The introduction of the exemption system for foreign profits and its effects on international acquisitions – the UK and Japan regaining international tax competitiveness?

Abstract

Purpose

Both, the UK and Japan abolished the tax credit system for foreign source dividends in 2009 in favour of the exemption system. With the move towards a dividend exemption system the governments intended to enhance the international tax competitiveness of their countries. The purpose of this paper is to evaluate the implications of substituting the credit system for the exemption system in the UK and Japan on cross-border transaction prices when competing for international acquisitions.

Design/methodology/approach

The paper uses an economic model under certainty to analyse the changes in cross-border marginal purchase and seller prices as a result of the introduction of the newly introduced dividend exemption system.

Findings

Shifting to an exemption system has ambiguous effects on the ability to compete for foreign acquisitions: investors from both countries are able to pay higher prices in the course of acquisitions, but while investors from the UK become more competitive, the relative competitive position for Japanese investors hardly changes and remains relatively constrained, independent of the form of double taxation relief. Thus the author verifies that the international tax regime is not the only determinant influencing the competitive position, ranking second to, e.g., the interaction with international tax rate differentials.

Originality/value

The international tax reforms in UK and Japan in 2009 offer a unique opportunity to study the impact of international tax policy on the international tax competitiveness of multinational firms in the course of foreign acquisitions. Evidence from this paper is not exclusively applicable to the UK and Japan setting. The observed effects shed new light on the intensified debate in the USA of changing the international tax system by analysing the impact on the bidding situation in international acquisitions in a real-world transition scenario.

Citation

Hohler, K. (2013), "The introduction of the exemption system for foreign profits and its effects on international acquisitions – the UK and Japan regaining international tax competitiveness?", Journal of Applied Accounting Research, Vol. 14 No. 3, pp. 224-247. https://doi.org/10.1108/JAAR-11-2012-0083