M&A Transactions Under Scrutiny
Post the financial crisis, the new global economic environment is having a significant impact on all aspects of tax, particularly as scrutiny increases from governments, tax authorities and the public. Private equity and the world of international transactions are by no means distanced from this.
Businesses conducting cross border transactions are asking themselves and their trusted tax advisors questions over the 'aggressiveness' and 'achievability' of tax planning in light of the current climate of heightened scrutiny. This topic is being discussed today at a global tax conference for multinational companies, held in Paris by Taxand, the world's largest independent global organisation of specialist tax advisors to multinational businesses.
To avoid scenes of protest by a disgruntled public outside your company's office, the concept of commercial substance is of particular importance. This is perhaps most pertinent in the case of M&A transactions, as tax authorities demand increasing levels of detail evidencing company activity in multiple jurisdictions. Hard evidence, even down to producing air travel boarding cards, is no longer an abstract concept and companies must continuously monitor the substance of their holding companies, particularly after the thrill of an acquisition has settled and the component parts of the transaction are long forgotten.
Where previously aggressive planning to save around 4-5% of tax costs in a transaction would have been undertaken without hesitation, the spectre of scrutiny has altered the approach of tax departments and their intermediaries. Instead, there is now an increasing trend to use in-depth understanding of a business to provide savings through alternative measures, such as the restructuring of the supply chain, which are not necessarily seen as 'aggressive'.
This new M&A tax environment was highlighted in one of the most significant transactions in Europe over the past two years where an unprecedented level of due diligence was necessary to ensure global control of the transaction's tax arrangements. This was particularly important to ensure local carve outs, and the closing of the transaction, were structured in an appropriate manner, suitable to the aims of the business and agreeable to the tax authorities involved.
The case involving Vodafone in India is another recent example of the scrutiny that multinationals face in cross-border transactions. The dispute was rooted in questions over the transfer of shares through a holding company in the Cayman Islands, sparking the demand of tax revenues from the Indian authorities and subsequently leading to a wave of litigation, instigated by Vodafone, which has been running since 2007 and was dismissed in the Bombay Supreme Court in the latest episode of this ongoing drama.
The Vodafone case throws up the ongoing debates of substance versus form and tax evasion versus tax avoidance. Importantly, the case also highlights the need for multinationals to carefully navigate their way through this unprecedented period of uncertainty in the global tax environment.
Frederic Donnedieu de Vabres, Chairman of Taxand, the world's largest independent global organisation of specialist tax advisors to multinational businesses
Your Taxand contact for further queries is:
Abigail Tarren, Global Operations Director
T. +44 (0)207715 5243