Introduction
Tax Avoidance
Methodology
Results
Conclusion
Tax Avoidance as a driver of Mergers & Acquisitions? Thomas Belz, Christian Steffens Universität Mannheim Leslie Robinson Tuck School of Business at Dartmouth Martin Ruf Universität Tübingen
Oxford 27.6.2014
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Introduction
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The acquirer of a firm is able to run the firm better than the initial owner (ownership advantage).
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Due to the higher expected cash flow the acquirer is able to outbid the reservation price of the initial owner.
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There are many possible reasons for ownership advantages - one candidate is taxation.
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Firms on average pay 30 % of their profits to the state as taxes.
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Is an acquirer able to reduce this percentage, this results in an ownership advantage.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Introduction
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Acquirers do not actively search for badly tax managed targets.
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But acquirers should predict future cash flows taking taxation into account.
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When predicting future tax payments they should rely on their past experience and take their typically applied tax avoidance strategies into account.
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Firms differ with respect to their tax avoidance activities.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Introduction
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Is tax avoidance a driver of mergers & acquisitions?
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Do we observe increased tax avoidance activities after mergers & acquisitions?
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European mergers & acquisitions from 1998 to 2009.
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Is tax avoidance important for initial owners to prevent takeovers?
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Are small and medium sized firms forced to sell to international acquirers due to systematic disadvantages with respect to their tax avoidance possibilities?
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Cash ETR
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Tax avoidance in 3 dimensions: cash ETR, leverage, transfer pricing.
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First dimension: Cash ETR (taxes paid/financial profits).
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The first driver of the cash ETR is the statutory tax rate.
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The second driver is the difference between financial accounting and tax accounting.
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The cash ETR is thus a measure for the tax accounting policy.
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Do we observe a decrease in the cash ETR after mergers & acquisitions?
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Cash ETR I I I I I
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The cash ETR does not cover the two most important tax planning strategies: Debt shifting and transfer pricing. Debt shifting and transfer pricing affect taxes paid and financial profits. As a result the cash ETR should not change. Second dimension of tax avoidance: Debt shifting. Interest expenses are tax deductible, while dividends are not => incentive to use debt at the firm level. In a national setting interest earnings bear a higher tax load then dividends => In sum in a national setting no/low incentive to use debt shifting. On the contrary in an international setting it is possible to use international tax differences to achieve a low taxation of interest earnings => Debt shifting is attractive. Do we observe a larger increase in leverage after international mergers & acquisitions? 6
Introduction
Tax Avoidance
Methodology
Results
Conclusion
Debt shifting
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Transfer Pricing
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Third dimension of tax avoidance: Transfer pricing.
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Using transfer pricing it is possible to shift profits out of high tax countries in low tax countries
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Only possible in multinational groups.
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Do we observe a larger reduction in a target’s profitability after international mergers & acquisitions?
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Transfer Pricing
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Policy Concern
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Two dimensions of tax avoidance are only available to multinational groups: debt shifting and transfer pricing.
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National firms can not use these. They pay per se higher taxes than an international acquirer would do.
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Does this tax disadvantage result in national firms being especial attractive targets?
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If so, this could be an economic justification for anti-abuse rules.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Data
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M&A-Data base Zephyr and financial statements data Amadeus Bureau von Dijk.
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81.730 deals from 1998 to 2009.
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No consolidation of acquired firm following acquisition.
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We need financial statements for at least 7 consecutive years: 3 years pre deal and 3 years post deal.
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Only corporations.
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Results in 832 deals.
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International vs. national takeovers.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Data
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National vs. international Takeovers:
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Use information on the group structure of the vendor and the acquirer from Amadeus => 4 cases: International vendor - international acquirer or national - national: no change in tax planning incentives (national takeover). 2 National vendor - national acquirer: same. 3 International vendor - national acquirer: decreased tax planning incentives 4 National vendor - international acquirer: increased tax planning incentives (international takeover) 1
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Data
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Any step up in the financial statement of the target because of the acquisition may bias our results.
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We thus focus on share deals only: 100 % acquisition of shares of corporations.
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In the case of share deals not step up at the level of the acquired corporation in Europe possible (different in the US: Section 338 election).
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Regional Origin of Acquirers
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Example
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Ergon NV, Belgium.
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Produces cement for construction industry.
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Sales 2003: 46 Mio EUR
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2004: Acquired by CRH PLC, Ireland (Sales 2003: >11 Bio. EUR)
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CRH PLC is in the same industry. Year Leverage Profitability
2002 0.698 0.077
2003 0.7 0.098
2005 0.89 0.035
2006 0.88 0.040
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Descriptives I
cash ETR (Acquisition: 0)
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Methodology
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Intuitive Research tool: Descriptive Statistic for cash ETR.
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Causality? Does this change occur because of acquisition or would it have occurred anyway?
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How would the acquired firm have behaved without the acquisition?
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Basic problem of social sciences: We do not have laboratory conditions - we can not observe the same firm twice.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Methodology
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Propensity Score Matching: Attempt to approximate such laboratory conditions.
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For each target find a very similar non acquired firm.
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Estimate the likelihood of being acquired for each firm (Selection equation)
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Match each target with a non-acquired firm having a similar probability for being acquired.
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Comparison of these firms allows to isolate the effect of the acquisition.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Selection Equation
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Balancing Property
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Cash ETR
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Cash ETR Targets vs. non-Targets Matching-Algorithm Radius Kernel
All -0.0313 *** (-4.51) -0.0375 *** (-5.42)
International -0.0425 *** (-4.21) -0.0538 *** (-5.33)
National -0.0227 ** (-2.39) -0.0367 *** (-3.87)
Note: t-Values in parentheses.*** 1% level; ** 5% level;* 10% level.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Cash ETR
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ETR: Tax aggressive vs. non tax aggressive acquirers Matching algorithm Radius Kernel
Tax aggressive acquirer -0.070 *** (-3.54) -0.095 *** (-4.81)
Non tax aggressive acquirer -0.03 (-1.57) -0.059 *** (-3.04)
Note: t-Values in parentheses.*** 1% level; ** 5% level;* 10% level.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Profitability
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Profitability Targets vs. Non-Targets Matching-Algorithm Radius Kernel
All -0.019 *** (-3.33) -0.0183 *** (-3.13)
International -0.0184 * (-1.88) -0.0159 (-1.62)
National -0.0212 *** (-3.03) -0.0178 ** (-2.55)
Note: t-Values in parentheses.*** 1% level; ** 5% level;* 10% level.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Profitability
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Profitability: High tax Targets vs. low tax Targets Matching algorithm Radius Kernel
High tax -0.0359 *** (-2.66) -0.0334 ** (-2.47)
Low tax -0.0083 (-0.65) -0.0058 (-0.46)
Note: t-Values in parentheses.*** 1% level; ** 5% level;* 10% level.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Leverage
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Leverage Targets vs. Non-Targets Matching-Algorithm Radius Kernel
All 0.020 * (1.71) 0.014 (1.21)
International 0.004 (0.21) -0.006 (-0.34)
National 0.032 ** (2.06) 0.016 (1.03)
Note: t-Values in parentheses.*** 1% level; ** 5% level;* 10% level.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Leverage
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Leverage: High tax Targets vs. low tax Targets Matching algorithm Radius Kernel
High tax 0.0117 (0.50) -0.0008 (-0.03)
Low tax -0.0018 (-0.08) -0.0093 (-0.42)
Note: t-Values in parentheses.*** 1% level; ** 5% level;* 10% level.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Debt-Push-Down I
Group taxation could be a possible explanation for finding no leverage effect
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It is tax efficient to install debt finance at the level of holdings: Debt-Push-Down
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Leverage
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Leverage Targets vs. Non-Targets - no group taxation only Matching-Algorithm Radius Kernel
All 0.083 *** (3.26) 0.078 *** (3.06)
Note: t-Values in parentheses.*** 1% level; ** 5% level;* 10% level.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Robustness
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Robustness check: Exact Matching I I I
Countries Industry Country-year
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Exact Matching Matching algorithm
Average ETR Radius Average Profitability Radius Average Leverage Radius
Average ETR Radius Average Profitability Radius Average Leverage Radius
All
All -0.0334 *** (-3.41) All -0.0201 ** (-2.54) All 0.0224 (1.42) All -0.0302 *** (-3.11) All -0.0189 ** (-2.42) All 0.0211 (1.35)
International Country specific International -0.0453 *** (-3.13) International -0.018 (-1.47) International 0.002 (0.09) Industry specific International -0.042 *** (-2.92) International -0.018 (-1.44) International 0.0003 (0.17)
National
National -0.0241 * (-1.82) National -0.02 ** (-1.99) National 0.0362 * (1.70) National -0.021 * (-1.64) National -0.0196 ** (-1.97) National 0.0316 (1.49)
30 The symbols ***, **, and * denote significance at the 0.01, 0.05, and 0.10 levels, respectively.
Introduction
Tax Avoidance
Methodology
Results
Conclusion
Conclusion
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The tax avoidance activities of targets increase after takeovers.
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This holds for the cash ETR and for transfer pricing (given appropriate tax incentives).
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Debt shifting instead may take place at the level of acquiring holdings.
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The increased tax avoidance activities generate an ownership advantage.
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Mergers & acquisitions could be tax motivated.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Conclusion
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Tax avoidance may help to avoid hostile take overs.
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So far the literature is concerned about the negative investment effects of anti abuse rules. However, they may help to prevent tax motivated takeovers of national firms by multinational groups.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Conclusion
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Thanks for your attention!
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Literature
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Blouin, Collins und Shackelford (2005, JATA) investigate the change in taxable income of US-firms following mergers & acquisitions.
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A large number of papers investigates the change in profitability following mergers & acquisitions - only a few focus on the target (Martynova und Renneborg (2008, JBF)).
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Tax planning literature (cash ETR, debt shifting, transfer pricing: Chen et al. (2010, JFE), Desai et al. (2004, JoF), Huizinga und Laeven (2008, JPubE)). External shock acquisition to identify effects.
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Descriptives I
Profitability (Acquisition: 0)
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Descriptives I
Leverage (Acquisition: 0)
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Matching I
Y1i ist das Ergebnis für die Einheit i mit Treatment (hier Unternehmensübernahme), Y0i ist das Ergebnis für die Einheit i ohne Treatment.
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Di ist Dummy für Treatment (dann Di = 1).
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Von Interesse: E [Y1i − Y0i |Di = 1].
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E [Y1i − Y0i |Di = 1] = E [Yi |Di = 1] − E [Yi |Di = 0] − {E [Y0i |Di = 1] − E [Y0i |Di = 0]}
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Annahme {Y1i , Y0i }⊥Di |Xi
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Dann gilt E [Y1i − Y0i |Di = 1] = E {E [Y1i − Y0i |Xi , Di = 1]|Di = 1} =
= E {E [Y1i |Xi , Di = 1]|Di = 1] − E [Y0i |Xi , Di = 1]|Di = 1]}
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Matching
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Wegen der Annahme gilt E [Y0i |Xi , Di = 0] = E [Y0i |Xi , Di = 1].
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und dann E {E [Y1i |Xi , Di = 1]|Di = 1] − E [Y0i |Xi , Di = 0]|Di = 1]} =
= E [δX |Di = 1] I
mit δX ≡ E [Yi |Xi , Di = 1] − E [Yi |Xi , Di = 0]
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Introduction
Tax Avoidance
Methodology
Results
Conclusion
Hightax vs. Lowtax
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cash ETR Targets vs. Non-Targets (NN-Matching)
ETR Leverage Profitability
High-Tax -0.318*** 0.028 -0.001
Low-Tax -0.003 -0.02 -0.02
Note: t-Values in parentheses.*** 1% level; ** 5% level;* 10% level.
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