Tax issues in a cross border Merger and Acquisition


A  company’s tax history and position need to be considered in any merger and acquisition (M&A) transaction. In a cross-border transaction, the tax issues are more complex and deserve special consideration. If you are considering acquiring a foreign target, make sure your due diligence addresses all possible tax issues. Here are five common issues to watch for:
1.    Has the target filed all required returns in all jurisdictions in which it is required to file them? While this might seem like a simple question, it often isn’t. Look beyond obvious considerations, like whether the company filed on time in its home market (and whether there is a history of audits or other challenges in that jurisdiction that might point to problems you could inherit). If the company is active in other jurisdictions, has its activities created filing obligations that it has not fulfilled? Take a look at the activities that a company’s executives or its third-party contractors performed in other jurisdictions. Depending on the jurisdiction, activities that go beyond preparatory or auxiliary business activity may trigger income or other tax return filing requirements.
2.    Income taxes aren’t the only issue. Payroll taxes, value-added taxes, withholding on cross-border transactions—the list goes on. Every jurisdiction has its own unique requirements, and they can differ substantially from what U.S. companies are used to. Be sure to get informed advice from professionals experienced with the jurisdictions in which your target is involved.
3.    Have you looked at transfer pricing? You should consider this from two perspectives. First, if the target historically has been engaged in transfer pricing to shift income and expenses among various jurisdictions, does it have a solid transfer pricing study in place to support its activities? Jurisdictions around the world are taking a harder look at transfer pricing. If your target’s transfer pricing decisions prove unsupportable, you could end up with a substantial compliance headache—and a substantial tax expense. Second, what will your transfer pricing picture look like going forward? What transactions do you anticipate between jurisdictions once the acquisition is completed? The economic rationale for those transactions will directly influence your future tax picture, so it is worth considering as you evaluate the target.
4.    Are you going to lose the target’s losses? A target company’s net operating losses can be a valuable tax attribute in a transaction, as they can help to lower taxes by offsetting revenue. But the rules about whether and how those losses transfer to a new owner vary widely. For example, Germany has particularly strict rules limiting the ability of an acquiring company to use the target company’s losses. Again, quality local advice concerning the portability of losses or other tax attributes can help eliminate unpleasant surprises and, perhaps, yield pleasant results.
5.    How should you structure the acquisition in each jurisdiction?      In nearly every international acquisition, there are numerous decisions that can affect the tax costs of the acquisition and the tax rate of the target after acquisition. These decisions include: whether to purchase the target’s entity or buy assets; whether to finance the acquisition with deductible debt; whether to utilize entities that are disregarded for United States tax purposes; how much working capital is needed after acquisition in each target entity; and which of your existing entities will acquire the target’s business. 

As these examples demonstrate, your target company’s tax history and position can significantly affect the success of any cross-border transaction. It’s impossible to provide an exhaustive list of the issues you should consider because it will be driven both by the jurisdiction or jurisdictions in which your target has a tax footprint and by the unique facts and circumstances of the target’s business. In every case, though, experienced local advice can provide the insight necessary to make an informed M&A decision.  

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