Cross–Border Acquisitions and Taxes: Efficiency and Tax Revenues

We develop a theoretical oligopoly model to study how international differences in profit and capital gains taxes affect foreign acquisitions. Reductions in foreign profit taxes tend to trigger inefficient foreign acquisitions, while reductions in foreign capital gains taxes may trigger efficient foreign acquisitions. Foreign acquisitions can increase domestic tax revenues even when profit taxes are evaded. The reason is that bidding competition between foreign firms ensures that all benefits from the acquisition, including tax advantages, are captured by a domestic seller paying capital gains taxes. Tax code issues, such as the treatment of goodwill, are shown to affect the pattern of foreign acquisitions.