Effects of the Fiscal Treatment of Tax Losses on the Efficiency of Markets and the Incidence of Mergers, [by] Michel Poitevin

This paper surveys the major issues regarding the transferability of tax losses upon a change of control. Whether tax losses should be transferable or not depends upon whether or not the market for corporate control is efficient. If there are too few efficiency-enhancing takeovers, then takeovers should be "subsidized." If, on the contrary, there are too many takeovers (from an efficiency point of view), then takeovers should somehow be taxed. In either case, the transferability of tax losses may be an instrument for doing so. Three aspects are considered: (1) whether or not tax losses should be transferred upon a change of control; (2) whether or not the transfer should be restricted to the same line of business; and (3) whether or not losses should be used at the same speed at which they were (to be) used pre-merger. These issues are then discussed in the context of managerial control, product market competition, financing decisions, and investment decisions and risk taking.