Andrew B. Lyon is a principal in the Washington National Tax Services office of PwC LLP.
The views expressed in this article are those of the author and do not necessarily reflect the views of PwC. The author thanks Eric Wilhelm for his assistance.
In this article, the author examines the 2018-2019 increase in cross-border mergers and acquisitions, saying that while a range of factors likely affects the volume of outbound and inbound M&A in any year, the data support the notion that the 2017 tax reform legislation improved the attractiveness of the United States as the tax domicile for multinational enterprises.
Copyright 2020 PwC. All rights reserved.
Cross-border mergers and acquisitions data show that for the first time since 2013, the dollar share of outbound transactions — that is, acquisitions by U.S. companies of foreign assets and companies — exceeded inbound transactions — that is, acquisitions by foreign companies of U.S. assets and companies — in 2018 and in 2019. The average annual dollar value of outbound transactions in 2018 and 2019 was 50 percent greater than the average in the two preceding years, before enactment of the Tax Cuts and Jobs Act. Over the same period, the dollar value of inbound transactions declined by 25 percent.
Although a range of factors likely affects the volume of outbound and inbound M&A in any year, the data are consistent with a view that the 2017 tax reform legislation improved the attractiveness of the United States as the tax domicile for multinational companies.
I. Introduction
In the years immediately preceding enactment of the TCJA, an increasing share of cross-border M&A transactions transferred assets and ownership of U.S. multinational companies to foreign ownership. In some cases, a U.S. company, or a division thereof, was acquired by a larger foreign company. In other cross-border transactions, a U.S. company redomiciled through a transaction with a smaller foreign company in which the newly formed entity established its tax domicile outside the United States.1
A major tax disadvantage under prior law facing U.S. companies with foreign activities was that foreign earnings remitted to a U.S. parent company were subject to additional U.S. tax under the U.S. worldwide tax system, whereas a foreign company headquartered in a country with a dividend exemption system (as was in place in 30 of the other 35 OECD countries before 2017) or with a low statutory tax rate (such as Ireland) could receive foreign earnings without an additional tax burden.2 The prior-law 39 percent combined federal and state corporate income tax rate was the highest in the OECD and more than 15 percentage points higher than the OECD average, and it generally resulted in a higher tax rate on earnings remitted to the U.S. parent than if the parent was incorporated in any other OECD jurisdiction.
Together, those features of the U.S. tax system encouraged U.S. companies to redomicile abroad and disadvantaged U.S. companies bidding on foreign targets because the targets’ earnings generally would be subject to a higher tax rate when owned by a U.S. company.3 That is, U.S. companies’ costs would be higher because of the higher tax burden, reducing the value of their foreign investments relative to foreign companies. For the same reason, the foreign assets of a U.S. company might be more profitably held by a foreign company, making the U.S. company a target for acquisition by foreign companies.
The U.S. Treasury Department responded to the growing volume of expatriations by companies through cross-border acquisitions with a series of notices and proposed regulations in 2014, 2015, and 2016 to make those transactions more difficult to achieve and reduce the tax benefits of doing so.4
The TCJA followed those regulatory actions by putting in place several provisions intended to make the United States a more competitive location for multinational corporations to be headquartered. Most prominent were the adoption of a 100 percent dividends received deduction for dividends received directly from a foreign subsidiary and the reduction in the U.S. statutory corporate tax rate from 35 percent to 21 percent.5
This article reports data on cross-border transactions between 2010 and 2019, with detail on acquisitions by U.S. companies of foreign assets and companies (outbound acquisitions) and foreign acquisitions of U.S. assets and companies (inbound acquisitions). While many factors likely affect the volume and direction of cross-border M&A transactions in any given year, if the TCJA improved U.S. attractiveness for multinationals to place their global headquarters, it should increase the desire of U.S. multinationals to pursue outbound acquisitions relative to being acquired by foreign multinational companies and attaining foreign domiciliation.
Importantly, while this article draws on a common data source for the transaction-level data, it reclassifies some transactions for identifying the domicile of the acquiring and target companies. That reclassification is necessary for transactions in which the U.S. company is identified by the data source as the acquirer of a foreign company despite the U.S. company becoming foreign domiciled. In the absence of that reclassification, not only would the domicile of the initial transaction be mischaracterized, all subsequent acquisitions by the then-U.S. and now-foreign entity would be misidentified as made by a U.S. company.
The data show that U.S. companies significantly increased their acquisitions of foreign assets and companies in 2018 and 2019 relative to the historical period. The average value of U.S. acquisitions of foreign assets and companies grew by 50 percent in those two years compared with the average of the two prior years. Foreign acquisitions of U.S. assets and companies fell in value by 25 percent in that period. Acquisitions by U.S. companies of other U.S. assets and companies (domestic acquisitions) grew in value by 21 percent over 2018 and 2019.6
Overall, the data are consistent with the view that the TCJA made U.S. multinational companies more competitive relative to foreign-based multinationals, as evidenced by the increased dollar value of acquisitions by U.S. companies of foreign companies.7
While the stricter regulatory environment for expatriations and TCJA-enacted tax penalties for those transactions may be responsible for a decline in redomiciliation transactions, and therefore a decline in the value of observed inbound M&A transactions, it is unlikely that they account fully for the observed trend in those years. First, expatriation M&A transaction values accounted for less than 3 percent of foreign acquisitions in the two years before tax reform. Second, several companies that had expatriated pre-TCJA have redomiciled to the United States since the law’s enactment. Because the transactions that led to those companies being domiciled outside the United States were not subject to either the referenced tax regulations or the TCJA penalties on expatriations, other TCJA provisions appear at least partly responsible for the increase in outbound acquisitions.
Regarding the increase in domestic acquisitions by U.S. companies in 2018 and 2019, factors may include increased liquidity of U.S. companies from improved cash flow because of the TCJA and the ability to repatriate foreign earnings without incurring additional U.S. tax.8 That greater ability to make domestic acquisitions also may have been partly responsible for the decline in foreign acquisitions of U.S. companies.
II. TCJA Provisions Affecting Cross-Border M&A
The TCJA included numerous provisions expected to alter — either favorably or unfavorably — the competitiveness of U.S. companies in acquiring foreign targets and the relative tax advantage for U.S. domiciliation over foreign. This section considers the potential effects of major provisions on cross-border M&A.
A. Dividend Exemption System
Prior research has found that a company based in a jurisdiction with a dividend exemption tax system was more likely to be the acquirer than one based in a country with a worldwide tax system.9 That research also found that the likelihood of a company based in a country with a worldwide tax system being the acquirer in a cross-border transaction decreased as its home country’s statutory tax rate increased. That finding logically follows because the home country tax on repatriated foreign earnings under a worldwide tax system will be greater the higher the country’s statutory rate is relative to that of the foreign jurisdiction where the earnings arise.
Thus, the adoption of a dividend exemption system should improve the competitiveness of U.S. multinational companies in cross-border M&A by increasing the valuation of foreign earnings relative to the prior-law worldwide tax system, thereby allowing U.S. companies generally to bid more for those foreign assets than under prior law.
Prior research estimated that if the United States had enacted a dividend exemption tax system in 2009, U.S. acquisitions of foreign companies would have increased by 17.1 percent, or approximately $15.9 billion a year based on average deal values between 2004 and 2010.10
A secondary effect of the dividend exemption system was to allow U.S. companies to repatriate prior-year foreign earnings without incurring additional U.S. tax.11 That may have increased companies’ ability to finance domestic acquisitions through enhanced liquidity. Also, unlocking those foreign earnings may have diminished the attractiveness of U.S. companies as a target of a foreign acquirer, because under prior law the acquirer could use the foreign earnings in its own foreign operations and not incur the prior-law U.S. tax on repatriation.12
B. GILTI
The global intangible low-taxed income regime established a new, current tax on the active foreign earnings of U.S. multinationals that exceed a routine rate of return on tangible assets. In general, GILTI provides for a 50 percent deduction (37.5 percent after 2025).
Foreign tax credits can be used to offset U.S. tax on GILTI but are computed taking into account only 80 percent of the foreign taxes paid. In the absence of any limitation on the use of FTCs, that implies that GILTI generally increases U.S. tax liability when the average foreign rate is less than 13.125 percent (16.41 percent after 2025). Given limitations on FTCs arising from expense allocation, the GILTI regime also may increase U.S. tax liability for U.S. multinational corporations with average foreign tax rates higher than 13.125 percent and even with foreign rates greater than the 21 percent U.S. statutory tax rate.
Because foreign countries do not impose a tax similar to GILTI on the active earnings of foreign subsidiaries, U.S. domiciliation still is potentially tax disfavored over foreign domiciliation in cross-border M&A.13
C. U.S. Corporate Tax Rate
The 21 percent corporate tax rate under the TCJA increases the profitability of U.S. operations on all U.S. production. Those benefits also would accrue to a foreign-domiciled company with U.S. operations.
Research examining the importance of a dividend exemption system in cross-border M&A has also found that the home country tax rate has an independent impact on the probability of being the acquirer (whether based in a country with a worldwide or territorial tax system), with a lower rate increasing the likelihood of being the acquirer. The researchers theorize that a reduction in the company’s domestic tax rate leads to an increase in domestic investment that also enhances the productivity of the company’s foreign operations. Other research has found a complementary relationship between a multinational company’s domestic and foreign investment.14
The lower corporate tax rate also would reduce the taxation of subpart F income earned by a U.S. company, and therefore reduce the disadvantage to U.S. domiciliation from the subpart F rules.
The lower corporate rate diminishes the potential tax benefit for foreign corporations to shift income from the United States — for example, through the strategic use of debt — the interest on which was paid to a foreign subsidiary outside the United States. The reduced tax benefit from income shifting may have reduced incentives for foreign acquisitions of U.S. companies.15
Finally, the 21 percent federal rate still leaves a combined federal and state rate of more than 25 percent, which is higher than the tax rate in two-thirds of OECD countries. Thus, the U.S. rate may reduce the adverse effects of the previously higher rate but still leave a disadvantage relative to headquartering in many other countries.
D. FDII
Foreign-derived intangible income can increase the attractiveness of U.S. operations by providing a lower tax rate on some income related to the provision of goods and services to foreign customers from the United States. It provides a 37.5 percent deduction (21.875 percent after 2025), which is not limited to U.S.-domiciled companies — the same benefit is available to a foreign-domiciled company exporting from the United States. As with the discussion regarding a lower corporate rate, it is possible that complementarities between domestic and foreign investment result in FDII’s increasing the competitiveness of a U.S. company in making foreign acquisitions.
E. Interest Expense Limitations and the BEAT
The TCJA included strict limitations on deductible interest expense of corporations. Section 163(j) as modified by the TCJA generally restricts deductible net interest expense to 30 percent of adjusted taxable income, regardless of whether interest is paid to a related or unrelated party. The base erosion and antiabuse tax is a minimum tax computed on a base that adds to taxable income some otherwise deductible payments made to a foreign related party, and it disallows specific tax credits.
If one incentive for foreign acquisitions under prior law was to shift income through related-party transactions, those limitations may reduce foreign acquisitions of U.S. companies.16 However, they also apply to U.S.-domiciled companies and can make the United States a less attractive headquarters location for a multinational corporation.
F. Anti-Expatriation Provisions
The TCJA also increased tax penalties intended to deter expatriation transactions — that is, those in which the entity would be treated as a surrogate foreign corporation under IRC section 7874. Generally, such transactions are those in which, after the acquisition, between 60 and 80 percent of the stock of the new entity is held by former shareholders of the U.S. corporation and the entity does not have substantial business activities in the country where it is domiciled.
First, the TCJA provides that a company that becomes a surrogate foreign corporation during the 10 years beginning on December 22, 2017, the date of its enactment, owes tax of 35 percent on the amount of foreign earnings included under the transition tax (on unrepatriated pre-TCJA earnings) rather than at the reduced rate of 15.5 percent for cash and 8 percent for noncash assets.17 Second, the act provides that for the BEAT, a base erosion payment includes payments for costs of goods sold to a related party that first becomes a surrogate foreign corporation after November 9, 2017.18 Third, the TCJA provides that dividends paid by a company that first becomes a surrogate foreign corporation after the date of its enactment are taxed at ordinary rates rather than at the lower rate applicable to qualified dividends.19 Fourth, the TCJA provides that some stock compensation of a director, officer, or more-than-10-percent owner of an entity first expatriating after the date of enactment is subject to a 20 percent excise tax on that compensation (increased from 15 percent pre-TCJA).20
While those anti-expatriation provisions are expected to reduce incentives for redomiciliations that would be subject to section 7874, they should not affect the domiciliation decision in other cross-border acquisitions, such as those in which the U.S. company represents less than 60 percent of the value of the combined entity. They also would not affect a direct sale of assets to the foreign acquirer.
G. Overall Impact of TCJA
Many TCJA provisions — and, most important, the movement to a dividend exemption system — are believed to have increased the attractiveness of the United States as the domicile following a cross-border acquisition, but GILTI likely has reduced that attractiveness. Given those counteracting influences on the choice of domicile, the TCJA’s net effect is theoretically ambiguous. Examining data on observed cross-border M&A transactions since enactment of the law can help inform analysis of its overall impact on U.S. competitiveness as a headquarters location for multinational corporations.
III. Post-TCJA U.S. Redomiciliations
There have been several transactions post-TCJA for which companies have indicated in SEC filings that the law was responsible for their choosing to maintain or elect U.S. domiciliation. Those include a U.S. company changing the structure of a cross-border acquisition to retain its U.S. domicile after previously disclosing the transaction would lead to foreign domiciliation, and a foreign company, which one year earlier had acquired a U.S. company, choosing to move its domicile to the United States. And two large cross-border M&A transactions in the pharmaceutical industry resulted in foreign companies that were once U.S.-domiciled returning to the United States.
In June 2019 AbbVie, a U.S.-domiciled company, announced its acquisition of Allergan, an Irish company formed by a 2015 merger between a U.S. company and Irish-based Actavis, with AbbVie retaining its U.S. domiciliation.21 Before its merger with Allergan, Actavis had become foreign domiciled through its merger with Warner Chilcott, an Irish company, in 2013.22
In July 2019 Mylan, previously a U.S. company that redomiciled to the Netherlands after its 2015 acquisition of some foreign assets of Abbott Laboratories, announced it would merge with Pfizer’s Upjohn division to form a new corporation domiciled in the United States.23 The companies said the decision to domicile in the United States rather than the Netherlands partly stemmed from Mylan’s board’s “understanding that the inefficiencies of being tax resident in the United States, relative to other jurisdictions, have been reduced as a result of recent U.S. tax reform legislation.”24
Those transactions and accompanying announcements support the view that the TCJA enhanced the competitiveness of the United States as the domicile for multinationals.
IV. Data and Analysis
This section presents data on cross-border and wholly domestic M&A transactions from 2010 to 2019. If the TCJA improved the attractiveness of the United States as the headquarters location of U.S. multinational companies, the data should show an increase in the dollar amount of cross-border acquisitions by U.S. companies and an increase in the dollar share of total cross-border transactions when the U.S. company is the acquirer.
A. Data
The primary data for this analysis consist of all completed and pending M&A transactions in the Refinitiv SDC dataset, a commonly used commercial database of M&A transactions. I identify transactions in which the parent of the ultimate acquirer or target is a U.S. entity, and either the target’s assets or at least 20 percent of its shares were (or will be) acquired. The year of transaction shown is based on the date of announcement, with canceled transactions removed. Some transactions with incomplete data were removed before assembling the data.25 After eliminations and reclassifications, the data include $14.2 trillion in domestic and cross-border M&A transactions with U.S. companies from 2010 to 2019.
To account for the flow of assets between foreign and U.S. domiciliation, I treat transactions in which the U.S. company becomes foreign domiciled as an acquisition by the foreign entity and the new entity as foreign domiciled. Without that change in classification, M&A transactions resulting in a redomiciliation cannot be observed in the data, and subsequent M&A transactions with the redomiciled company are mischaracterized.26 Transactions over the 2010-2019 period with companies known to have redomiciled through an acquisition were examined and reclassified from an acquisition by a U.S. company to one by a foreign company when not originally classified that way. All future transactions involving the new foreign entity were also reclassified as with a foreign entity rather than a U.S. entity when necessary.27
B. Cross-Border M&A
Table 1 and Figure 1 show the cross-border M&A data, classified by U.S. acquisitions of foreign companies and foreign acquisitions of U.S. companies between 2010 and 2019. As shown, there was a major increase in the dollar volume of acquisitions by U.S. companies of foreign companies (outbound acquisitions) in 2018 and 2019 relative to prior years. Average annual outbound acquisitions of $339.4 billion in 2018-2019 were 50 percent greater than the average of $227 billion in the two preceding years. The value of outbound transactions as a share of all cross-border transactions rose to 53 percent and 52 percent in 2018 and 2019, respectively, the highest share since 2013. That increase is consistent with U.S. domicile being more attractive following the enactment of the TCJA.
Foreign acquisitions of U.S. companies (inbound acquisitions) declined to an annual average of $309.3 billion in 2018-2019 from an annual average of $414.5 billion in 2016-2017, a decline of 25 percent. The stricter regulatory environment for expatriations cannot account for that decline because expatriation M&A transaction values accounted for less than 3 percent of foreign acquisitions of U.S. companies in the two years preceding tax reform. As a result, the decline in inbound acquisitions is also consistent with the TCJA increasing the attractiveness of the United States as the tax domicile of multinationals.
Year | Total Value | U.S. Acquisitions of Foreign Companies | Foreign Acquisitions of U.S. Companies | U.S. Acquisitions of Foreign Companies (% of total value) | Foreign Acquisitions of U.S. Companies |
|---|---|---|---|---|---|
2010 | $383.0 | $148.6 | $234.4 | 38.8% | 61.2% |
2011 | $421.8 | $235.9 | $185.9 | 55.9% | 44.1% |
2012 | $445.2 | $217.2 | $228.1 | 48.8% | 51.2% |
2013 | $484.5 | $275.2 | $209.3 | 56.8% | 43.2% |
2014 | $762.8 | $207.4 | $555.4 | 27.2% | 72.8% |
2015 | $683.6 | $211.0 | $472.6 | 30.9% | 69.1% |
2016 | $723.6 | $188.2 | $535.3 | 26.0% | 74.0% |
2017 | $559.4 | $265.7 | $293.8 | 47.5% | 52.5% |
2018 | $625.0 | $331.1 | $293.9 | 53.0% | 47.0% |
2019 | $672.5 | $347.7 | $324.7 | 51.7% | 48.3% |
Addenda: |
|
|
|
|
|
Avg. 2018-2019 vs. 2016-2017 | 1% | 50% | -25% |
|
|
Source: PwC tabulations from Refinitiv SDC database. Details may not sum to total due to rounding. | |||||
C. Total Acquisitions by U.S. Companies
Table 2 and Figure 2 show all acquisitions by U.S. companies for the 2010-2019 period. The data repeat from Table 1 the detail on acquisitions by U.S. companies of foreign companies (outbound acquisitions) and add to it detail on acquisitions by U.S. companies of other U.S. companies (domestic M&A).
Year | Total Value | U.S. Acquisitions of Foreign Companies | U.S. Acquisitions of U.S. Companies | U.S. Acquisitions of Foreign Companies | U.S. Acquisitions of U.S. Companies |
|---|---|---|---|---|---|
2010 | $705.6 | $148.6 | $557.1 | 21.1% | 78.9% |
2011 | $956.4 | $235.9 | $720.5 | 24.7% | 75.3% |
2012 | $718.2 | $217.2 | $501.0 | 30.2% | 69.8% |
2013 | $892.6 | $275.2 | $617.4 | 30.8% | 69.2% |
2014 | $1,123.6 | $207.4 | $916.1 | 18.5% | 81.5% |
2015 | $1,379.1 | $211.0 | $1,168.1 | 15.3% | 84.7% |
2016 | $1,054.9 | $188.2 | $866.7 | 17.8% | 82.2% |
2017 | $1,176.9 | $265.7 | $911.3 | 22.6% | 77.4% |
2018 | $1,359.5 | $331.1 | $1,028.5 | 24.4% | 75.6% |
2019 | $1,470.9 | $347.7 | $1,123.2 | 23.6% | 76.4% |
Addenda: |
|
|
|
|
|
Avg. 2018-2019 vs. 2016-2017 | 27% | 50% | 21% |
|
|
Source: PwC tabulations from Refinitiv SDC database. Details may not sum to total due to rounding. | |||||
U.S. acquisitions of other U.S. companies represent the majority of acquisitions by U.S. companies, with outbound acquisitions accounting for 30 percent or less of the total value each year. In the two years after enactment of the TCJA, the value of domestic acquisitions increased by 21 percent relative to the two prior years. That is less than the 50 percent increase in the value of outbound acquisitions found in 2018-2019 relative to 2016-2017.
It is possible the TCJA had some influence on the increase in U.S. acquisitions of other U.S. companies. Enhanced cash flow from the lower corporate tax rate and increased liquidity from the ability to repatriate foreign earnings without incurring additional U.S. tax may have increased the dollar volume of transactions. It is also possible that U.S. companies targeted for acquisition could be more successfully acquired by U.S. companies relative to foreign companies if the TCJA reduced the disadvantages to U.S. ownership. As shown in the cross-border data, foreign acquisitions of U.S. companies declined in 2018-2019 by 25 percent relative to the two prior years.
Finally, through 2023, the TCJA provides for 100 percent expensing of tangible property (including used property) with a recovery period of 20 years or less. That provision may have increased incentives for acquisitions of U.S. assets (relative to nontaxable stock transactions) because tax on the gain from the sale of those assets would be offset by an immediate deduction to the acquirer.28
Appendix. Preliminary M&A Data for 2020
This appendix provides data on M&A transactions announced in the first six months of 2020 that were completed or are pending. The data show a significant reduction in all M&A transactions (outbound, inbound, and wholly domestic), likely attributable to the global pandemic, recession, and economic uncertainty.
Table A-1 presents a comparison of the data on cross-border M&A for the first two quarters of 2020 with that for each of the four quarters of 2019.
Year and Quarter | Total Value ($ billions) | U.S. Acquisitions of Foreign Companies | Foreign Acquisitions of U.S. Companies | U.S. Acquisitions of Foreign Companies | Foreign Acquisitions of U.S. Companies (% of total value) |
|---|---|---|---|---|---|
2019 Q1 | $126.9 | $62.9 | $64.0 | 49.6% | 50.4% |
2019 Q2 | $211.1 | $132.2 | $78.9 | 62.6% | 37.4% |
2019 Q3 | $178.3 | $93.1 | $85.2 | 52.2% | 47.8% |
2019 Q4 | $156.1 | $59.5 | $96.6 | 38.1% | 61.9% |
Avg. 2019 Q1-Q4 | $168.1 | $86.9 | $81.2 | 51.7% | 48.3% |
2020 Q1 | $109.7 | $74.7 | $35.1 | 68.0% | 32.0% |
2020 Q2 | $63.4 | $33.6 | $29.8 | 52.9% | 47.1% |
Addenda: Pct. Change |
|
|
|
|
|
2020 Q1 vs. Avg. 2019 | -35% | -14% | -57% |
|
|
2020 Q2 vs. Avg 2019 | -62% | -61% | -63% |
|
|
Source: PwC tabulations from Refinitiv SDC database. Details may not sum to total because of rounding. | |||||
Compared with average quarterly transactions in 2019, outbound acquisitions declined in value by 14 percent and 61 percent in the first and second quarters of 2020, respectively. Inbound acquisitions declined by larger amounts relative to average quarterly transactions in 2019, falling 57 percent in the first quarter of 2020 and 63 percent in the second quarter.
It would be expected that the TCJA has much less of an influence on transactions in 2020 relative to broader economic effects from the pandemic. However, the data do show a continuation of the trend of a greater dollar share of outbound transactions than inbound transactions, as found for 2018 and 2019.
Table A-2 compares data on all acquisitions by U.S. companies for the first two quarters of 2020 and those for all four quarters of 2019. The data repeat from Table A-1 the detail on acquisitions by U.S. companies of foreign companies (outbound acquisitions) and add to it detail on acquisitions by U.S. companies of other U.S. companies (domestic M&A).
Year and Quarter | Total Value | U.S. Acquisitions of Foreign Companies | U.S. Acquisitions of U.S. Companies | U.S. Acquisitions of Foreign Companies | U.S. Acquisitions of U.S. Companies |
|---|---|---|---|---|---|
2019 Q1 | $405.0 | $62.9 | $342.1 | 15.5% | 84.5% |
2019 Q2 | $478.6 | $132.2 | $346.4 | 27.6% | 72.4% |
2019 Q3 | $280.7 | $93.1 | $187.6 | 33.2% | 66.8% |
2019 Q4 | $306.5 | $59.5 | $247.1 | 19.4% | 80.6% |
Avg. 2019 Q1-Q4 | $367.7 | $86.9 | $280.8 | 23.6% | 76.4% |
2020 Q1 | $217.9 | $74.7 | $143.2 | 34.3% | 65.7% |
2020 Q2 | $93.2 | $33.6 | $59.7 | 36.0% | 64.0% |
Addenda: Pct. Change |
|
|
|
|
|
2020 Q1 vs. Avg. 2019 | -41% | -14% | -49% |
|
|
2020 Q2 vs. Avg 2019 | -75% | -61% | -79% |
|
|
Source: PwC tabulations from Refinitiv SDC database. Details may not sum to total because of rounding. | |||||
Compared with average quarterly transactions in 2019, domestic acquisitions declined by 49 percent and 79 percent in the first and second quarters of 2020, respectively. Given the larger decline of domestic acquisitions relative to outbound acquisitions, the dollar share of total acquisitions represented by U.S. acquisitions of foreign companies increased through the first two quarters of 2020 relative to 2019.
FOOTNOTES
1 The Congressional Budget Office identified 60 transactions between 1983 and 2015 transferring assets of $305 billion (2014 dollars) in which a U.S. company became domiciled outside the United States while the shareholders of the original U.S. company retained a greater than 50 percent interest in the new entity. Including private equity acquisitions and bankruptcy transactions, that number increases to 73 transactions. In some instances, having achieved sufficient size through that kind of transaction, the redomiciled entities then engaged in further acquisitions of U.S. companies. See CBO, “An Analysis of Corporate Inversions,” Pub. 53093 (Sept. 2017).
2 Ireland has a worldwide tax system, but its 12.5 percent statutory tax rate generally results in no additional tax on the repatriation of foreign earnings to Ireland if the earnings are taxed at a foreign rate of at least 12.5 percent.
3 In contrast, some have speculated that because pre-TCJA foreign earnings of U.S. companies were “trapped” abroad because of the tax that would be owed on repatriation, U.S. companies might have been induced to overpay for foreign acquisitions by using that trapped foreign cash. (Evidence of that effect is found by Michelle Hanlon, Rebecca Lester, and Rodrigo Verdi, “The Effect of Repatriation Tax Costs on U.S. Multinational Investment,” 116 J. Fin. Econ. 179 (Apr. 2015); and Alexander Edwards, Todd Kravet, and Ryan Wilson, “Trapped Cash and the Profitability of Foreign Acquisitions,” Rotman School of Management Working Paper No. 1983292 (July 26, 2014).) Some studies also found that companies with trapped foreign cash under prior law were less likely to engage in domestic M&A because of the high tax cost of repatriation (see Hanlon et al.; and Jeremiah Harris and William O’Brien, “U.S. Worldwide Taxation and Domestic Mergers and Acquisitions” (Sept. 29, 2017)).
4 See Notice 2014-52, 2014-42 IRB 712; Notice 2015-79, 2015-49 IRB 775; and REG-108060-15. The proposed section 385 regulations were modified, most recently on May 14, 2020, when they were finalized (T.D. 9897).
5 See, for example, the reasons for change provided in S. Prt. 115-20 (Dec. 2017) regarding the dividends received deduction (“The provision would allow U.S. companies to compete on a more level playing field against foreign multinationals when selling products and services abroad by eliminating an additional level of tax.”) and the corporate rate reduction (“The Committee believes that lowering the corporate tax rate is necessary to ensure domestic corporations remain globally competitive with their counterparts domiciled in the United States’ largest international competitors.”).
6 Data for the first two quarters of 2020 are presented in Appendix A. The value of transactions in 2020 is significantly reduced because of the pandemic and global recession. Despite an overall reduction in both outbound and inbound acquisitions, the 2020 data show, consistent with the findings for 2018 and 2019, that U.S. acquisitions of foreign companies represent an increased share of cross-border transactions relative to the pre-2018 period.
7 Those findings differ from a recent paper that tests whether the TCJA changed the likelihood that a foreign target is acquired by a U.S. company versus a foreign company while controlling for other factors (see Harald Amberger and Leslie Robinson, “The Effect of the 2017 U.S. Tax Reform on U.S. Acquisitions of Foreign Firms,” WU International Taxation Research Paper Series No. 2020-06, Tuck School of Business Working Paper No. 3612783 (May 2020)). The authors find that the TCJA reduced the likelihood of a foreign target being acquired by a U.S. company from about 21 percent pre-TCJA to between 16 and 17 percent post-TCJA. They attribute their finding of reduced incentives for U.S. companies to acquire foreign companies to (i) foreign earnings of U.S. companies no longer being trapped abroad so domestic uses of the cash are valued equally to foreign acquisitions, and (ii) increased tax on foreign intangible income under the GILTI rules, reducing the posttax profitability of some foreign acquisitions. One difference between the Amberger and Robinson study and this article is that this article focuses on deal value while their study effectively treats all transactions equally regardless of their size. Amberger and Robinson also find that the TCJA increased the likelihood of a U.S. target being acquired by a U.S. company relative to a foreign company, possibly because the TCJA improved the ability to access the U.S. target’s foreign earnings in a manner similar to that of a foreign acquirer headquartered in a territorial country.
8 The TCJA increased taxes on pre-TCJA foreign earnings under the transition tax by applying tax at 15.5 percent for cash and 8 percent for noncash assets, and the GILTI regime increased tax on some foreign earnings. However, those TCJA taxes apply whether or not a company chooses to repatriate, so no additional U.S. tax results from repatriation.
9 See Harry Huizinga, Johannes Voget, and Wolf Wagner, “International Taxation and Takeover Premiums in Cross-Border M&As” (Feb. 7, 2008); Huizinga and Voget, “International Taxation and the Direction and Volume of Cross-Border M&As,” 64 J. Fin. 1217 (May 20, 2009); and Lars P. Feld et al., “Effects of Territorial and Worldwide Corporation Tax Systems on Outbound M&As,” Center for European Economic Research (2013).
10 Feld et al., supra note 9.
11 As noted, the TCJA applied some new taxes to pre-TCJA foreign earnings (the transition tax) and future foreign earnings (GILTI), but those taxes apply regardless of whether a company chooses to repatriate foreign earnings.
12 Prior research found that companies with trapped cash were more likely to be the targets of foreign acquirers. See Andrew Bird, Alexander Edwards, and Terry Shevlin, “Does the U.S. System of Taxation on Multinationals Advantage Foreign Acquirers?” (Jan. 2015).
13 If other countries adopt minimum taxes, as outlined in pillar 2 of the OECD project on the digital economy, the disadvantage to U.S. domiciliation resulting from GILTI would be reduced.
14 Mihir Desai, C. Fritz Foley, and James R. Hines Jr., “Domestic Effects of the Foreign Activities of U.S. Multinationals,” 1 Am. Econ. J.: Econ. Pol’y 181 (Feb. 2009).
15 A 2007 Treasury study found that U.S. companies that moved their tax domiciles to low-tax countries reduced substantially all their U.S. income through related-party interest payments. While the Treasury study found that other foreign-controlled U.S. companies had lower taxable profits than U.S.-controlled domestic companies, it did not find evidence that that was because of related-party payments. See U.S. Treasury Department, “Report to The Congress on Earnings Stripping, Transfer Pricing and U.S. Income Tax Treaties” (Nov. 2017).
16 The Senate Budget Committee’s discussion of the interest limitation in the original Senate bill stated that under prior law, “U.S. subsidiaries of foreign-parented multinationals have an incentive to issue related-party debt to increase the interest deductions allowed against U.S. taxable income.” S. Prt. 115-20 (Dec. 2017). Regarding the BEAT, the report states:
Foreign-owned U.S. subsidiaries are able to reduce their U.S. tax liability by making deductible payments to a foreign parent or foreign affiliates. This can erode the U.S. tax base if the payments are subject to little or no U.S. withholding tax. Foreign corporations often take advantage of deductions from taxable liability in their U.S. affiliates with payments of interest, royalties, management fees, or reinsurance payments. This provision aims to tax payments of this kind. This type of base erosion has corroded taxpayer confidence in the U.S. tax system. Moreover, the current U.S. international tax system makes foreign ownership of almost any asset or business more attractive than U.S. ownership.
As noted, if those incentives existed under prior law, the corporate rate reduction diminishes them.
17 Section 965(l).
18 Section 59A(d)(4).
19 Section 1(h)(11)(C)(iii).
20 Section 4985(a)(1).
21 AbbVie, “AbbVie to Acquire Allergan in Transformative Move for Both Companies” (June 25, 2019).
22 U.S. Securities and Exchange Commission, “Actavis, Plc 10-K for Fiscal Year Ended December 31, 2013.”
23 Pfizer, “Mylan and Upjohn, a Division of Pfizer, to Combine, Creating a New Champion for Global Health Uniquely Positioned to Fulfill the World’s Need for Medicine” (July 29, 2019).
24 U.S. Securities and Exchange Commission, “Amendment Number 1 to Upjohn Form S-4 Registration Statement” (Dec. 13, 2019).
25 A small number of transactions were removed if they had missing deal value; the nation of the ultimate parent of the acquirer or target is unknown; or the acquirer is identified as an investor group, preferred shareholders, or undisclosed. Transactions removed with a known deal value account for less than 1 percent of the total $14.2 trillion M&A deal value over the 2010-2019 period.
26 As an example, Allergan and Mylan are classified in the Refinitiv database as U.S. entities before the announced transactions that resulted in their redomiciliation to the United States. That is because the initial redomiciliation of the entity from the United States was not recorded as a change in domicile; instead, the acquiring entity was recorded as a U.S. entity in the Refinitiv data. For the acquisition of Allergan in 2014, the acquiring company (Actavis) had been identified in the database as a U.S. entity. For Mylan’s acquisition of some assets of Abbott Laboratories that led to its incorporation in the Netherlands, Mylan’s prior identification as a U.S. entity was unchanged after its incorporation in the Netherlands.
27 Redomiciliations that do not involve a merger or acquisition with an unrelated company are excluded from the data, but the domicile of the company is changed to reflect its new domicile for future M&A transactions.
28 Because both domestic and foreign acquirors are eligible to expense the acquired assets, that provision is not expected to advantage U.S. acquirers over foreign acquirers of U.S. assets.
END FOOTNOTES