Tax issues dominating mergers acquisitions : Ernst Young survey

New Delhi: Ernst & Young annual Global M&A tax survey & trends suggest that global tax directors at the world’s largest companies have increased their efforts to find value through tax efficiencies as part of the mergers and acquisitions process.

The report finds that 54% of global companies are placing more importance on tax issues in deals than three years ago. 84% 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. While 34% of tax directors said that they have helped position their companies to act on potential acquisitions, often before the target even comes to market.

Amrish Shah, Partner & Transaction Tax Leader, Ernst & Young said, “Tax is playing an increasingly imperative role in mergers & acquisitions both in terms of identifying efficiencies associated with the transaction itself and valuing them over the longer term. Our survey reveals 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.

He further adds, “As a concomitant of the complex and sometimes tumultuous tax regime and in line with the global trend, India is also seeing a definitive focus on tax early in the transaction life cycle. Tax aspects involved in structuring the deal, optimisation of tax synergies arising from the deal; and interestingly, even tax issues on a future divestment have become matters of importance at the deal planning stage itself.”

On the other side, the report highlights that 48% of those surveyed are 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 favourite 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.

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. Also, 69%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 Ernst & Young 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.

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