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10 years of M&A tax
Mergers and acquisitions are a key part of the global business environment. The M&A landscape has seen many many peaks and troughs over the last 10 years, not least in the tax environment surrounding M&A transactions. The increase in cross-border activity, global recessions and political pressures have all had their effects on the M&A tax landscape. The Taxand global M&A tax service line discusses further.
Through historic waves of M&A activity, diligent tax planning has been key in ensuring that fiscal benefits can be achieved by ensuring structures and financing are tax efficient. The continued increase in cross-border activity has given many opportunities and although national tax authorities have been working to secure their tax take, proper tax planning can always unlock benefits.
The challenges facing M&A tax advisers have been growing over the years as tax jurisdictions have been reacting to perceived tax abuse, particularly in the face of national recessions and budgetary pressures. However, the biggest change to the M&A tax environment is currently underway.
Economic history has divided merger activity in waves. The fifth wave was largely driven by cross-border mergers which reached its peak in 2000, when there were around 40,000 deals worldwide with an estimated total value of around $4 trillion, although, of course, cross-border mergers are still continuing today. The recession in 2002 brought the number of deals in that year down to just over 10,000, although the total value was over $2.5 trillion. The sixth merger wave followed, fuelled by shareholder activism, private equity and LBOs (leveraged buy-outs). Taxand was formed during the build-up of this wave which peaked in 2007 with nearly 50,000 deals with a total value of $5 trillion.
One of the great challenges of cross-border mergers is bringing together different cultures of the merging companies. Not achieving this could lead to a failure of the merger; The Alcatel-Lucent merger is often cited as failing due to the inability to reconcile the cultural differences between the US and French workforce. Similarly, the tax systems and approach of tax authorities in different jurisdictions vary greatly and it is critical that the cross-border tax implications are carefully considered to ensure fiscal benefits are achieved.
The fifth wave of mergers brought with it the opportunity for creative cross-border tax planning. The difference in tax systems can result in fiscal benefits such as a mismatch of income and expenses and the shifting of profits from high to low tax jurisdictions. Couple this with the subsequent LBO activity and tax planning opportunities increased with ability to carefully plan for the debt used to lever the transactions.
Tax authorities were generally slow to respond but following the financial crisis of 2008 their appetite to prevent the perceived tax leakage from their jurisdictions increased due pressures on their own national deficits.
More focus was given to substance issues in multinational groups, transfer pricing and controlled foreign company rules. This was largely a unilateral approach although some landmark legal cases caught the attention of number of tax authorities, notably Indofoods v. JP Morgan. This sought to clarify the meaning of beneficial ownership of interest and so would affect the ability of a payer of interest to rely on the double tax treaty to avoid local withholding. Although this was not a tax case it is cited by tax authorities and was reviewed in the famous Prevost case.
We also saw the introduction of ‘debt cap’ rules in countries such as Germany and the UK under which the level of debt or interest that subsidiaries in those countries can recognise for tax purposes.
Now there is also growing political pressure being put on Governments to ensure that taxpayers are paying their ‘fair share’ of tax and this is being fuelled by strong public opinion across the globe. This has led to ‘knee-jerk’ introduction of legislation which in some cases has been ill-thought through, can catch situations not intended to be caught and can also affect the competitiveness and attractiveness of some jurisdictions.
However, more significantly countries are now beginning to adopt a multi-lateral approach to so called tax avoidance and this is being spear-headed by the OECD/G20 with the Base Erosion and Profits Shifting (BEPS) initiative. This initiative recognises that national tax laws have not always kept pace with global corporations and the fluid movement of capital, and there are gaps which can be exploited to generate tax saving. Fifteen specific actions are being developed and many of these could significantly affect M&A tax planning and existing corporate and private equity structures.
The current timetable anticipates that work on these fifteen actions is to be completed in three phases in September, October and December 2015. However, the big unknown with many of these actions is how individual jurisdictions will implement them into their national law.
Many of the actions will directly affect M&A structures and it is critical that multinationals stay abreast of these both in respect of future transactions and also how existing structures might be affected.
Quality tax advice, globally
We are now in the midst of the most concerted multi-lateral project aimed at tax abuse. Many of the actions will directly affect M&A structures and it is critical that multinationals stay abreast of these both in respect of future transactions and also how existing structures might be affected.
The political pressure and public scrutiny tax payers are under to pay their ‘fair share’ of tax requires careful consideration when deciding upon strategies. It would be unfortunate for a company to have a new anti-avoidance tax measure named after it, such as the UK ‘Google tax’.