Tax considerations and merger activity in national and international context: Empirical evidence from the Czech Republic

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Year of publication 2014
Type Article in Proceedings
Conference European Financial Systems 2014: Proceedings of the 11th International Scientific Conference
MU Faculty or unit

Faculty of Economics and Administration

Field Management and administrative
Keywords tax policy; merger; double taxation; tax savings; tax costs
Description Being closely interconnected with method of payment and structure of the deal, tax policies determine the scope of financial synergies from mergers. Majority of current tax regimes impose a significant burden on domestic firms earning foreign income. One of its major components is double taxation, which in combination with other tax issues significantly distorts ownership patterns and reduces cross-border and domestic investment flows. An exemption of foreign income and shareholder income from taxation helps to promote social welfare, although not to the global optimum. There is positive significant correlation between international tax rates and the probability of choosing a location for an affiliate of a multinational firm for both greenfield investments and cross-border mergers. The latter react less strongly to high tax rates than greenfield investments. Thus substitution of greenfield investments by cross-border mergers in some cases unambiguously intensifies tax competition, thus enhancing public welfare. As for the Czech Republic, the level of cross-border mergers is very low. Domestic mergers significantly outnumbered cross-border mergers during the last decade. On the other hand foreign investors own a lot of companies realizing the merger in this period. The aim of this paper is to identify whether companies going for mergers in the Czech Republic consider tax motives, problems and impacts of mergers in the process of the merger and to compare the obtained results with earlier existing evidence from the worldwide.
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