In structuring a deal, tax impacts that are beneficial to the seller can generally result in a down side to the buyer. Hence like valuation, tax is also a subject of negotiation in an M&A transactions.
To aid the negotiation process, there are a few approaches that can generally be followed as a road map during the various stages of the M&A deal. The summary points during each of the stages are listed below.
During a Preliminary Due Diligence:
Identifying the preliminary tax structures and tax budgeting
This will generally involve the identification of historic tax exposures that the buyer could become directly or indirectly liable for. This can often result in the identification of integration issues or other matter requiring management attention.
Identifying the cashflow impact of all foreseeable tax issues.
This will be possible by gaining all information relevant to structuring the transaction, financing considerations and negotiation of contract terms. As this step is under time pressure, consider any issues that may arise during due diligence based on availability of information over the last 4 years or more, and consistency of information to watch out for any contradictions.
At this stage, think about all of the Target commitments, contingencies, exposures, compliance gaps, outstanding audits or scheduled audits. On the other hand, it may be helpful to consider other tax attributes such as validity of losses carried forward, R&D and other tax incentives and concessions.
During the Detailed Due Diligence
Defining the tax structures
This includes developing tax structures for the proposed transaction that take into consideration the tax impacts to both the buyer and the seller. Hence this includes identifying ways in which the buyer may receive a step-up in tax basis that may be used as a negotiation tool.
Identifying all existing tax liabilities
This may include going through all records and bring to the table solutions for tax objectives of the buyer and seller which may conflict or also be resolved based on their individual profiles and the structure being defined. For example, quantify the validity of losses, contingencies and reserves, outstanding intercompany balances, limitations on interest deductions, payroll taxes and employment taxes. Some of the more current topics will include pending international issues such as Transfer Pricing areas of risk and Permanent Establishment(PE) related risks in light of BEPS extended PE definitions and anti-avoidance measures and MLIs in place.
Estimating all taxes applicable on the transaction
There are a range of state and federal taxation implications that will occur during a transaction. In Australia for example, the considerations would extend to federal income tax, capital gains tax, and goods and services tax (GST) and eight separate state and territory systems of duties and taxes.
Estimating all future impacts to taxation given the transaction and tax structures
Tax modelling on prospective effective tax rates and cash taxes for the Target, including the step-ups achieved, validity of losses and limitations on ownership change are all factors that will provide a clearer picture on how to fine tune management discussions.
During Integration Planning & Deal Closure
Ensuring legal entity readiness based on latest assumptions
This involves another look at the tax attributes of the Target that will lapse or carry over, including requirements and limitations that apply under the tax regulations including losses and beneficial tax status. If the Target and Buyer operate different tax accounting methods, consider the implications post transaction on adoption of new methods, requisite elections.
Updating tax input to closing items
Consider preservation of any tax incentives, credits and benefits in addition to traditional tax inputs in the deals. Generally, this also presents opportunities to streamline legal entity structures or operating models to reinforce geographic footprint, combining filing requirements, grouping provisions, blended income tax rates, and streamlining of functions assets and risks in several geographic locations from a transfer pricing perspective.
Providing integration tax input to all departments and ensuring readiness of systems including payroll, indirect taxes and compliance file notes and positions taken.
Consider all documentation that require an allocation of acquisition costs to tax attributes, step-up breakdown, documentation in support of incentives, losses and credits and provide input to NPV calculations in support of bid price.