The tax director's search for value continues

Global M&A tax survey and trends

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It's clear why tax remains so important in corporate M&A. That's why we commissioned market research agency TNS to survey tax directors at 150 of the world's largest companies across 14 major markets to ascertain their views on tax issues surrounding transactions.

In fact, 84% of the global tax directors interviewed in this survey said they had an increased focus on finding tax efficiencies to reduce the costs of deals or improve returns on them. Nearly two-thirds, or 64%, said their deals had been subjected to more scrutiny by tax authorities, a sharp rise from a similar survey in 2011, when just 49% said their deals were attracting increased interest from tax administrators.

In addition, despite a number of countries engaging in legislative simplification exercises, tax complexity affecting deals continues to increase.

Tax remains a key driver of value for deals

Tax has continued to be a key component of value in M&A deals. The tax directors surveyed said that tax issues and tax planning in deals have continued to be as important in 2012 as they were in 2011.

Causes of increased importance
Causes of increased importance
Change in level of scrutiny from tax authorities
Change in level of scrutiny from tax authorities

Addressing tax risks and delivering value

The increasing level of scrutiny from tax authorities means the importance of tax in delivering both value and managing risks has never been more in the spotlight. Tax directors are adopting a number of strategies to in this regard.

In fact, our survey indicates that an increasing number of companies have a formal protocol for other functions involved in the M&A process to consult with the tax function and involve more people with the tax sign-off procedure. By putting appropriate processes and controls in place in advance of a deal, tax issues and opportunities can be identified and extra value delivered.

Other strategies to enhance value include broadening the areas of tax that are looked at to include areas beyond those that need to be considered simply to get the job done. Also, considering whether a deal should be the trigger for a wider review of the group structure.

There are significant benefits that can be realized from a business-led restructure, often encompassing legal entity and process rationalization that can improve tax efficiency.

Advance planning for divestments and acquisitions

Despite limited overall transaction activity, large multinational corporations are expecting targets of strategic interest to come to market, either through other corporate entities rationalizing or through private equity owners selling assets at the end of their investment life cycle to pay down debt and return funds to investors.

Indeed, 34% of the tax directors surveyed stated that they were actively planning for a potential acquisition that they knew, or strongly expected, would come on to the market.

Tax directors are adapting to the search for value from increasingly diverse sources.

While this planning primarily involved forming initial views of funding and structuring options for a proposed acquisition, 79% of tax directors surveyed were already considering how to integrate the potential acquisition within their own group to realize expected tax synergies.

Realizing value from synergies is a key tax value driver, and the findings confirm our experience that in the current market many tax directors are looking to identify and value these potential benefits very early in the process.

For a divestment, a business can be prepared for sale, and work can be performed in advance to address and rectify areas of potential concern for purchasers.

Acceptance and understanding of tax in emerging markets

Tax is typically involved earlier in the process for deals in emerging markets, potentially allowing directors a broader scope to influence a deal. As tax directors gain more experience in such markets, they are better able to make the right judgment calls about balancing risks and value in these jurisdictions.

The reaction of tax directors surveyed in 2012 to the risks inherent in emerging markets would appear to be a combination of factors depending on the circumstances and the risk.

These are:

  1. to perform additional work with a view to understanding the risk better
  2. simply to reflect the risk in the valuation model; and/or
  3. to accept such risks as inevitable in some markets

Where tax directors go from here

Overall, the results in our survey indicate that deals are still happening where valuations are realistic and there are clear strategic reasons for them and that tax continues to be fundamental to their successful completion.

Many of the themes from this year's research build on trends from prior years, but they also demonstrate how tax directors are adapting to the search for value from increasingly diverse sources.

In this context, we have included in the report some guidelines tax directors can follow to help deliver value in the current market.

These are grouped in the key areas of:

1. Creating robust processes that clearly identify and manage risk

2. Ensuring the early involvement of tax

3. Thinking differently to find new sources of value

4. Looking beyond the immediate to consider synergies and restructuring

5. Navigating the risks of emerging markets

Causes of increased importance

Causes of increased importance×

Change in level of scrutiny from tax authorities

Change in level of scrutiny from tax authorities ×

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