Who Bears The Burden of International Taxation Evidence From Cross-Border MaAs

Journal of International Economics 88 (2012) 186197
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Journal of International Economics

journal homepage: www.elsevier.com/locate/jie
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
Tilburg University, The Netherlands

CEPR, London, United Kingdom
c
University of Mannheim, Germany
d
Duisenberg School of Finance, The Netherlands
b
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
We thank two anonymous referees, Michael Devereux, Timothy Goodspeed,

Michael Overesch, Nadine Riedel, Martin Ruf and seminar participants at the University
of Bremen, the University College Dublin, the University of Sankt Gallen, and the Said
Business School, Oxford University, for useful comments.
Corresponding author at: Tilburg University, The Netherlands.
E-mail address: huizinga@uvt.nl (H. Huizinga).
0022-1996/$ see front matter 2012 Elsevier B.V. All rights reserved.
doi:10.1016/j.jinteco.2012.02.013
liability as recorded in its books. However, these mechanisms may

also entail sizeable economic costs that are not identied as such in
the accounting framework, but rather manifest themselves in a reduced pre-tax protability of the rm. This suggests that accounting
data may in practice understate the true burden of the additional taxation stemming from foreign ownership.
This paper instead aims to measure the burden of international
taxes by the extent to which they are capitalized in the takeover bid
premium and acquiring-rm excess stock returns around the bid announcements of cross-border M&As. By jointly considering the takeover premium paid for an international target and acquiring-rm
excess stock returns, we obtain information on the overall burden of
international taxation as well as on the sharing of this burden between target-rm and acquiring-rm shareholders.
Pricing data from cross-border M&As are ideally suited to examine
the burden of international taxation for two reasons. First, crossborder M&As by and large are unforeseen by market participants,
which suggests that price formation concerning cross-border M&As
fully reects the burden of the additional international taxation triggered by the new foreign ownership. Second, our M&A data provide
large variation in the pairs of countries that are party to the deal,
and hence in the additional statutory taxation that is brought to
bear on the newly created foreign subsidiaries.
For this study, we have gathered detailed information on the international taxation of dividend ows among a set of European countries, Japan
and the US. This information includes non-resident withholding tax rates,
corporate tax rates and details of the double tax relief conventions applied
H. Huizinga et al. / Journal of International Economics 88 (2012) 186197
by the countries in our sample. We examine international M&As over the

19852004 period, using deal information from the Thomson Financial
SDC data base. On average, cross-border M&As in our sample of 948
deals create an additional international tax burden of about 4% of the target's income net of the local corporate tax.
Our estimation suggests that additional international taxes are
fully capitalized in reduced takeover bid premiums. In fact, the coefcient measuring the pass-through of international taxation into
lower takeover premiums is not statistically different from one in
the benchmark specication. The benchmark estimation is only
slightly affected by several robustness checks, including instrumental
variables estimation that controls for possible endogeneity of the additional international taxation. We further nd that the additional
statutory tax burden is not reected in a statistically signicant way
in acquiring-rm excess stock returns around the announcement
date of a cross-border takeover bid.
Our results lead us to conclude that the perceived additional tax
rate, as reected in market pricing, closely resembles the additional
statutory tax rate implied by the cross-border deal. This suggests
that any activities that the multinational undertakes to evade or
avoid the additional international tax burden triggered by foreign
ownership (such as international prot or debt shifting) do not materially reduce the economic burden of this taxation (including the cost
of these activities in terms of reduced protability). Theoretically, it is
to be expected that multinational rms engage in international tax
evasion and avoidance to the point where its marginal benet (in
terms of a lower tax liability) equals its marginal cost (in terms of
lower net-of-tax prots through reduced pre-tax protability). Our
result of a full pass-through of international taxation into lower takeover bid premiums could reect that tax evasion and avoidance opportunities in practice are limited or rather costly.
Our nding that target-rm shareholders, and not acquiring-rm
shareholders, bear the burden of the additional taxation created by
new foreign ownership is consistent with previous research indicating that any (positive) gains from (domestic) M&As tend to accrue
mainly to target shareholders. Andrade et al. (2001), for instance, report that targets experience a highly signicant positive average abnormal return of 20.1% over a three day window around the
announcement date in case of cash-nanced acquisitions, while acquirer shareholders experience insignicant average abnormal return
of 0.4% in this instance. 1 International taxation reduces the net-of-tax
gains from a new international business combination, with the reduction in the net gain fully borne by target-rm shareholders.
A full incidence of additional international taxation on target-rm
shareholders also suggests that such taxation is not passed on to
target-rm workers in the form of lower wages. This contrasts with
the theoretical prediction by Bradford (1978) that the incidence of a
corporate income tax in a small open economy is fully on labor. Subsequent general equilibrium models developed by Randolph (2006)
and Gravelle and Smetters, and empirical estimation by
Arulampalam et al. (2010) suggests that at least half of the incidence
of the corporate income tax is borne by labor in open economies. This
literature, however, addresses the incidence of a general corporate income tax, rather than the incidence of additional international taxation of the income of a single target rm. Additional taxation of a
single rm will not affect the general wage level, and hence has limited potential to affect the wages paid by the concerned rm.
The present paper contributes to an existing literature on the capitalization effects of domestic dividend taxation on share prices, including Harris et al. (2001), McDonald (2001), and Gentry et al. (2003). An
advantage of our international taxation study over these domestic taxation ones is that we can clearly identify the dividend recipient as a
corporation resident in a particular country, while domestic taxation
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.
2. Taxation and the takeover premium in cross-border M&As

This section describes the main features of the international tax system that applies to a multinational rm created by a cross-border takeover, and it provides a framework for estimating the empirical
relationship between international taxation and the takeover premium.
To x ideas, let us assume that a rm in country i takes over a rm in
country j, resulting in a parent rm in country i and a foreign subsidiary
in country j.
The subsidiary's income in country j is rst subject to a corporate income tax tj. The rst column of Table 1 indicates the statutory tax rate
on corporate income for our sample of European countries, Japan and
the US in 2004. The tax rates in Table 1 include regional and local tax
rates as well as specic surcharges. Among the European countries, Germany has the highest tax rate at 38.3%, while Estonia is at the bottom
with a zero tax rate. For each of the years 19852004, we have collected
corporate tax rates and all other tax system information from the International Bureau of Fiscal Documentation and several other sources.5 All
sources and variable denitions are listed in an online appendix. Tax
rates vary considerably over our sample period. For example, the average
top statutory tax rate for countries in our sample involved in M&As in
both 1985 and 2004 falls from 48.1% to 33.7% between these two years.
The subsidiary can retain its after-tax corporate income or repatriate it
to the parent company as a dividend. The subsidiary country may levy a
bilateral non-resident withholding tax wij on any outgoing dividend income. Bilateral dividend withholding taxes among countries in Europe,
Japan and the US for 2004 are presented in Table 2. These rates are zero
in many instances, for instance among long-standing EU member states
subject to the EU Parent-Subsidiary Directive adopted in 1990. New EU
member states such as the Czech Republic, Hungary and Poland still
maintain non-zero dividend withholding taxes vis--vis considerable
numbers of European countries at the time of their accession in 2004.
Non-EU member states such as Bulgaria, Japan and Romania similarly
maintain several bilateral non-zero dividend withholding taxes in 2004.
The combined corporate and withholding tax rate in the subsidiary
country is seen to be tj +(1tj)wij. Parent country i may in addition tax
the income generated abroad at a rate ti. Let ij be the resulting double
tax rate dened as the tax rate to be paid by the multinational rm on income from country j in excess of the corporate tax rate tj in country j. In
the absence of any double tax relief, the double tax ij equals ti +
(1 tj )wij . In practice, most countries provide some form of international double tax relief. Some countries operate a territorial or sourcebased tax system, effectively exempting foreign-source income from
taxation. In this instance, the double tax rate ij equals (1 tj)wij.
Alternatively, the parent country operates a worldwide or residencebased tax system. The parent country then in principle subjects income
reported in country j to taxation, but it generally provides a foreign tax
credit for taxes already paid in the subsidiary country. 6
5
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
Corporate Subsidiary taxation

tax rate
With tax
Without
treaty
tax treaty
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
in a direct credit regime, the multinational pays no tax in the parent

country due to the foreign tax credit limitation if wij ti.
A few countries with worldwide taxation do not provide foreign
tax credits, but instead allow foreign taxes to be deducted from the
multinational's taxable income. For the various double tax relief conventions, we summarize in the online appendix the expressions for
the double tax rate ij that, in the case of a foreign tax credit, depend
on whether the foreign tax credit limitation is binding.
Countries tend to vary their method of double tax relief, i.e.
through an exemption, credit or deduction, depending on the existence of a double tax treaty with the other country. Columns 2 and
3 of Table 1 provide information on the double taxation rules applied
to incoming dividends from treaty partners and non-treaty partners.
Finland and Spain, for instance, exempt dividend income from treaty
countries, while they provide a direct and indirect foreign tax credit
in the case of non-treaty counties. In these instances, the existence
of a tax treaty makes the method of double tax relief more generous.
Across the categories of treaty and non-treaty countries, the exemption system is seen to be the most common method of double tax relief, followed by foreign tax credits. At the same time, indirect foreign
tax credit regimes are somewhat more common than direct foreign
tax credits. As an exceptional case, the Czech Republic applies the deduction method to foreign dividends from non-treaty countries. The
tendency to discriminate double tax relief on the basis of the existence of a tax treaty implies that we need to know whether a bilateral
tax treaty is effective in any given year. Such information for 2004 is
available from, for instance, Huizinga and Voget (2009, Table W-II).
In describing the international tax system, we have assumed that
the target rm becomes a foreign subsidiary of the new multinational
rm. In a minority of cases, the target rm may in practice become a
foreign branch. The double taxation of income from a target in country i then generally differs. First, non-resident dividend withholding
taxes normally do not apply to branch income. Second, the parent
country may apply a different method of double tax relief to foreign
branch income. The double tax relief methods that apply to foreign
branch income with and without a tax treaty are listed in columns 4
and 5 of Table 1. Foreign tax credits rather than exemptions are
seen to be the dominant method of providing double tax relief for foreign branch income in case of a tax treaty. Thus, the additional parent-country corporate taxation of foreign-source income may on
average be somewhat higher if a branch is created.
A cross-border takeover reduces the target's net-of-tax income by
ij
a proportion 1t
, given that in the absence of a takeover the target
j
pays income tax at a rate tj in country j. 7 We will refer to this double
tax out of net income as the net double tax, or nij.
Next, we present a framework for relating the net double tax to
the takeover premium, to be used in the subsequent empirical
work. Prior to the takeover, the target's share price is assumed to represent the present discounted value of the net-of-corporate tax income stream that is paid out as dividends. 8 By itself, the net double
tax n (with subscripts omitted) reduces this rm valuation proportionately. To rationalize a cross-border takeover, there have to be efciency or synergy gains that more than offset the additional
international tax burden. To reect this, let be the permanent proportional increase in the target's income and dividends due to the
takeover. We can now model the takeover premium, , as follows
1 1n1
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.
where is the extent to which target shareholders can appropriate

the net gains from the merger. 9 For and rather small, we can
now approximate the premium in Eq. (1) as follows
n
In the empirical work below, the synergy gains rate is taken to

be a function of a set x of rm, deal and country characteristics so
that = x. Substituting for into Eq. (2), we get the following expression for the premium
^
xn
^ . Eq. (3) forms the basis of our empirical estimation of

where
the impact of international double taxation on takeover premiums.
An international takeover provides the acquiring rm with a right
to the target's dividend stream, but not to its interest or royalty payments. In Eq. (3), the premium is therefore related to the double tax
on dividends, but not to the double tax on interest or royalty payments. However, after a takeover the new parent rm may be interested in providing its new subsidiary with some internal debt or
some intangible asset, giving rise to internal interest or royalty payments to the parent, to be able to shift prots internationally. The initial takeover premium potentially reects ex post prot shifting
opportunities created by the cross-border takeover. In the empirical
work, we provide some tests of whether the premium represents
the valuation of ex post prot shifting opportunities.
Our double tax measure n reects top statutory tax rates, rather
than effective tax rates that also take into account other provisions
of the tax system. Generally, effective corporate income tax rates
are calculated to be lower than statutory corporate income tax rates
due to various exemptions and deductions. However, it does not follow that effective double tax rates are less than statutory double tax
rates on account of exemptions and deductions. In fact, (effective)
double tax rates are negatively related to (effective) corporate tax
rates in the target country, as is evident from the expressions for
the double tax rate (as summarized in the online appendix). Thus,
the effective double tax rate may be more than the statutory double
tax rate, if the effective corporate tax rate in the target country is
less than the statutory tax rate. In this instance, the relevant coefcient for measuring the marginal effect of changes in the effective
double tax rate on the takeover premium would be closer to zero
than the one that we estimate based on statutory double tax rates. Alternatively, effective double tax rates can be lower than statutory
double tax rates on account of parent-country tax deferral, anticipated repatriation tax holidays and tax avoidance. In this case, the relevant coefcient for measuring the marginal effect of changes in the
effective double tax rate would be larger in absolute value than the
one that we estimate. Our data set does not provide us with the information necessary to construct effective double tax rates as a means to
check for any bias in the estimation.
3. The deal-level data
The M&A data are taken from the Thomson Financial SDC database. This database provides pricing information and other deal characteristics as well as some accounting information of the two merging
rms. Additional accounting data are obtained from Compustat North
America and Compustat Global, while additional stock price data for
acquirers are collected from Datastream. Our sample consists of 948
mergers and acquisitions involving any two countries in a set of European countries, Japan and the US between 1985 and 2004. The
9
Efciency gains from a takeover may stem from several sources, and acquirer and
target shareholders could share the various efciency benets in different ways. For
simplicity's sake, however, we posit a uniform sharing parameter, .
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.
could command a larger premium. The leverage variable is the ratio

of the target liabilities to target assets. A highly leveraged target
could be prevented from additional borrowing to nance worthwhile
investments. This suggests that a highly leveraged target can obtain a
higher takeover premium.
Several deal characteristics are included in the empirical work. Equity is a dummy variable that takes on a value of one if only equity is
offered to target shareholders. All-equity deals provide target shareholders less certainty about the longer-term value of the deal, but
they could have the advantage of delaying capital gains taxation.
Thus, equity deals could generate either higher or lower takeover premiums. Hostile is a dummy variable that takes on a value of one, if the
takeover is not supported by the board of the target rm. The bidding
rm may need to pay relatively much, if target management does not
support the takeover and correspondingly Moeller (2005) nds a signicant positive impact of the hostile nature of the takeover bid on
the premium. Poison pill is a dummy variable indicating the presence
of a defense measure against a takeover in the form of a poison pill.
Such a measure may, for instance, give existing shareholders the
right to buy additional shares at a discount if any shareholder acquires more than a certain percentage of the shares, making an acquisition more costly. Alternatively, some stock may be given superior
voting rights compared to common shareholders. The scheme possibly gives management the option to revoke the poison pill, which
would make it unattractive to undertake an acquisition without involvement of the target management. 11 Comment and Schwert
(1995) nd a positive impact of poison pills on takeover premiums.
Tender is a dummy variable that is one, if the takeover is preceded
by a tender offer for all shares. If a bid is for more shares than necessary to gain control, the bidding rm may wish to bid relatively less.
11
Only 1% of the transactions in our sample have a poison pill as seen in Table 4. See
Malatesta and Walkling (1988) for further information on poison pills.
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.
Moeller (2005) in fact nds a negative impact of the tender variable

on the premium. At the same time, a tender offer may be called for,
if target ownership is dispersed. With dispersed target ownership, it
is more likely that the benets from the takeover accrue to target
shareholders in the form of a higher bid premium. Consistent with
this, Ofcer (2003) and Rossi and Volpin (2004) nd a positive impact
of the tender offer variable on the takeover premium. Finally, cleanup
is a dummy variable that takes on a value of one, if the bidder already
owns at least 50% of the shares and seeks to acquire the remaining
shares. In this instance, the bidder already has control over the target
and hence may bid relatively little to acquire the remaining interest.
Ofcer (2003) indeed nds a relatively small premium in case of a
cleanup.
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.
Net double tax

Market value
Book-to-market
Leverage
Equity
Hostile
Poison pill
Tender
Cleanup
Acquirer GDP
Target GDP
No
truncation
Truncation
Instrumental
variables
Instrumental variables excluding credit

dummy
Acquirer excess return

(unadjusted)
Acquirer excess return

(adjusted)
(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
countries), but they can be taken to be exogenous to synergy shocks

particularly affecting deals between the two countries. 14
Regression 3 reports the results of the second stage of the IV estimation, as applied to regression 1. The estimated coefcient for the
net double tax is 0.957 and it is signicant at the 1% level. This estimated coefcient of 0.957 is lower than the corresponding estimate of 0.677 in regression 1. This suggests that endogeneity of
international double taxation, if any, takes the form of higher double
taxation imposed on transactions that command higher takeover premiums. However, the coefcient for the net double tax variable in regression 3 estimated using instrumental variables is not signicantly
different from the one in regression 1 estimated by ordinary least
squares. Thus, any endogeneity does not seem to lead to a signicant
upward bias of the coefcient on the net double tax variable in the regression estimated by ordinary least squares. We note that our instruments are strong instruments (their partial R 2 in the rst stage is 0.52,
14
In a robustness check, we correct for truncation and possible endogeneity simultaneously using a two-stage procedure. Specically, in the rst stage we generate predicted
values for the endogenous tax variable from a regression on the three instruments and
other explanatory variables. In the second stage, we perform a regression with truncation,
but replace the tax variable by its predicted value. Standard errors are estimated by bootstrapping. In this approach, the estimated impact of the net double tax on the takeover is
very similar to regressions 2 and 3 of Table 5 where we apply truncation and correct for
endogeneity separately (unreported).
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
various strategies, including international prot and debt shifting, to

mitigate international double tax payments. 15 However, these double
tax reducing strategies themselves may carry signicant economic
costs that stock market investors should take into account in valuing
the implications of international double taxation. These costs include
the costs of employing accountants, of inappropriate capital structures, of potentially low returns on locally re-invested earnings to
defer parent-country taxation, as well as the risks of nes if the tax reducing activities are illegal. Our result of a full pass-through of statutory international double taxation into stock market value suggests
that stock market investors see these costs of international tax avoidance and evasion as comparable to the benets in terms of reduced
worldwide tax payments.
Next, Table 6 presents several additional takeover premium regressions that serve as robustness checks of regression 2 in Table 5.
First, we include several time-varying indices of the institutional
quality of the target country that could affect the efciency or synergy
gains created by a cross-border takeover and hence the takeover premium. These target-country institutional variables are: capital controls (with a higher value denoting less stringent capital controls),
quality of the legal system (with a higher value denoting higher
legal system quality), the mean tariff rate, and shareholder protection
(with a higher value denoting better shareholder protection). In addition, we include an acquirer-country shareholder protection variable
as rms located in countries with a high degree of shareholder protection may be able to bid more for foreign targets. 16
The inclusion of these institutional variables reduces the sample
size to 765 transactions. The capital controls variable enters regression 1 with a positive coefcient that is signicant at 10%, suggesting
that less stringent target-country capital controls yield a higher takeover premium. This could reect that higher synergy gains can be
achieved with less stringent capital control, perhaps because the
pool of potential foreign acquirers is larger in the absence of prohibitive capital controls. The coefcient on the net double tax variables is
now estimated at 1.233, slightly less than the estimate of 1.061 in
regression 2 of Table 5, and it is signicant at 1%.
Regression 2 alternatively includes several bilateral variables that
proxy for the degree of closeness and integration of the acquirer and
target countries. Among these, common language is a dummy variable indicating whether acquirer and target countries share a common language, while common currency is a dummy variable
indicating whether acquirer and target countries have the euro as a
common currency. Furthermore, distance is the log of the distance
in miles between the capitals of the acquirer and target countries,
contiguity is a dummy variable indicating whether acquirer and target countries share a border, and. regional trade agreement is a
dummy variable indicating whether acquirer and target countries
are both members of a free trade area, and in particular of the European Economic Area. Huizinga and Voget (2009, Table IX) report that
the frequency of aggregate bilateral M&A transactions is positively
and signicantly related to the common language and common border variables. In the takeover premium regression 3, however, we
nd that all ve bilateral variables are estimated with insignicant
coefcients. Countries with a common language and a common border thus experience a higher frequency of bilateral cross-border
M&As without a signicant impact on the takeover premium. This
could reect that geographical and linguistic closeness increases the
demand and supply of possible targets, resulting in little impact on
pricing. The estimated coefcient for the net double tax variable in regression 2 is 1.076, very similar to the estimate of 1.061 in regression 2 of Table 5.
15
See Huizinga and Laeven (2008) and Huizinga et al. (2008) for recent evidence on
international prot shifting and debt shifting.
16
The institutional variables are taken from Gwartney et al. (2005) except for the
shareholder protection variables which are from Rossi and Volpin (2004).
195
Table 6
The impact of taxes on takeover premiums: robustness checks.
Net double tax
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)
Net double tax manufacturing

Net double tax non-manufacturing
1.613***
(0.434)
Gross double tax
0.570*
(0.315)
Net double tax branches

Net double tax no deferral
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).
statutory tax rate applied to the target's income is fully discounted

into lower takeover bid premiums also suggests that the perceived
increase in the effective tax burdeninclusive of the costs of international tax evasion and avoidance activitiesis commensurate with
the increased statutory tax burden, as international tax evasion and
avoidance activities may not materially reduce the effective tax
burden inclusive of these costs.
Our result that target-rm shareholders appear to absorb the international tax costs of cross-border M&As implies that international
tax policies may have consequences that are unintended. Countries
that impose non-resident dividend withholding taxes presumably
do so with a view of taxing the foreign owners of domestically located
rms. Our evidence, however, suggest that the incidence of these
taxes may be on any original domestic owners of these rms, as the
price that foreigners pay to acquire domestic rms is adjusted downward to reect any future non-resident dividend withholding taxes.
In a competitive international market for ownership and control, it
is perhaps not surprising if countries cannot impose a real tax burden
on foreign ownership.
Our estimation equally implies that the incidence of acquirercountry corporate income taxation may be substantially on targetrm shareholders domiciled abroad. This suggests that countries
that are home to many multinational rms have an incentive to increase or at least maintain systems of worldwide taxation of corporate income, as this tax can to some extent be exported to foreign
shareholders prior to international acquisitions. Traditionally, several
countries with a large multinational-rm base, in particular the UK,
the US and Japan, have imposed corporate income taxation on a
worldwide basis. In practice, however, international double taxation
could discourage multinational rm formation and location in countries with worldwide taxation, thereby limiting the scope for corporate income tax exportation to foreign shareholders prior to
acquisitions. This may in part have motivated recent switches from
worldwide taxation to territorial taxation by the Japan and the UK
in 2009, leaving the US as the only major economy that imposes
worldwide taxation.
Appendix A. Supplementary data
Supplementary data to this article can be found online at doi:10.
1016/j.jinteco.2012.02.013.
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Journal of International Economics 88 (2012) 186197

Contents lists available at SciVerse ScienceDirect

Journal of International Economics

Tilburg University, The Netherlands

We thank two anonymous referees, Michael Devereux, Timothy Goodspeed,

liability as recorded in its books. However, these mechanisms may

H. Huizinga et al. / Journal of International Economics 88 (2012) 186197

by the countries in our sample. We examine international M&As over the

H. Huizinga et al. / Journal of International Economics 88 (2012) 186197

2. Taxation and the takeover premium in cross-border M&As

Corporate Subsidiary taxation

H. Huizinga et al. / Journal of International Economics 88 (2012) 186197

H. Huizinga et al. / Journal of International Economics 88 (2012) 186197

in a direct credit regime, the multinational pays no tax in the parent

where is the extent to which target shareholders can appropriate

In the empirical work below, the synergy gains rate is taken to

^ . Eq. (3) forms the basis of our empirical estimation of

H. Huizinga et al. / Journal of International Economics 88 (2012) 186197

could command a larger premium. The leverage variable is the ratio

H. Huizinga et al. / Journal of International Economics 88 (2012) 186197

Moeller (2005) in fact nds a negative impact of the tender variable

H. Huizinga et al. / Journal of International Economics 88 (2012) 186197

Net double tax

Instrumental variables excluding credit

Acquirer excess return

Acquirer excess return

countries), but they can be taken to be exogenous to synergy shocks

H. Huizinga et al. / Journal of International Economics 88 (2012) 186197

various strategies, including international prot and debt shifting, to

H. Huizinga et al. / Journal of International Economics 88 (2012) 186197

Net double tax

Net double tax manufacturing

Gross double tax

Net double tax branches

H. Huizinga et al. / Journal of International Economics 88 (2012) 186197

H. Huizinga et al. / Journal of International Economics 88 (2012) 186197

statutory tax rate applied to the target's income is fully discounted

Comment, Robert, Schwert, G. William, 1995. Poison or placebo? Evidence on the

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