Companies are increasingly seeking tax savings and efficiencies as part of M&A as authorities step up scrutiny of deals
London, 17 October 2012 – Global tax directors at the world’s largest companies say in a new Ernst & Young survey they have increased efforts to find value through tax efficiencies as part of the of mergers and acquisitions process. At the same time, almost two-thirds of them say their companies’ deals are attracting more scrutiny by their national tax authorities, a significant increase from 2011, when 49% said their deals were attracting increased attention.
Ernst & Young’s third annual Global M&A tax survey and trends - The tax director’s search for value, reports that 54% of global companies are placing more importance on tax issues in deals than three years ago. Eighty-four percent of global tax directors said they had increased their focus on finding tax efficiencies to reduce the costs of deals or improve returns on them. And 34%of tax directors said they have helped position their companies to act on potential acquisitions, often before the target even comes to market.
The survey covered global tax directors at 150 multinational companies in 14 major markets. Two-thirds of the companies had revenues of more than US$5 billion.
“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,” says Aidan Stokes, Ernst & Young’s Global Director for Transaction Tax at Ernst & Young. “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.”
The survey revealed that the heightened interest in M&A activity by tax administrators is closely related to a rise in tax legislation around the world affecting mergers & acquisitions with 73% of those surveyed citing “increased complexity of tax legislation affecting deals” as an area of increased importance, and the additional scrutiny was mentioned by 68% as an area of concern.
Overall, however, the survey showed tax directors playing a larger and earlier role in determining the value of transactions, using a broader range of tax factors. The most important of these factors was post-transaction business combinations with 83% of tax directors surveyed recording this factor as an important source of transaction value, compared to 73% in 2011.
Sixty-nine percent of tax directors stated that planning in relation to foreign exchange exposures on deals was significant for transaction value.
Tax directors are increasingly becoming involved at the front-end of decisions to divest. More than half of those surveyed said they were reviewing their corporate structure to facilitate future divestments, if needed. The report highlighted that the tax director can play a critical role in determining where the sale of a business can create value in appropriate situations, and ensuring value is not lost in others. Forty-eight percent of those surveyed expected to be involved in a deal concerning a company based in a BRIC country within 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.
Stokes concludes “Tax has always been viewed as a factor when looking at how to value an acquisition or disposal. However 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 realizing value.”
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