M&A deals attracting more scrutiny from tax authorities

Monday, 29 October 2012 — Two-thirds of tax directors globally surveyed by Ernst & Young say their companies’ deals are attracting more scrutiny from their national tax authorities, up from 49% in 2011.

Ernst & Young’s third annual Global M&A tax survey and trends - The tax director’s search for value surveyed tax directors at 150 multinational companies in 14 major markets including Australia. Two-thirds of the companies had revenues of more than US$5 billion.

Ernst & Young transaction tax partner Mark Bennett says tax is playing an increasingly important role in deal-making both in terms of identifying efficiencies associated with the transaction itself, and valuing them over the longer term.

“The challenge for tax directors is identifying, quantifying and then delivering value in the current market environment and we are seeing tax directors adapting to this and searching for value from increasingly diverse sources,” Mr Bennett said.

Mr Bennett said that heightened interest in M&A activity by tax authorities is closely linked to an increase in related tax legislation around the world with more than 70% of tax directors citing “increased complexity of tax legislation affecting deals” as an area of increased importance.

Other key findings from the survey include:

• Tax directors are increasingly becoming involved at the front-end of decisions to divest with more than half of those surveyed said they were reviewing their corporate structure to facilitate future divestments
• Fifty four per cent of global companies are placing more importance on tax issues in deals than three years ago
• Eighty four per cent of global tax directors said they had increased focus on finding tax efficiencies to reduce costs of deals or improve returns
• Thirty four per cent of tax directors said they have helped their companies act on potential acquisitions, often before the target comes to market

Forty-eight percent of those surveyed expected to be involved in a deal with a company based in Brazil, Russia, India or China (BRIC) in the next 12 months, down from 54% in 2011. Overall, China (28%) remains a firm favorite as a popular deal location, with Brazil and India following closely (both 21%). Africa was most frequently cited as the most popular destination for investment outside the BRICs. The report indicates that tax is typically involved earlier in the process for deals in rapid growth markets allowing tax directors to properly assess the value and risk associated with those investments.

“Tax has always been viewed as a factor when looking at how to value an acquisition or disposal.

“But tax directors today are being asked to think more dynamically about identifying all the possible tax synergies in a deal to help their companies strike the right balance between managing risk and realising value,” Mr Bennett said.

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