The Effect of U.S. Tax Reform on Foreign Acquisitions

The Tax Cuts and Jobs Act (TCJA) of 2017 marked a significant change in U.S. international tax policy, altering the tax costs associated with U.S. ownership of foreign assets. We examine the pattern of foreign acquisitions by U.S. firms, both before and after the TCJA, emphasizing the key tax reform provisions that alter incentives for outbound investment. We find considerable cross-sectional variation across target and acquirer characteristics in changes to the probability of foreign acquisition. Notably, we find a decrease in the likelihood that a highly profitable foreign target in a low-tax jurisdiction will be acquired by a U.S. firm, as the TCJA’s Global Intangible Low-Taxed Income (GILTI) regime imposes an immediate U.S. tax on these foreign earnings. Our findings are important in light of the current U.S. administration’s intention to make GILTI more burdensome. A stated intention of the TCJA was to improve the competitiveness of U.S. firms. Our study cautions that, through GILTI, the reform reduces U.S. firms’ ability to compete in global M&A markets and that this situation would worsen if current proposals were adopted.