Current market conditions demand a proactive approach, both for companies actively looking for transactions and for those that are open to offers in a seller’s market. That means companies need to understand which assets or units could be sold and be ready to articulate the tax attributes of the particular business before any potential buyer emerges.
Macro issues make tax a strategic consideration in any divestment
Global changes have elevated the importance of tax factors in any potential divestment. The 2018 divestment study indicates that 80% of companies consider tax policy changes worldwide as a key geopolitical driver of divestment plans following the 2017 Tax Cuts and Jobs Act in the US and the OECD’s BEPS action plan. The study also revealed that 86% said labor or immigration laws may affect divestment plans, a topic you can read more about here.
In both cases, says Paul Hammes, EY Global Transaction Diligence and Divestiture Advisory Services Leader, the market is responding to an injection of clarity after several years of uncertainty. Tax reform was long-awaited in the US and came with significant incentives for multinationals to boost activity in the US, such as the lower overall tax rate for corporate income, which dropped from 35% to 21%.2 BEPS, meanwhile, is a series of country-level tax-policy changes that attempt to reduce artificial tax-planning strategies that allow profits to be claimed in countries regardless of where sales, workers or factories are located. It was approved in 2013 and, now that implementation is underway, taxpayers have fewer questions about how it will work.
However, in some specific cases, such as in the UK, uncertainty is driving deals. There, a survey by the private equity firm Aurelius found that European divestment activity is expected to be driven by a lack of clarity on how Brexit will affect UK corporations and their non-core holdings, particularly in the financial services sector.2
”Recent experience shows that the legislative changes coming into play in the tax landscape are starting to make a real difference, both in terms of divestment activity, as well as in deal modeling and pricing, both on buy side and sell side,” says Bridget Walsh, EY Global Transaction Tax Leader. “By thinking about tax up front, sellers can ensure their tax assets and liabilities are priced appropriately, and buyers can be more competitive by being able to accurately model their potential future returns.”