The introduction of the exemption system for foreign profits and its effects on international acquisitions – the UK and Japan regaining international tax competitiveness?

Abstract

Purpose -Both, the UK and Japan abolished the tax credit system for foreign source dividends in 2009 in favour of the exemption system. With the move towards a dividend exemption system the governments intended to enhance the international tax competitiveness of their countries. The purpose of this paper is to evaluate the implications of substituting the credit system for the exemption system in the UK and Japan on cross-border transaction prices when competing for international acquisitions. Design/methodology/approach -The paper uses an economic model under certainty to analyse the changes in cross-border marginal purchase and seller prices as a result of the introduction of the newly introduced dividend exemption system. Findings -Shifting to an exemption system has ambiguous effects on the ability to compete for foreign acquisitions: investors from both countries are able to pay higher prices in the course of acquisitions, but while investors from the UK become more competitive, the relative competitive position for Japanese investors hardly changes and remains relatively constrained, independent of the form of double taxation relief. Thus the author verifies that the international tax regime is not the only determinant influencing the competitive position, ranking second to, e.g., the interaction with international tax rate differentials. Originality/value -The international tax reforms in UK and Japan in 2009 offer a unique opportunity to study the impact of international tax policy on the international tax competitiveness of multinational firms in the course of foreign acquisitions. Evidence from this paper is not exclusively applicable to the UK and Japan setting. The observed effects shed new light on the intensified debate in the USA of changing the international tax system by analysing the impact on the bidding situation in international acquisitions in a real-world transition scenario.

Regulatory framework of mergers and acquisitions

“…In addition, we advise both economic policymakers and regulatory authorities that allowing a tax credit in foreign transactions will let MNCs invest more in the same business and other prospective industries in the given host country. For example, Hohler (2013) suggested that the government should establish a policy -"foreign tax payments can be credited against domestic taxes". While allowing the cross-listing mode, both local firms and foreign MNCs can get better access to international financial markets that result in cheaper external financing (Georgieva and Jandik, 2012).…”

Determinants of Cross-Border Mergers and Acquisitions: A Comprehensive Review and Future Direction

“…In the scientific literature, value is treated as the best valuation indicator of an enterprise performance, integrating the drivers and reflecting the enterprise internal situation as well as external environment (Kazlauskienė & Christauskas, 2008;Hohler, 2013). Further, deals complete when both parties arrive at a win-win value (Allen & Rigby, 2003) and value always depends on expectations (Fernandez, 2007).…”

“…Hence, we have come across the literature [besides, own observations] that acquirer and target do not reveal the method of valuation, but they announce the economic value that goes to target shareholders. For instance, cross-border acquisitions largely follow asset valuation models to define the value of target firm undertaking both anticipated future cash flows and individual tax burden (Hohler, 2013;Madura, Vasconcellos, & Kish, 1991).…”