Global companies are seeking even greater tax efficiencies in their mergers and acquisitions. Meanwhile, those companies are feeling the scrutiny of national tax regulators as complexity of legislation increases, according to a new report.
Eighty-four per cent of company tax directors in an Ernst & Young global M&A tax survey said they have increased their focus on tax efficiencies in an effort to lower the cost of deals or raise the amount of returns generated by mergers and acquisitions.
About one-third of tax directors (34%) said they have helped position their companies for acquisitions, many times before the target even comes to market. Global tax directors at 150 multinational companies participated in the survey.
National tax authorities apparently are watching closely as companies seek these tax efficiencies. Sixty-four per cent of survey respondents said tax authorities’ scrutiny of the tax planning components of deals has increased over the last three years. That’s up from 49% in the 2011 survey.
“As tax directors over the last couple of years have looked to extract further benefits from transactions, in a similar vein I think tax authorities are trying to get to their take,” E&Y Corporate Transaction Tax Partner Steven Hales said in a video accompanying the survey. “So they’ve increased the level of scrutiny, particularly in relation to large-level transactions.”
A rise in tax legislation around the world is affecting mergers and acquisitions. Seventy-three per cent of respondents said increased complexity of tax legislation affecting deals is an area of increased importance in the M&A landscape, according to the report.
Governments seek to offset deficits
The rise in scrutiny of M&A deals is part of a larger trend, as tax authorities across the globe are stepping up enforcement to help offset government deficits, according to PwC research. More audits and tax disputes are being brought in front of local authorities as governments are reshaping their tax systems, PwC says.
“Multinational companies are experiencing rapid change with regard to tax audits and policies,” Paul de Chalain, PwC’s head of Africa tax, said in a statement. “Tax authorities around the world are engaging in intense tax audits, and pressure has been exerted on the tax enforcement and compliance processes.
“As a result, tax authorities have become more aggressive in the corporate arena, leading to more tax audits, creating an uncertain environment.”
The stepped-up enforcement is resulting in new approaches to resolve tax disputes, including the writing of mandatory binding arbitration clauses in income tax treaties, according to the report.
PwC and de Chalain advise that:
Companies should adopt a coordinated strategy with respect to tax audits and disputes.
Multinational companies should consider coordinating and aligning procedures and policies to respond to audits and examinations across jurisdictions.
Potential disagreements with authorities should be anticipated, and defensive strategies should be drafted.
“Evaluating the future tax audit and controversy landscape has become a business imperative,” de Chalain said in a statement. “These and other forward perspectives should be built into every aspect of a company’s proactive and coordinated business strategy.”
—Ken Tysiac (firstname.lastname@example.org) is a CGMA Magazine senior editor.