By Hansen, Fay
Business Finance , Vol. 12, No. 10
Hidden tax liabilities can slash the overall value of a deal - and they can be very different from one country to the next.
THE BOOM IN CROSS-BORDER MERGERS and acquisitions (M&A) has given new urgency to understanding and managing the complex tax consequences of international expansion. CFOs must focus on new layers of due diligence for uncovering the tax implications of each transaction and the best strategies for minimizing liabilities and reducing costs.
Senior corporate executives predict that 2006 M&A activity will surpass last year's record performance, according to a survey by KPMG LLP. More than 60 percent of survey participants estimate that at least 25,000 deals will be completed for 2006 worldwide, while 66 percent expect their own company to complete at least one cross-border transaction by year's end. In 2005, almost 23,000 deals were completed globally, and half of those were cross-border transactions.
The survey participants also said, however, that challenges such as tax issues could continue to affect transaction success rates. Hidden or unrecorded liabilities and incomplete planning ranked as the top two tax problems facing M&A participants, at 70 percent and 49 percent, respectively.
Tax liabilities may be deeply obscure in global deals. "CFOs involved in cross-border mergers and acquisitions as purchasers need to be extremely cognizant of the adequacy of any inherited tax provisions as well as the effect that these items might ultimately have on a purchaser's own tax provision," says Gregory A. Falk, principal in charge of the M&A tax practice at New York City-based KPMG. "Applicable seller indemnities and any book vs. tax differences arising from the acquisition deserve equally important consideration."
The implications for CFOs as sellers are slightly different. "Just as a seller looking to put a home on the market enhances its curb appeal to ensure top dollar, a company looking to sell itself needs to make sure its financial house is in order, including the tax side," Falk says. "Insufficient or inaccurate tax information may erode the credibility of the seller and its advisors and lead to negative purchase-price pressure or reconsideration of the deal."
Sellers should be ready to report the location and structure of the company's debt and intellectual property. "They should also be aware of - and have full documentation of - all transfer pricing arrangements and other related party transactions," Falk notes.
Structuring the Deal
A number of important issues arise in structuring a cross-border M&A deal to ensure that tax liabilities and costs will be minimized for the acquiring company. "For starters, a purchaser should try to create as tax-efficient a financing structure as possible," Falk says.
The first step is to explore leveraging local-country operations for cash management and repatriation advantages. "Additionally, companies should be looking at the availability of asset-basis stepup structures for tax purposes and keeping a keen eye on valuable tax attributes in merger and acquisition targets, including net operating losses, foreign tax credits and tax holidays," Falk advises.
When a U.S.-based company acquires a foreign corporation, the CFO needs to decide whether the acquisition should be structured as an asset or stock purchase. In conjunction with that determination, the CFO must decide whether the transaction should be structured as taxable or the reorganization should be tax-free, according to Joseph Calianno, partner and leader of the international technical tax practice in the national tax office of Grant Thornton LLP in Washington, D.C.
These determinations hinge on a number of factors, including the type of consideration that will be used to facilitate the acquisition, such as cash, notes of the U.S.- based company or stock of the U.S.-based company. Calianno also advises CFOs to review the tax attributes of their company and its subsidiaries as well as the tax impact on the foreign target corporation and its major shareholders of the different possible deal structures in the relevant foreign jurisdictions. …