overall additional
double tax as a share of income net of the target-country corporate income tax. Market value is the log of the market value of the target in millions of US dollars. Book-to-market is
the ratio of the book and market values of the target. Leverage is the ratio of the liabilities and assets of the target. Equity is dummy variable signaling an all equity transaction.
Hostile is a dummy variable signaling the offer is not supported by the board of the target. Poison is a dummy variable signaling the presence of a poison pill. Tender is a
dummy variable signaling there is a tender offer for all shares. Cleanup is a dummy variable signaling the acquisition of a remaining interest with initial interest exceeding 50%.
Acquirer GDP is the log of acquirer-country GDP in constant 2000 US dollars. Target GDP is the log of target-country GDP in constant 2000 US dollars. Columns 1, 5 and 6 report
OLS regression results. Column 2 reports a truncated regression with a lower truncation threshold of zero. Column 3 and 4 report the second-stage results from instrumental variable regressions. The last three lines in Columns 3 and 4 report the partial R2 of the rst stage regression with respect to the three instruments, the F-statistic with respect to the
joint signicance of the three instruments in the rst stage regression, and Wooldridge's robust score test statistic of overidentifying restrictions. The latter test is applicable instead
of Sargan's Chi-squared test as we use a robust covariance matrix. All regressions include acquirer country, target country and year xed effects. We report robust standard errors
clustered at the target-country level in parentheses. * denotes signicance at 10%, ** signicance at 5%, and *** signicance at 1%.
to sign a tax treaty, thereby lowering bilateral double taxation and inducing additional M&As between them. This type of endogeneity by
itself can explain a negative estimated coefcient for the net double
tax variable in regressions 1 and 2. Alternatively, high synergy gains
may lead countries to install or maintain rather high non-dividend
withholding taxes in order to let the tax authority share in these
higher-than-normal synergy gains. Endogeneity of this kind instead
biases the estimated coefcient on the net double tax variables in
our premium regressions upward.
To deal with potential endogeneity of bilateral double taxation, we
use an instrumental variable (IV) technique. We introduce three instruments for the net double tax variable: the average net double
tax faced by a rm in the actual acquirer country if it takes over a
rm in alternative target countries (this average tax variable is computed using the GDPs of these alternative target countries as
weights), the average net double tax faced by rms in alternative acquirer countries if they take over a rm in the actual target country
(this average tax variable is computed using the GDPs of these alternative acquirer countries as weights), and a dummy indicating
whether or not the acquirer country uses a credit system for alleviating foreign-source taxes. These instruments are proxies for the general level of international taxation imposed by the acquirer and target
countries involved in a particular cross-border deal (and thus they
should be correlated with double taxation involving these two
194
and the F-statistic with respect to the joint signicance of the three
instruments in the rst stage regression is 646). Also, the instruments
pass Woolridge's robust score test of overidentifying restrictions with
a p value of 0.16. This suggests that our instruments are appropriate
instruments, as they only affect the takeover premium through their
effect on the net double tax variable.
Despite the formal tests, one may doubt whether the credit system
dummy variable is a strictly exogenous instrument. M&A transactions
tend to occur in industry-specic waves. Some countries may possibly defer or hasten a switch from a credit system to an exemption system (or vice versa) when confronted with an M&A wave, even if the
ow of multinational rms created by cross-border M&As in any
given year is small relative to the stock of existing multinational
rms. Regression 4 in Table 5 is the second stage of an IV regression
that excludes the credit system dummy variable as an instrument,
yielding an estimated coefcient for the net double tax variable of
0.926 that is very similar to the estimated coefcient of 0.957
in regression 3.
Regressions 24 suggest that the incidence of the double taxation
triggered by a cross-border takeover is fully on target-rm shareholders. The implication is that none of the incidence of the additional
international taxation is on acquiring-rm shareholders. If this is the
case, the excess stock market returns achieved by bidding rms
around the bid announcement date should not be affected by the additional international taxation of the target's income following the
takeover. We next consider the empirical relationship between
these excess returns and our net double tax variable, to gain additional insight into the sharing of the additional double tax burden between target-rm and acquiring-rm shareholders.
The acquirer excess return is constructed as the share price appreciation rate between the day after the bid announcement and four
weeks prior to the announcement, adjusted for the return on the national stock market over the same period. Share price information is
collected from Datastream. The resulting sample contains 475 deals,
with a mean acquirer excess return of 1.6% and a mean bid premium
of 50%.
Regression 5 relates the acquiring-rm excess return to the net
double tax variable, while it is otherwise analogous to regression 1.
The net double tax variable obtains an estimated coefcient of
-0.261 that is not signicant. Among the controls, the hostile variable
obtains a negative coefcient that is signicant at the 5% level to suggest that the acquirer has to pay more in case of a hostile bid. The poison variable enters with a positive and signicant coefcient, perhaps
because a poison pill tends to prevent value-reducing acquisitions.
Next, in regression 6 we adjust the acquirer excess return variable
to account for different market values of the two rms. Specically,
the acquiring-rm excess return is multiplied by the ratio of acquirer
market value to target market value as of four weeks prior to deal announcement. This adjustment makes the estimated tax coefcient
analogous to the one for the same variable in the bid premium regressions, with a coefcient of 1 implying a complete pass-through of
the target's additional tax burden into acquiring-rm market value.
The net double tax variable now obtains a rather large coefcient of
9.872 that is statistically very insignicant.
We conclude that there is no evidence that acquirer excess returns
are affected by the prospective international taxation following a
cross-border acquisition. This is consistent with the evidence from
our takeover premium regressions (2) and (3), simultaneously including acquirer country, target county, and time xed effects, that
the incidence of the additional international taxation is fully on
target-rm shareholders.
A full pass-through of our net double tax variable into stock market value suggests that our statutory double tax variable closely approximates the real tax burden as perceived by investors. Our
statutory double tax variable may well overstate the actual rate of additional income taxation paid by multinationals, as these rms have
195
Table 6
The impact of taxes on takeover premiums: robustness checks.
Country controls
Bilateral controls
Industry effects
Manufacturing sample
Gross income
Branches
Deferral
Prot shifting
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
1.233 ***
(0.561)
1.076***
(0.356)
1.161***
(0.337)
1.306***
(0.330)
1.138***
(0.248)
1.033***
(0.235)
1.156**
(0.580)
1.613***
(0.434)
0.570*
(0.315)
0.576
(0.929)
0.607
(0.435)
Tax difference
Capital controls (target)
Legal system (target)
Mean tariff (target)
Shareholder protection (target)
Shareholder protection (acquirer)
0.068*
(0.034)
0.007
(0.095)
0.012
(0.046)
0.073
(0.073)
0.044
(0.030)
Common language
Common currency
Distance
Contiguity
Regional trade agreement
Market value
Book-to-market
Leverage
Equity
Hostile
Poison pill
Tender
Cleanup
Acquirer GDP
Target GDP
N
R2
0.063***
(0.015)
0.075***
(0.014)
0.182***
(0.048)
0.217***
(0.082)
0.066
(0.050)
0.416*
(0.231)
0.171***
(0.023)
0.242***
(0.081)
0.306
(0.271)
0.700
(0.721)
765
n/a
0.045
(0.071)
0.205
(0.180)
0.003
(0.091)
0.069
(0.069)
0.131
(0.400)
0.061***
(0.014)
0.079***
(0.015)
0.172***
(0.047)
0.219**
(0.086)
0.069
(0.049)
0.425*
(0.221)
0.172***
(0.024)
0.257***
(0.065)
0.066
(0.236)
0.635
(0.487)
781
n/a
0.058***
(0.013)
0.079***
(0.014)
0.193***
(0.042)
0.236***
(0.069)
0.071
(0.050)
0.490**
(0.225)
0.169***
(0.022)
0.236***
(0.091)
0.012
(0.186)
0.533
(0.670)
781
n/a
0.062***
(0.013)
0.078***
(0.014)
0.170***
(0.046)
0.225***
(0.079)
0.066
(0.047)
0.422*
(0.224)
0.170***
(0.022)
0.239***
(0.084)
0.060
(0.261)
0.525
(0.526)
781
n/a
0.062***
(0.014)
0.078***
(0.014)
0.170***
(0.045)
0.225***
(0.077)
0.065
(0.049)
0.423*
(0.227)
0.170***
(0.022)
0.239***
(0.085)
0.083
(0.241)
0.575
(0.490)
781
n/a
0.062***
(0.014)
0.079***
(0.014)
0.168***
(0.044)
0.227***
(0.078)
0.058
(0.049)
0.414*
(0.220)
0.171***
(0.023)
0.235***
(0.084)
0.000
(0.217)
0.508
(0.664)
781
n/a
0.061***
(0.014)
0.077***
(0.015)
0.165***
(0.047)
0.221***
(0.080)
0.068
(0.051)
0.416*
(0.223)
0.169***
(0.022)
0.243***
(0.084)
0.046
(0.243)
0.532
(0.582)
781
n/a
0.061***
(0.015)
0.078***
(0.014)
0.166***
(0.045)
0.224***
(0.079)
0.068
(0.048)
0.417*
(0.218)
0.169***
(0.022)
0.242***
(0.082)
0.172
(0.267)
0.615
(0.593)
781
n/a
Notes: The dependent variable is the target premium. The net double tax is the overall additional double tax as a share of income net of the target-country corporate income tax. Net
double tax manufacturing (net double tax non-manufacturing) is the net double tax rate interacted with a dummy indicating a manufacturing (a non-manufacturing) rm. The
gross double tax is the overall additional double tax computed as a share of the income of the target before the target-country corporate income tax. Net double tax branches computes the net double tax on the assumption that the target is a foreign branch. Net double tax no deferral is the double tax interacted with a dummy signaling that deferral of acquirer-country tax is not available. Tax difference is the absolute value of the difference of the tax rates of the acquirer and target countries where the latter is adjusted to take into
account non-resident withholding taxation and acquirer-country corporate income taxation of the income of the target. Capital controls is the percentage of capital controls not
levied as a share of the total number of considered capital controls. Legal system is an index of the quality of the legal structure and the security of property rights. Mean tariff
is the unweighted mean of tariff rates. Shareholder protection is an index of minority shareholders rights. Common language is a dummy variable indicating whether acquirer
and target countries share a common language. Common currency is a dummy variable indicating whether acquirer and target countries both use the euro. Distance is log of distance in miles between the capitals of the acquirer and target countries. Contiguity is a dummy variable indicating whether acquirer and target countries have a common land border. Regional trade agreement is a dummy variable indicating whether acquirer and target countries are both members of the European Economic Area. Market value is the log of
the market value of the target in millions of US dollars. Book-to-market is the ratio of the book and market values of the target. Leverage is the ratio of the liabilities and assets of the
target. Equity is dummy variable signaling an all equity transaction. Hostile is a dummy variable signaling the offer is not supported by the board of the target. Poison is a dummy
variable signaling presence of a poison pill. Tender is a dummy variable signaling there is a tender offer for all shares. Cleanup is a dummy variable signaling the acquisition of a
remaining interest with initial interest exceeding 50%. Acquirer GDP is the log of acquirer-country GDP in constant 2000 US dollars. Target GDP is the log of target-country GDP
in constant 2000 US dollars. All columns report truncated regressions with a lower truncation threshold of zero and include acquirer country, target country and year xed effects.
In addition, regression 3 includes industry xed effects. We report robust standard errors clustered at the target-country level in parentheses.
* denotes signicance at 10%, ** signicance at 5%, and *** signicance at 1%.
196
Cross-border M&A activity possibly varies by industry. This potentially affects our estimated effect of the net double tax on the takeover
premium, if certain industries are represented more strongly in countries with certain tax structures. To control for this, regression 3 includes industry xed effects, in addition to acquirer country, target
country and time xed effects. The industry effects are captured by
a set of dummy variables that signal target rms with a common
rst digit of the primary SIC code. The net double tax variable enters
regression 3 with a coefcient of 1.161, slightly more negative
than the corresponding estimated coefcient of 1.061 in regression
2 of Table 5.
Next, we consider whether the burden of international double taxation, as capitalized in the takeover premium, is different for
manufacturing and non-manufacturing rms. Manufacturing rms
tend to have real assets and associated prots that may be relatively
difcult to shift internationally, which suggests that the burden of international double taxation on manufacturing rms may be relatively
large. To check this, regression 4 includes two net double tax variables that are interacted with dummy variables that signal that a
rm is a manufacturing rm and a non-manufacturing rm, respectively. The estimated coefcient for the net double tax variable for
manufacturing rms is 1.033 (and signicant at 1%), slightly less
negative than the coefcient for the net double tax variable for nonmanufacturing rms of 1.156 (and signicant at 5%). These estimated coefcients are not signicantly different from 1, or from
each other. The estimated international double tax burden on
manufacturing rms is thus not higher on account of relatively scarce
tax avoidance and evasion options.
Next, regression 5 replaces our net double tax variable by the
gross double tax variable ij that represents the additional international tax as a share of target-rm gross rather than net income. A
gross double tax formulation is appropriate if the acquiring rm
fails to take into account that any additional taxes triggered by an international takeover have to be paid out of the target's net-ofcorporate-tax rather than gross income stream. The gross double
tax variable obtains a coefcient of 1.613 that is signicant at the
1% level. The more negative coefcient no doubt reects that the double tax variable on a gross basis tends to be smaller than the double
tax on a net basis.
Our tax variables have been constructed on the assumption that
the target rm becomes a subsidiary rather than a foreign branch of
the newly created multinational rm. This premise probably is correct in the majority of cases. All the same, as a robustness check we
construct an alternative net double tax variable on the assumption
that the target rm becomes a foreign branch. In this scenario, nonresident dividend withholding taxes do not apply, as a foreign branch
does not return its income to the parent rm in the form of dividends.
In some instances, parent-country taxation of foreign branches and of
subsidiaries also differ, as seen in Table 1. In regression 6, the net double tax variable for the branch case is seen to obtain a coefcient of
0.570 that is only signicant at the 10% level. The lower signicance
level is consistent with the assumption that foreign subsidiaries are
more often chosen than foreign branches.
With a few exceptions, acquirer countries allow their multinational rms to defer acquirer-country tax on foreign-source income if this
is retained abroad. Using information on deferral policies for 2004
from Huizinga and Voget (2009, Table WIV), we can construct a bilateral dummy variable indicating whether deferral is unavailable for
any pair of acquirer and target countries. This is in particular the case
if the acquirer is located in Japan, Portugal, Spain, the UK or the US
and if the target-country corporate tax rate is sufciently low. 17
Regression 7 includes our standard net double tax variable and the
net double tax variable interacted with the dummy variable signaling
17
See Huizinga and Voget (2009) for details on the construction of the no deferral
dummy variable.
that deferral is not available. We expect the net double tax variable
interacted with the no-deferral dummy to obtain a negative coefcient, as a lack of deferral would make acquirer-country taxation
more burdensome. The net double tax interacted with the deferral instead obtains a positive coefcient of 0.576, but this interaction variable is not statistically signicant. This may reect that no deferral is
the exception rather than the rule so that most multinational rms
qualify for deferral.
Finally, we address the potential role of international prot shifting by a newly created multinational rm. International prot shifting
within the new combined rm could serve to reduce its worldwide
tax liability. In fact, some multinationals could well be created with
the exact purpose of creating subsequent international prot shifting
opportunities, as suggested by Bucovetsky and Hauer (2008). The
tax savings per shifted dollar are given by the difference in the corporate income tax rates of acquiring and target countries (with an adjustment for any additional taxation of the target's income triggered
by the international takeover), or vice versa. The absolute value of
the tax difference is included as an additional explanatory variable
in the bid premium regression 8 in Table 6. If prot shifting takes
place, we would expect the tax difference variable to obtain a positive
coefcient to reect that the acquirer is willing to pay more for a target that comes with subsequent prot shifting opportunities. The tax
difference variable, however, enters the regression with a coefcient
of 0.607 that is statistically insignicant. Hence, there is no evidence that takeover bid premiums reect prot shifting opportunities
created by cross-border takeovers, which is consistent with the nding of a full pass-through of international double taxation into lower
stock valuation. 18
Overall, the results of Table 6 conrm that the international tax
burden created by a cross-border merger, as proxied by our net double tax variable, is fully capitalized into lower takeover bid premiums.
5. Conclusion
A cross-border merger can trigger additional taxation of the
target's income in the form of non-resident dividend withholding
taxation imposed by the target country and corporate income taxation imposed by the acquirer country. Using detailed information
about the international tax system, we calculate the increase in the
statutory rate of taxation of the target's income for a large sample of
cross-border M&As. Then we assess the burden of this addition international taxation empirically by relating the calculated statutory tax
increase of the target's income to the takeover bid premium and to
acquiring-rm excess stock returns around the bid announcement
date.
We nd that prospective international double taxation is fully
capitalized in lower international takeover bid premiums, while
acquiring-rm excess stock returns appear unchanged. This suggests
that the incidence of the additional international tax burden is fully
on target-rm shareholders, while acquiring-rm shareholders are
not affected. Our evidence that the tax costs of international mergers
are fully borne by target-rm shareholders is consistent with earlier
evidence that target-rm shareholders tend to appropriate the synergy gains created by M&As. The nding that the increase in the
18
We investigated whether prot shifting opportunities affect the target premium
differently for transactions involving rms that potentially have wider prot shifting
opportunities. In particular, we constructed dummy variables reecting M&As involving rms in the same industry, high tech target rms, and relatively protable target
rms. In three separate regressions based on regression 8 of Table 6, we found that
the tax difference variable, an included dummy variable, and an interaction of the
tax difference variable with the included dummy variable obtain coefcients that are
statistically insignicant (unreported). Also, we constructed a debt shifting propensity
variable that equals one for target rms with low leverage in high-tax countries and for
target rms with high leverage in low-tax countries, and zero otherwise. This debt
shifting propensity variable obtains an insignicant coefcient as well (unreported).
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