DISCUSSION OF: �TAX AVOIDANCE THROUGH CROSS-BORDER MERGERS AND ACQUISITIONS

Discussant: Leslie Robinson (Tuck/Dartmouth)

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Authors: Jean-Marie Meier and Jake Smith (UT-Dallas)

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1. CONCEPT OF TAX RESIDENCE�FRAMEWORK AND PROCESS

• Desai (2009)* framework for “decentering” the global firm 🡪 3 countries matter
• A Financial Home
• A Legal Home
• Home(s) for Managerial Talent
• This paper focuses on tax residence
• The “tax citizenship” of the global legal parent entity of a company (pg. 2)
• Need to identify 🡪 acquirers and targets that are tax resident in a haven
• If a subsidiary company effectuates the M&A transaction, how do you determine the acquirer? Do you rely on SDC to tell you the ‘global ultimate owner’?
• “A gvkey (unique firm identifier) from Compustat is assigned to each SDC deal”
• Deals have two firms involved so what firm are you matching to Compustat? Did you consider using BvD Zephyr/Orbis for this project? For future projects?

*Desai, Mihir, 2009. The Decentering of the Global Firm. The World Economy, 32(9). Special Issue: Europe Special Issue – Taxation and the Globalization Process

1. CONCEPT OF TAX RESIDENCE�TAX AVOIDANCE STRATEGIES USING TAX RESIDENCE

• The double-Irish structure used by U.S. companies is a play on tax residency rules
• The structure was abolished in 2015 for new companies in Ireland but those already using it had until the end of 2020 to phase it out
• Company X incorporated in Ireland but managed/controlled from Bermuda
• Ireland considers X to be tax-resident in Bermuda
• U.S. considers X to be tax-resident in Ireland
• This is different from a dual-resident company (later slide)
• Practitioners generally note that the same tax result can be achieved using Malta or Jersey
• Do you see a disproportionate amount of acquirers in a non-haven INC country purchasing haven targets in an INC/MC country? Very few firms/strategies account for the vast majority of tax avoidance globally.

2. TAX RESIDENCE ALOGORITHM�MAXIMIZE CONTRIBUTION

• Highlighted in the abstract as a contribution but first real data discussion on p 41
• “10.1% of the total deal value involves a target or acquirer that is headquartered and incorporated in different countries, necessitating the use of our algorithm to determine the appropriate tax residence”
• “this figure jumps to 23.2% for M&A deals involving a haven-resident firm”
• Table 9 suggests that this is a really big deal 🡪 $631b misclassified haven M&A?! How much annual tax avoidance would be estimated using uncorrected data?
• Are you recommending that tax research should incorporate your algorithm? Are you planning to make the algorithm easy for others to implement? Do we know how accurate Compustat is regarding incorporation and headquarter locations?
• Mis-measuring tax residence would matter – a lot – in the profit shifting literature.

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3. TIE-BREAKER RULE FOR DUAL-RESIDENTS�IMPROVING THE TAX RESIDENCE ALGORITHM

“The difficult part about determining tax residence is the appropriate tie-breaking provision” (p 61)

This may be easier than you think …

• Tax treaties are almost always based on ‘models’ set by the UN or the OECD
• This means that there are globally accepted conventions on tax matters, including these tie-breaker rules
• Prior to 2017, the OECD Model Tax Convention (which most countries followed) had a rule for corporate dual residence 🡪 tax residence is determined using the place of effective management of the company
• After 2017, we have the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the ‘MLI’)
• “Under the new tie-breaker rule, a dual-resident company will lose its automatic single jurisdiction of residence status for treaty purposes that is based on place of effective management. Instead, the competent authorities will endeavor to resolve the residence status by mutual agreement…”

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https://revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-35/35-01-11.pdf (Irish ratification)

• https://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf (MLI signatories)

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4. CORRECTING M&A DATA�ACCURACY OF M&A DATA AND PROCESS

• “In examining the Refinitiv data I also made some reclassifications. First, if a US company acquired a foreign company but then redomiciled to a foreign country as part of the transaction, I treated the acquisition as a foreign acquisition of a US company. Second, in many instances the Refinitiv data listed the newly created foreign company as US domiciled, and I instead treat it as foreign domiciled. (This affected the identification of subsequent M&A transactions by these companies.)
• As one example, the 2015 acquisition by Avago of Broadcom is identified by the database as a US company acquiring another US company (despite Avago being domiciled in Singapore). The new company changed its name to Broadcom, and the Refinitiv database continued to treat Broadcom as a US company post-acquisition. In other examples, Warner Chilcott PLC prior to its merger with Actavis in 2013 is identified as a US company (despite being domiciled in Ireland) and is listed as the target in the merger with Actavis. Post-merger, Actavis PLC (and later Allergan PLC) continued to be identified as a US company by the database.
• I am curious if you know how these and other transactions by a redomiciled company is treated in your database?”* 
• *Lyon, A.B., 2020. Insights on Trends in U.S. Cross-Border M&A Transactions After the Tax Cuts and Jobs Act. Tax Notes Int. 100, 497–507. (correspondence email between myself and Drew Lyon regarding M&A data)

4. CORRECTING M&A DATA�ACCURACY OF M&A DATA AND PROCESS

• This paper: “For deals flagged as reverse acquisitions in SDC, we classify the acquirer as the target and the target as the acquirer. In this way the acquirer is always the economic acquirer (the larger company), as opposed to the legal or accounting acquirer.” (p 12)
• Note that this is precisely the opposite decision that Drew Lyon made in his study (previous slide)
• Does how you correct M&A data depend on what you are doing? Is the acquirer versus the target black and white? Are there M&A settings where you would want to consider incorporation country or headquarters country of acquirer and/or target rather than apply an algorithm to determine tax residence?

5. SAMPLE CONSTRUCTION�CROSS-BORDER HAVEN M&A OTHER THAN INVERSIONS

• “13,458 cross-border tax haven M&A transactions from 1990-2017” (abstract)
• Online Appendix H
• Haven acquirers: 6,444+2,695 = 9,139
• Haven targets: 4,157+1,067 = 5,224
• 9,139+5,224 = 14,363>13,458 🡪 the summary statistics do not appear to match the abstract

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• Lewellen (2021), Tax haven incorporation and financial reporting transparency
• 999 firms with parent incorporated in tax haven but headquartered in non-haven (1990-2013)

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• How many observations should we expect you to have? What to compare it to?

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OVERALL REACTIONS

• This paper was a tremendous amount of work.
• This paper is innovative and contributes to the tax and cross-border M&A literature.
• Highlights important data and measurement issues in cross-border M&A research.
• Are M&A databases capturing the location of acquirers and targets correctly?
• Why do SDC, Refinitiv, Zephyr, etc not align on the location of acquirers and targets?
• When do we care about incorporation v headquarters v tax residence in M&A?
• Can you streamline the algorithm using the model tax treaty conventions in place?
• Consider placing $33 billion estimate (and the measurement error) of recurring annual tax avoidance in the context of policy debates about international tax policy.