Source versus residence based taxation with international mergers and acquisitions

This paper analyses tax competition and tax coordination in a model where capital flows occur in the form of mergers and acquisitions, rather than greenfield investment. In this framework, we show that differences in residence based taxes do not necessarily distort international ownership patterns. Moreover, tax competition yields globally efficient levels of source based corporate income taxes if residence based taxes on capital income are absent. In contrast, in the presence of residence based taxes on dividends, source based corporate income taxes are inefficiently high. The widespread view that tax coordination is less urgent if residence based taxes are available may therefore be misguided.

Research Highlights
► We consider tax competition when investment takes the form of m&a instead of greenfield investment.
► The efficiency properties of tax competition differ completely if m&a are taken into account.
► Without residence based taxes, competition in source based taxes for m&a leads to efficiency.
► With of residence based taxes on dividends, tax competition leads to overtaxation of corporate income.