Impact of Double Taxation Agreements on Cross-Border Mergers and Acquisitions

ABSTRACT

Mergers and acquisitions (M&As) across borders have become a key approach through which multinational corporations aim to expand, diversify their markets and enhance operating efficiency. Nevertheless, the problem of occurrence of the concept of a double taxation where a single income, capital gains, or dividends can be taxed in both the home and host countries is one of the most important issues when organizing such transactions. Bilateral negotiations with states between states are vital in reducing these tax barriers, and determining the financial feasibility of cross-border M&As through the agreements formed between the two states (Double Taxation Avoidance Agreements or DTAAs). This paper analyses the effects that DTAAs have on the international M&A activity, including the effects that treaty provisions have on deal structuring, valuation, and the integration of a deal after a merger. Withholding tax relief, capital gains exemptions, residency regulations and the removal of tax on intercompany dividends are provided, which decreases the cost of transactions and also increases the certainty of investors. DTAAs bring transparency by delegating taxation powers and deterring evasion of tax. DTAAs also help address the issue of fiscal evasion and distribution of taxing rights, thereby being beneficial to reduce jurisdictional claims, thereby reducing controversy and enhancing certainty of deal-making across borders. Moreover, positive treaty networks usually serve as encouragement to companies to channel investments across the focal intermediary jurisdictions and thus influence the global M and A movements. Despite the illumination of these benefits, the implications of DTAAs are one-sided. They enable such treaties that result in capital mobility and barriers to tax inefficiency but at the same time, they also enable the incidences where it can be used to treaty-shop and destabilize tax base and transfer of profits-that is why the anti-abuse provisions were also improved in both the OECD BEPS framework and the Multilateral Instrument. Moreover, this has contributed to the increasing trend in modern treaty policy to ensure that a balance is found between protection of the tax base and ensuring that sufficient space is allowed to allow true cross-border investments to be made. Comprehensively, DTAAs impact the cross-border M&A operations by reducing frictions in taxes, providing predictability, and setting out a set of criteria under which the decision-making of investors is formed. The adaptable nature of DTAAs shows changes in the strategies of companies and international taxation that affect the atmosphere of international M&A activity.