Pillar Two of the OECD/G20 BEPS 2.0 Project has introduced a global minimum tax framework that can significantly influence M&A processes throughout the deal life cycle. While the framework aims for a “common approach”, its implementation varies across jurisdictions, adding complexity and uncertainty to cross-border deals. For Swiss dealmakers, understanding the Pillar Two impact on M&A transactions is now essential for successful transactions. Deal teams that adapt quickly and integrate Pillar Two considerations throughout the M&A lifecycle will be best positioned to manage risks and capture value. This article is the first in a series of five, focusing on how Pillar Two affects each stage of the M&A deal lifecycle.
The M&A Lifecycle under Pillar Two
The Global Anti-Base Erosion (“GloBE”) Model Rules mark a significant shift in how Multinational Enterprise (“MNE”) Groups are taxed worldwide. In an M&A context, this shift brings several new considerations and challenges at every stage of the M&A deal lifecycle. The structure and complexity of a transaction continue to depend on factors like size, international scope, regulatory requirements and fiscal considerations, amongst others. However, with 55 jurisdictions having enacted final Pillar Two legislation, dealmakers must now also assess how the GloBE Model Rules interact with these factors and influence both deal design and execution.
While the GloBE Model Rules generally aim to account for the specific tax nuances of transactions, achieving alignment across all 144 Inclusive Framework jurisdictions was of course not possible. In Switzerland, for instance, the GloBE Model Rules and the Swiss domestic tax rules apply largely similarly to transactions, yet some differences remain. Additionally, the GloBE Model Rules introduce a number of new wrinkles which must be considered. We will explore this topic in greater detail in our upcoming article on the technical rules. Here we will focus on the strategic impact of Pillar Two throughout the deal lifecycle.
While every transaction is unique, most deals, whether structured as a share or asset purchase, follow a typical sequence, as outlined below:
1. Strategy and Target Identification: Define strategic objectives, identify and screen potential Targets aligned with strategic and financial criteria.
2. Due Diligence: Perform comprehensive due diligence procedures (amongst others, financial, legal and tax) to validate assumptions and identify risk areas.
3. Deal Economics, Valuation Modelling and Structuring: Assess the financial impact of the transaction, including pricing, projected cash flows and tax effects. Determine transaction structure, financing arrangements and payment mechanisms to sell/acquire the Target in a tax and commercially efficient manner.
4. Transaction Documents: Obtain/provide protection of known and unknown (tax) risks, set out information and conduct matters, draft and execute definitive agreements (SPA or APA).
5. Signing, Closing and Post-deal Integration: Complete legal and financial closing; Implement post-closing obligations, integrate operations, teams and systems to realize synergies and ensure long-term value creation.
This article outlines each phase and highlights the specific considerations that arise in a world with Pillar Two.
1. Strategy and Target Identification
The introduction of Pillar Two adds an additional layer of analysis to the early stages of the M&A process. While strategic and commercial considerations remain the primary drivers when identifying potential Targets, tax aspects now can play a more prominent role, particularly for Buyers already in-scope of Pillar Two or those that may enter into scope as a result of a transaction.
An acquisition can influence a group’s Pillar Two exposure, its jurisdictional tax profile and compliance requirements. It is therefore relevant to assess at an early stage whether the transaction could push the combined group above the EUR 750 million revenue threshold, bringing parties into scope for the first time and triggering new reporting and data requirements. Understanding how the acquisition affects consolidated revenues, group composition and the resulting Pillar Two obligations helps avoid unexpected consequences later in the process.
For both Buyers and Sellers, familiarity with the GloBE Model Rules and their interactions with the group structure is of particular relevance during the target screening phase. Early modelling and scenario analysis allow deal teams to identify potential risks, anticipate compliance needs and determine whether a potential transaction remains viable in light of Pillar Two.
2. Due Diligence
In the short term, the impact of Pillar Two on the due diligence process is moderate and typically specific to certain types of historical transactions of the target group as well as the targets position vis-à-vis its Transitional Safe Harbor position. Currently, Pillar Two implications are still often being scoped out of a tax due diligence. However, with the GloBE Model Rules entering into force per 1 January 2024 in many jurisdictions, this will not remain a suitable approach for much longer.
Having said this, we anticipate that the focus on historical Pillar Two tax issues will significantly increase over time, adding complexity to future tax due diligence. The Pillar Two tax position will attract greater scrutiny, necessitating an expansion of traditional tax risk assessments to include a broader range of factors. Key areas of interest will include the Target’s GloBE implications, such as whether it is subject to charging provisions and how non-perimeter entities may affect its GloBE position. It will also be crucial to evaluate any historical GloBE tax risks, the effects of pre-sale restructurings or intra-group transfers during transition years, and the elections made. A standard information request list for the due diligence process should include a comprehensive list of the Target’s deferred tax assets and liabilities, along with their treatment under Pillar Two prior to the transaction. Documentation related to compliance with Transitional Safe Harbor requirements, total consolidated revenue figures for the MNE Group over the past four years, Country-by-Country Report (CbCR) documentation for the previous two years, and detailed calculations of GloBE-related tax provisions will also be critical.
As a result, the due diligence process is expected to become more complex and time-consuming whenever the Target is subject to Pillar Two, but to some extent also in cases where only the Buyer is or is about to become subject to Pillar Two. While it should encompass the aforementioned items, obtaining the extensive information required – such as details about the Seller’s non-perimeter entities – will likely be challenging, if not impossible, in practice. The feasibility of gathering this information will depend on the negotiating power of the parties involved. Overall, we expect greater information asymmetry in the due diligence process and ultimately an increase in the overall due diligence burden for parties involved in the transaction. In addition, the very long Pillar Two compliance timeline further exacerbates these challenges. While the GloBE rules apply from 2024 in many jurisdictions, the first returns will, for most countries, only be due in mid-2026. As a result, for transactions in 2024 and 2025, reliable and fully validated Pillar Two information will often not yet be available. Deal teams will therefore need to rely on preliminary calculations, assumptions and incomplete data sets, which further increases uncertainty.
3. Deal Economics, Valuation Modelling and Structuring
Structuring considerations are becoming increasingly important because of their potential GloBE impact, as additional Pillar Two factors now feed into deal modelling and can materially influence pricing discussions. This part of the deal life cycle is highly affected by Pillar Two, both in the short and in the long term.
At a broader level, jurisdictional blending and the mechanics of the GloBE Model Rules can work in both directions: they may create a tax downside that must be reflected in the valuation, or they may offer a tax upside that enhances value. At a detailed level, top-up tax exposures and potential recaptured deferred tax liabilities can alter future cash flows, change the ETR and impact cash tax consequences. Furthermore, transitional-period asset transfers can result in questions around amortization deductibility, which can directly affect net cash flows. In addition, elections available under the GloBE framework, whether made historically by the Target or implemented post-deal, can materially shape modelling outcomes and should be assessed early in the structuring process. Moreover, prior year adjustments also need to be considered.
The Buyer’s GloBE position will play a critical role in shaping both structuring and deal economics. Consequently, some Buyers may enjoy comparative advantages over their competitors based on their own GloBE position as well as that of the Target. This dynamic is likely to create a degree of competitive distortion, as Pillar Two adds another layer to the traditional commercial and tax considerations that influence overall deal economics.
4. Transaction Documents
While the GloBE Model Rules have introduced significant complexity to the drafting of transaction documents, we anticipate that this effort will slightly diminish over time as these documents become more standardized.
Key areas of focus include compliance with Pillar Two tax regulations and the historical and potential future tax risks associated with them. Additionally, the definition of taxes must be broadened to encompass all potential future payments required under Pillar Two, necessitating a comprehensive understanding of these regulations. Given the information asymmetry, Sellers’ tax representations will gain importance, as Buyers may not be able to fully assess the Target’s compliance during the due diligence process due to lack of information. Tax indemnities will remain a crucial tool for Buyers to mitigate uncertainties surrounding Pillar Two, though their inclusion will depend on negotiation power and deal dynamics. Lastly, tax cooperation clauses will become increasingly relevant, particularly in light of the potential historical connections between the Target and the Seller, with the complexity of these tax clauses varying based on the deal mechanics, such as locked box versus closing accounts.
W&I insurance, however, has not yet broadly adapted to this new landscape. Many Pillar Two-related risks, particularly those linked to transition-period asset transfers or pre-sale intragroup restructurings, typically fall outside coverage. While some ordinary adjustments may eventually become insurable, most GloBE-specific issues currently require direct allocation in the Share Purchase Agreement.
Currently, there is not yet an established language or fully evolved general best practice regarding the question how to deal with Pillar Two in the relevant transaction documents, nor is there clear jurisprudence regarding the taxes that should now also be reflected in these documents. This creates inherent uncertainty for both parties, each seeking protection for unknown risks, often at the other’s expense. The negotiation power, deal dynamics, and expertise of the involved tax departments and advisors will significantly influence the extent to which each party can secure such protection. In summary, it will be more complex to get contractual protection.
5. Signing, Closing and Post-deal Integration
As a deal moves from signing toward closing, Pillar Two influences several practical considerations. Parties need to agree who is responsible for straddle-period filings, how GloBE-related returns will be prepared and which entity will be treated as the UPE after completion. It also needs to be clarified whether the IIR, a QDMTT or UTPR will apply to the combined group.
After closing, tax, finance and accounting teams must align processes, ensure that the right data is available for GloBE reporting and monitor deferred-tax recapture over the coming years. How complex this phase is, largely depends on the Target’s level of preparedness, whether preliminary work on Pillar Two has already been undertaken, and whether systems and data structures exist that can be built upon.
Conclusion
The introduction of Pillar Two adds an additional layer of complexity to M&A transactions, requiring closer attention at each stage of the deal lifecycle. There will be an increased need for information in the due diligence process – to identify the relevant tax risks – as well as in the modeling phase – to determine the favorable deal economics. However, obtaining the extensive information required will be challenging. The magnitude will largely depend on negotiating power throughout the process. Because of information asymmetry, it is (at least currently) more complex to get contractual protection for the Pillar Two-related tax risks. The structuring restrictions and opportunities introduced with the GloBE Model Rules also lead to new comparative advantages and disadvantages amongst bidders. The Buyer’s GloBE position in relation to the Seller’s GloBE position will be crucial in shaping deal economics. This dynamic may lead to competitive distortions as traditional commercial and tax considerations are further complicated by Pillar Two.
Overall, tax (and finance) departments will require increased time and resources to navigate the complexities introduced by Pillar Two during M&A transactions. It is essential to secure buy-ins from key stakeholders within the respective organization, ensuring they understand when either the Target and/or the Buyer is or is about to become subject to the GloBE rules. The tax workstream becomes critical due to its potentially significant commercial impact on the overall M&A process. The expertise of tax departments will be vital in addressing these challenges effectively.
