The Effects of the U.S. Tax Reform on Investments in Low-Tax Jurisdictions—Evidence from Cross-Border M&As

ABSTRACT This paper examines the effects of the 2017 U.S. tax reform, commonly known as the “Tax Cuts and Jobs Act” (TCJA) on cross-border M&As of U.S. acquirers. The TCJA replaced the U.S. worldwide tax system by a territorial system, albeit with one important exception: the “Global Intangible Low-Taxed Income” (GILTI) provision. We utilize a difference-in-differences type design and compare cross-border M&A patterns of U.S. acquirers with acquirers outside the U.S. before and after the TCJA. Our results suggest that the outbound acquisition pattern changed significantly for those U.S. acquirers likely affected by the new GILTI provision. GILTI-affected firms acquire targets in low-tax countries and tax havens significantly less often after the TCJA. Furthermore, post-TCJA, GILTI-affected U.S. firms acquire targets that are less profitable and have lower excess returns. JEL Classifications: G34; H26; H32.