Tax integration - unlocking tax value post-closing
Essentially every M&A transaction has tax implications. Understanding and planning for these implications can mitigate transaction risks, enhance economic opportunities and increase shareholder value. In order to capitalize on opportunities and optimize deal value, tax implications should be considered throughout the entire deal-making process, from pre-transaction structuring to due diligence through post-deal integration.
Although many due diligence and business structure planning efforts consider taxes during the pre-closing phase of a transaction, many transactions fail to deliver the anticipated tax results due to poor integration efforts: there is a difference between closing a deal and completing it. The post-closing or integration phase of the deal is critical to unlocking the promised tax savings and efficiency gains, as well as delivering the tax risk mitigation strategies that were planned for in the pre-closing phase.
Cross-functional communication is necessary for a successful tax integration since tax planning can be significantly impacted by decisions taken by legal, finance, IT, HR and other functional areas. As a result of the critical importance of the integration phase, many deal teams will prepare a cross-functional 100 Day Plan, detailing all the steps necessary for a successful integration or separation and tax plays a significant role in preparing and executing that plan.
For example, a decision to change legacy operations, modify the legal entity structure, adopt a new financial reporting system, relocate or shut down a business unit may have a significant impact on the effective tax rate and may complicate tax accounting and tax return reporting requirements.
Tax post-closing integration efforts should focus on four key value drivers: (1) creating a tax-efficient business structure that produces a competitive effective tax rate and allows for tax-efficient cash flows; (2) managing tax compliance and documentation costs while preserving tax attributes; (3) improving the quality of data needed to meet regulatory requirements and facilitate strategic business decisions; and (4) managing tax risks and exposures on a local and global basis.
The tax integration plan should contain a list of immediate action items to keep the day to day operations running smoothly; steps to implement pre-close tax structure planning; and recommendations to improve operating efficiencies and risk mitigation. At a minimum, the tax integration plan should specifically address the following:
Purchase accounting/opening balance sheet
• Resolve conflicting financial and tax accounting methods, policies and procedures and controls
• Ensure legacy tax exposures are properly identified and recorded
• Assess the need to record or release valuation allowances on acquired tax attributes (e.g. net operating losses, tax credits, etc.)
• Establish tax accounting for deferred tax assets and liabilities
Tax planning
• Assess the impact of the ownership change on pre-existing tax credits and/or incentive packages
• Identify opportunities to utilize existing tax attributes and prepare supporting documentation
• Reconcile transfer pricing methods, determine appropriate transfer pricing for related party transactions and prepare contemporaneous documentation
• Identify and address conflicting tax positions the businesses may have taken
• Establish tax accounting methods that are most advantageous to the combined or separated businesses
• Determine whether transaction cost analysis and/or cost segregation studies are advantageous
• Identify and negotiate applicable tax incentives and credits with domestic and foreign jurisdictions
• Document significant tax positions taken before and during the integration, if not previously documented
Tax compliance
• Identify requirements to file pre- and post- closing short-period tax returns
• Identify and complete tax statements and elections related to the completed transaction
• Identify jurisdictions where returns must be filed going forward
• Assess compliance requirements for sales & use tax, value added tax, property tax, employment tax, and unclaimed property of the integrated business and complete filings
• Complete additional domestic and/or foreign tax registrations or revoke unnecessary registrations
• Determine inside and outside tax basis and develop mechanisms for tracking these going forward
In addition, the tax integration plan should include input into the integration plans of other functional areas.
Tax gathers and uses source data from many other areas within a business, including finance, treasury, legal, HR, IT, supply chain, etc. Tax should work with these areas to optimize the interchange of information, to facilitate management decision-making, and to enhance reporting and compliance efficiencies.
Bottom line is that the participation of tax in post-closing integration efforts is a foundational step toward managing the effective tax rate, minimizing tax risk, ensuring efficient compliance with reporting requirements and adding value to the deal and organization as a whole.
• Sara Neff is a tax director with FGMK with offices in Bannockburn and Chicago. Contact her at sneff@fgmk.com.