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Divesting for value: Tax issues and consequences - EY - Global

Divesting for value

Tax issues and consequences

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In a changing economic environment, a deal can live or die on its tax implications.

Attention to tax issues can lead to more efficient deal structures and higher valuations.

Key points:

  • Introduce tax expertise early in the divestiture process
  • Understand the assets being sold and their location and tax bases when determining deal structure
  • Consider the complex tax issues posed by alternative transactions

By itself, a divestiture is rarely driven by taxation factors. Asset and business disposals should make sense from a broader economic or strategic perspective. However, paying close attention to tax implications is essential, as they are complex and can add considerable value to a transaction.

The tax process

In any disposition, a seller’s primary goal is to often maximize after-tax proceeds. Sellers should work through a series of questions to identify the tax characteristics of the business or assets, as well as the tax needs of the seller and buyer.

The questions generally are:

  1. What assets are being divested?
  2. What is the tax basis of those assets?
  3. Where are the assets located?
  4. What tax attributes can the seller monetize?

Alternative transactions

In a changing economic environment, a deal can live or die on its tax implications. Some companies are considering a variety of alternative structures featuring favorable tax aspects, including “tax-free” deals.

Tax-free — or alternative structures — are not divestitures in the strictest sense. These are often reorganizations, partnerships or joint ventures without a clear buyer or seller. Often, these deals exchange assets or move assets to new ownership structures. Where financing is scarce, alternative transaction structures can help companies achieve divestiture goals.

Considering the tax-free spin

As companies increasingly turn to spin- offs they need to appreciate the benefits and complexities before committing to the task.

Tax-free spinoffs are attracting the attention of more and more companies today. Sectioning off part of a publicly traded enterprise can improve business focus in each resulting entity and provide higher market valuations.

A spinoff may also achieve better allocation of financial, intellectual or physical capital, as well as a more efficient use of leverage. When in a credit-starved marketplace — in which outright buyers can be few and far between — such a deal can deliver many of the benefits of a divestiture. Add the benefit of a tax-free transaction and the concept appears almost irresistible.

In its operational, regulatory and strategic complexity, a tax-free spinoff is something of a three-headed beast: it is as demanding as any business carve-out, with added requirements akin to those of an initial public offering (IPO) plus the close involvement of tax authorities and the Securities and Exchange Commission (SEC).

This adds up to an undertaking with challenges, costs and pitfalls that should not be underestimated.

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