Martin Ruf

The Taxation of Passive Foreign Investment - Lessons from German Experience

English Abstract: The paper evaluates the working of German CFC rules that restrict the use of foreign subsidiaries located in low‐tax countries to shelter passive investment income from home taxation. While passive investments make up a significant fraction of German outbound FDI, we find that German CFC rules are quite effective in restricting investments in low‐tax jurisdictions. We find evidence that the German 2001 tax reform, which unilaterally introduced exemption of passive income in medium‐ and high‐tax countries, has led to some shifting of passive assets into countries for which the exemption was previously limited. French Abstract: Ce texte evalue l’impact des regles imposees aux succursales a l’etranger des societes allemandes – regles qui limitent l’usage de filiales etrangeres localisees dans des pays a fiscalite legere pour mettre les revenus d’investissement passif a l’abri de la fiscalite dans le pays d’origine. Ces investissements passifs constituent une fraction significative de l’investissement direct a l’etranger des Allemands, et on decouvre que les regles allemandes sont tres efficaces pour restreindre les investissements dans des economies a fiscalite legere. Les resultats montrent que la reforme fiscale allemande de 2001, qui a unilateralement introduit une exemption du revenu passif dans les pays a fiscalite medium or lourde, a entraine un deplacement des actifs passifs vers les pays pour lesquels l’exemption etait limitee auparavant.

Consequences of the New UK Tax Exemption System: Evidence from Micro‐level Data

Until 2009, the United Kingdom operated a system of worldwide taxation. Taxation of foreign income was deferred until repatriated as dividends, leaving UK-owned multinational firms the possibility of avoiding UK taxation by delaying dividend payments and keeping earnings abroad. In 2009, the UK switched to a system under which all foreign-earned income is exempted from taxation. This fundamental change had a number of straightforward implications for UK-owned multinational firms and particularly changed incentives to repatriate profits. This paper assesses the effects of the reform on the foreign affiliates of UK-owned multinational firms. We use data provided by Bureau van Dijk on 61,738 foreign affiliates located in one of 29 European countries to estimate the impact of the reform on the repatriation pattern and other outcomes of UK-owned affiliates. We use an identification approach that quasi-randomizes over the country of residence of the ultimate firm owners, allowing us to compare outcomes of treated UK-owned foreign affiliates to control non-UK-owned foreign affiliates. Our results suggest that the switch to tax exemption not only changed dividend repatriation behavior of firms but also the conditions under which foreign entities operate in general, for instance, with regard to investment behavior.

The Taxation of Passive Foreign Investment: Lessons from German Experience (La Fiscalité De L’Investissement Étranger Passif)

English Abstract: The paper evaluates the working of German CFC rules that restrict the use of foreign subsidiaries located in low‐tax countries to shelter passive investment income from home taxation. While passive investments make up a significant fraction of German outbound FDI, we find that German CFC rules are quite effective in restricting investments in low‐tax jurisdictions. We find evidence that the German 2001 tax reform, which unilaterally introduced exemption of passive income in medium‐ and high‐tax countries, has led to some shifting of passive assets into countries for which the exemption was previously limited. French Abstract: Ce texte evalue l’impact des regles imposees aux succursales a l’etranger des societes allemandes – regles qui limitent l’usage de filiales etrangeres localisees dans des pays a fiscalite legere pour mettre les revenus d’investissement passif a l’abri de la fiscalite dans le pays d’origine. Ces investissements passifs constituent une fraction significative de l’investissement direct a l’etranger des Allemands, et on decouvre que les regles allemandes sont tres efficaces pour restreindre les investissements dans des economies a fiscalite legere. Les resultats montrent que la reforme fiscale allemande de 2001, qui a unilateralement introduit une exemption du revenu passif dans les pays a fiscalite medium or lourde, a entraine un deplacement des actifs passifs vers les pays pour lesquels l’exemption etait limitee auparavant.

Effects of Territorial and Worldwide Corporation Tax Systems on Outbound M&As

Repatriation taxes reduce the competitiveness of multinational firms from tax credit countries when bidding for targets in low tax countries. This comparative disadvantage with respect to bidders from exemption countries violates ownership neutrality, which results in production inefficiencies due to second-best ownership structures. This paper empirically estimates the magnitude of these effects. The abolishment of repatriation taxes in Japan and in the U.K. in 2009 has increased the number of acquisitions abroad by Japanese and British firms by 31.9% and 3.9 %, respectively. A similar policy switch in the U.S. is simulated to increase the number of U.S. cross-border acquisition by 17.1 %. We estimate the yearly gain in efficiency to be around 525 million dollar due to the Japanese reform and 13.5 million dollar due to the U.K. reform. Simulating such a reform for the U.S. results in a yearly efficiency gain of 1134 million dollar.

CFC Legislation, Passive Assets and the Impact of the ECJ's Cadbury-Schweppes Decision

In its Cadbury-Schweppes decision of 12 September 2006 (C-196/04), the Court of Justice of the European Union decided that the UK controlled foreign corporation rules, which were implemented to subject low taxed passive income of foreign affiliates to UK corporate tax, implied an infringement of the freedom of establishment. Consequently, many EU countries including Germany changed their legislation. The paper discusses to which extent the ECJ ruling has impacted on the allocation of passive assets in German multinationals. Using firm level data we find evidence for an increased preference for low-tax European countries compared to non-European countries.

Tax Avoidance as a Driver of Mergers and Acquisitions

Following a merger or acquisition, a target firm’s effective tax rate decreases on average by 3 percentage points. This decline is as high as 8 percentage points when the acquiring firm is tax aggressive. Further, target firm profitability decreases, particularly in the case of targets having a higher statutory tax rate than the acquirer. These results point to acquiring firms’ ability to more effectively lower target firms’ tax burdens after the deal takes place being a potential driver of the deal. On the contrary we do not find a change in target leverage post deal. The latter finding we attribute to the existence of group taxation regimes in many countries, which makes it more efficient to use a highly levered holding company to acquire the target instead of altering the leverage of the target itself.

Taxing Away M&A: The Effect of Corporate Capital Gains Taxes on Acquisition Activity

Using a comprehensive sample of M&A deals around the world, we analyze the effect of corporate capital gains taxation on M&As involving corporate sellers (e.g. subsidiary sales). Capital gains taxation distorts the market for corporate control by imposing a cost on corporate sellers which leads to a lock-in effect that inhibits the completion of deals. We find that an increase in the corporate capital gains tax rate affects the location choice and reduces acquisition activity significantly. For the United States, this implies forgone acquisitions from corporate sellers at a volume of around

Die Messung der effektiven Steuerbelastung. Ein Vergleich verschiedener effektiver Steuersätze

34.4 billion annually due to capital gains taxes.

Holdings als Mittel der Steuerplanung zur Implementierung von steuerlich motiviertem Fremdkapital

Effektive Steuersatze sind ein weithin akzeptiertes Instrument der okonomischen Analyse des Steuerrechts. International bekannt wurden effektive Steuersatze durch die Untersuchungen von King und Fullerton 1 sowie von Devereux und Griffith 2, auf denen auch die beiden grosen Untersuchungen zur Unternehmensbesteuerung im Binnenmarkt beruhen, welche die Europaische Kommission veroffentlicht hat3.

Die Besteuerung des Unternehmenskaufs - Empirische Evidenz

This paper shows the empirical importance of holdings in combination with fiscal unions for implementing tax induced debt finance. Holdings are responsible for half of the internal liabilities on the balance sheet of German subsidiaries of foreign multinationals summing up to 11 8 billion Euros in 2005. Furthermore the leverage of holdings reacts stronger to tax incentives. The specific importance of holdings for implementing tax induced debt finance may thus explain why prior empirical studies find a surprisingly low response of the leverage to tax incentives.ZusammenfassungHoldinggesellschaften halten im Jahr 2005 etwa die Hälfte der konzerninternen Verbindlichkeiten deutscher Tochtergesellschaften ausländischer multinationaler Konzerne in Höhe von 118 Milliarden Euro. Der Verschuldungsgrad solcher Holdinggesellschaften reagiert stärker als der operativ tätiger Tochtergesellschaften auf Veränderungen steuerlicher Anreize. Die spezifische Bedeutung von Holdings als Mittel der Steuerplanung, die im Rahmen früherer empirischer Untersuchungen nicht berücksichtigt wurde, kann damit zumindest teilweise erklären, warum diese Untersuchungen einen überraschend schwachen Einfluss steuerlicher Anreize auf die unternehmerische Wahl des Verschuldungsgrads finden.