During the downturn in the transaction market over the past year and a half, we have seen changes in the role tax plays in corporate M&A
Moscow, 28 JANUARY 2011 - The downturn in the transactions market is creating an environment in which companies are being forced to squeeze greater value from their deals. In particular, companies are recognizing the value inherent in closer evaluation of the tax implications of a transaction according to Ernst & Young's Global Tax Trends: Raising and Investing Capital.
The report summarizes results of the independent survey conducted to ascertain the views of tax directors at 130 of the world’s largest companies across 11 major markets on tax issues surrounding M&A transactions.
We were looking to find out how widespread the shift in the role tax plays in corporate M&A might be, and what it might mean for future corporate transactions.
The findings of Global Tax Trends: Raising and Investing Capital point clearly to the escalation of tax considerations further up the M&A agenda of multinational companies:
- Driving down tax costs and realizing tax savings is now a core element of transaction planning. Tax is no longer something which is considered as an enhancement after the decision to do the deal has already been taken — increasingly, it is the difference between success and failure.
- The range of tax issues being considered in transactions has expanded rapidly beyond matters such as tax relief for the costs of transaction debt. It now includes many areas not previously considered in transaction structuring.
- Tax efficiencies are now being sought more rigorously to reduce the after-tax cost of deals. This is raising the profile and changing the emphasis of tax due diligence to focus on sources of future value.
- Companies are becoming more cautious about assuming tax risks in transactions.
- At the same time, striking the right balance between managing tax risk and the most tax effective transaction structures has never been more important.
- Identifying tax savings and potential pitfalls early in the process of a transaction has become more critical.
- Early consideration of key tax issues in the context of carve-outs is even more important.
- Distressed assets present significant opportunities and often come together with tax attributes that enhance deal value. Companies which blend these findings into their transaction practices can be confident that they are putting themselves in the most favorable position to do the best deal.
Reece Jenkins, Ernst & Young Partner, head of Ernst & Young Transaction Tax in the CIS, comments “We see tax playing an increasing role for Russian based multinational companies as they increase their M&A activity around the world”.
Historical assumptions around the management of tax risk inherent in transactions are now compounded by an expectation that transactions will come under greater scrutiny from tax authorities. There is now more emphasis than ever before on understanding the costs and cost savings — including tax — associated with a transaction. Together, these trends are elevating the role of tax directors around corporate M&A.
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