IMPACT OF TAX ON M&A Simon Fletcher
AGENDA 1. Tax environment 2. Recent developments 3. Impact on M&A 4. Questions Disclaimer: this presentation is intended to be for general guidance on matters of interest, it does not constitute tax or legal advice and no guarantee is given on completeness or accuracy. 2
1. TAX ENVIRONMENT 3
1. TAX ENVIRONMENT Google fails to measure up on tax, and it s the UK public who has to pay The Guardian 4
1. TAX ENVIRONMENT Public pressure on MNCs Visibility of tax affairs Corporate income tax paid G20 & OECD: BEPS* 15 point action plan Transparency to tax authorities EU Driven Actions Anti Tax Avoidance Directive State Aid challenges Local Country Changes Taxable presence General Anti-Avoidance Rules (GAARs) Lux leaks Panama papers UK Public Accounts Committee scrutiny Media / NGO / public pressure Interest and financing restrictions Treaty limits PEs / Transfer Pricing rules Country by country reporting (CbCR) Interest and financing restrictions GAARs Exit charges Public CbCR Starbucks (NL), Fiat Finance (Lux), Apple (Ire) Diverted Profits taxes (UK/Australia) GAARs (India/others) Anti-inversion (US) * = Base Erosion and Profit Shifting 5
2. RECENT DEVELOPMENTS 6
2. RECENT DEVELOPMENTS OECD BEPS Source OECD 7
2. RECENT DEVELOPMENTS ACTION 4 INTEREST DEDUCTIONS 1. Fixed ratio rule (FRR) 2. Group ratio concession 3. Specific rules / concessions Restrict tax deductibility of net interest expense to % of EBITDA Includes third party interest Suggested range for FRR benchmark 10% to 30% Tax-EBITDA De minimis (optional) Apply group s net interest / EBITDA ratio where higher than FRR Consolidated F/S Possible uplift to net third party interest expense of up to 10% Optional Options include: Carry forward of disallowed interest Carry forward or unused capacity Carry back of disallowed interest Specific rules for banks and insurance cos 8
2. RECENT DEVELOPMENTS US PROPOSED s385 REGS 1 2 3 Denial for principal purpose distribution and acquisition transactions + 72 month rule Debt instruments issued on or after 4 April 2016 Related party debt instruments recharacterised as stock for U.S. federal income tax purposes Intention is for debt to only be tax deductible where it relates to an actual capital investment by the issuer 4 5 Documentation rules with safe harbour 9
2. RECENT DEVELOPMENTS ACTIONS 7-10 PEs / TRANSFER PRICING Dependent agent PEs Old rule: is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State and authority to conclude contracts in the name of the enterprise New rule: habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise Transfer pricing IP / intangibles DEMPE functions Conduct of parties aligned with contractual arrangements? Return for risk control and financial capacity 10
2. RECENT DEVELOPMENTS UK DIVERTED PROFITS TAX (DPT) Applicable from 1 April 2015 25% tax (not corporation tax) Notification requirement 1. Artificial avoidance of a UK taxable presence Carrying on activity in the UK in connection with supplies of goods or services and Tax avoidance motive and/or mismatch (tax reduction and lack of substance) 2. Arrangements lacking economic substance Effective tax mismatch Insufficient economic substance: tax benefit > non-tax benefit exclusions 11
2. RECENT DEVELOPMENTS ACTION 13 COUNTRY BY COUNTRY REPORTING (CbCR) Who? All MNE Groups with a consolidated group turnover > 750m (preceding FY) What? Revenues divided between unrelated and related party Profit / (loss) before income tax Income taxes paid cash including WHT Current tax accrual excluding UTPs Stated capital and accumulated earnings Number of employees Tangible assets other than cash and cash equivalents Constituent entities organised in the country of reporting Tax jurisdiction (if different from incorporation) Main business activities 12
2. RECENT DEVELOPMENTS ACTION 13 COUNTRY BY COUNTRY REPORTING (CbCR) When? Accounting periods starting on or after 1 January 2016 Filed within 12 months of the period end How? Return should be filed with tax authority of the ultimate parent entity of the MNC The receiving tax authority will automatically share the CbCR with all other tax authorities where an information exchange agreement is in place Local notification requirements Possible issues Inclusion of dormants, branches, permanent establishments Reconciliation to financial statements Availability / use of tax losses not evident Employee numbers don t identify roles / seniority Future public disclosure? 13
2. RECENT DEVELOPMENTS EU ANTI-TAX AVOIDANCE DIRECTIVE (ATAD) 1 2 General antiabuse rule 3 Controlled foreign company (CFC) rules Interest limitation rules Exit taxation rules 4 5 Timing? Member states have until 31 December 2018 to implement the directive in national law (31 December 2019 for exit taxation rules) Hybrid mismatch rules 14
2. RECENT DEVELOPMENTS BREXIT Too early to tell Withholding tax directives Parent and Subsidiary Indirect taxes Interest and Royalties Applicability of EU directives Customs tariffs US tax treaties limitation of benefits EU tax initiatives Anti-tax avoidance directive State Aid rules 15
3. IMPACT ON M&A 16
3. IMPACT ON M&A DEAL LIFECYCLE Structuring / Integration Due diligence Contracts Modelling / Valuation 17
3. IMPACT ON M&A TAX DUE DILIGENCE Traditional DD Focus on historic / pre-completion tax risks Widen scope? Reputation Are there any potential reputational issues? Rulings Tax attributes Tax rate Any rulings in EU territories at risk of State Aid challenge? Are any excess tax losses or allowances at risk? Is the historic tax rate sustainable going forwards under BEPS? 18
3. IMPACT ON M&A MTIC / CAROUSEL FRAUD Europol estimate: at least EUR 60bn annual losses through VAT fraud Started in mobile phones / computer chips but mutated to intangibles, such as carbon credits and wholesale telecoms airtime Intelligence from HMRC: fraudsters now prefer to use large companies to fund the VAT that is being defrauded and may also look to place people directly within a large organisation Risk applies to all parties in the supply chain and could be greater than EV Broaden due diligence and consider contractual protection Source Dutch tax authority 19
3. IMPACT ON M&A MODELLING / VALUATION Is the historic tax rate sustainable going forwards under BEPS? Tax deductibility of interest and financing Any hybrid entities or instruments? Beneficial tax regimes e.g. patent box? Transfer pricing / permanent establishments profits taxed in the appropriate jurisdictions? Potential CFC tax charges? Synergy assumptions Tax attributes 20
3. IMPACT ON M&A CONTRACTS Price adjustment Deferred consideration / escrow Rulings Tax W&I W&I insurance 21
3. IMPACT ON M&A STRUCTURING / INTEGRATION Tax attributes Treaties / substance Acquisition vehicle Exit strategy Integration Financing 22
4. QUESTIONS 23