Effect Of Financial Factors On Your Business
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Taxes have always played a crucial role in shaping businesses in a particular way. Since ages, there have been examples of enterprises flourishing and being demolished due to the taxes imposed by the Government. Taxes are an extremely important financial factor that affects the working of a business organisation. Government taxes largely affect the organisations dealing in mergers and acquisitions. As the international mergers and acquisitions increased over the last two decades, it is well documented. The amount of the total mergers and acquisitions that were accounted for by cross-border deals has been reported to increase from 23% in 1998 to a whopping 45% in 2007. Also, the amount of all the foreign direct investments taking place as cross-border mergers and acquisitions increased from a mere 14% in 1991 to more than 50% by the time it was 1999. This research tends to examine an aspect of the determination with which mergers and acquisitions have been taking place all over the world. This aspect deals with the international location of the target company by the concerned acquirer, and particularly, the role of taxes in this choice. It is clear that in principle, if there is a higher tax rate in the country, there are more chances of that country being a target for another country’s acquisition.
Also, differences in the corporate tax rates across several countries create an opportunity for tax arbitrage, often undergone by giant multinational companies. However, identifying the existence as well as the magnitude of profit shifting which is tax-motivates is always fraught with difficulty. Majority of the studies rely on measuring the impact of variation in the corporate tax rates on the measure of profitability of fellow affiliates. Instead, this research exploits shocks to the earnings happening in the parent firm, and also analyses how these shocks tend to spread across the affiliates of a multinational group of enterprises. Particularly, it makes an assessment about the shifting of earning shocks which are exogenous for the low-tax subsidiaries. The study also exploits a huge European micro dataset which tends to provide detailed accounting and information about the ownership on 1.6 million companies. The results have showed a strong support for the profit-shifting hypothesis. While the impact of earning shocks in the parent company on the income of the affiliates that are high-tax is not easily distinguishable from zero, a significantly positive impact was found on the income of the low-tax affiliates. Measuring the same quantitatively, estimates have suggested that around 2% of additional earnings made by the parent companies are shifted to the low-tax subsidiaries.
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