When asked by his accountant what business he could see himself investing in, the client said, “A mirror factory!” That attempt at humor was quickly extinguished when the conversation turned to more serious considerations—M&A deals, taxes and inversion. COMMERCE asked a select group of CPA firm partners to discuss the key M&A tax issues, as well as the use of inversion to avoid paying tax on worldwide revenues.
EisnerAmper, LLP By Michael Hadjiloucas, CPA, Tax Partner
Foremost in M&A deals is whether the transaction itself is taxable, tax-free or partially tax-free. Transactions can be structured as asset sales, stock sales or mergers— each bringing about its own challenges and rewards. Often overlooked are the ancillary tax implications of the deal: its impact on attribute carryforwards, such as net operating losses; transaction costs; golden parachutes; and other compensation issues triggered by the deal. Leveraged acquisitions might impact the deductibility of interest. With respect to tax inversions, as we’ve seen in the case of Pfizer/Allergen, countries are making a greater effort to preserve the tax bases within their borders. In addition, in the United States the IRS is asking its agents to take a broader view when examining transfer pricing situations and giving them detailed guidance on what to look for in transfer pricing audits.
Goldstein Lieberman & Company LLC By Phillip E. Goldstein, CPA, Co-Founder, Managing Partner
The tax consequences of an M&A deal—whether it will be taxable or taxfree—will depend upon the structure of the transaction. Asset sales and stock purchases have immediate tax consequences for both parties while certain mergers and/or reorganizations/recapitalizations can be structured so that at least a portion of the sale proceeds, (in the form of acquirer’s stock) can receive tax deferred treatment. The tax inversion premise means that companies based in one country can benefit significantly by buying firms in another country where taxes are lower and thereby reduce their overall tax rate. The tax rate for U.S. businesses is 35 percent. In countries such as Ireland, it can be as low as 11 percent. Most recent deals have been in the pharmaceutical industry, but there also have been inversion deals in the media, consumer and manufacturing sectors. The premise and practice of tax inversions has the attention of the Obama administration and that scrutiny is causing many proposed deals to collapse. We should simply lower the U.S. tax rate to somewhere in the range of 20 percent to 25 percent. That way fewer companies would attempt to invert and more companies would be willing to keep their headquarters in the United States.
Grant Thornton LLP By Barry Grandon, Esq., Managing Director, M&A Tax Services
Several recent tax developments will likely have far-reaching implications on current and futureM&A activity. The two most prominent developments are the temporary inversion regulations and the sweeping new proposed regulations addressing related-party lending transactions and their ensuing earnings stripping effects. The inversion regulations released April 4 were broader than anticipated, and killed several high-profile inversion deals. Companies considering cross-border M&A activity should closely monitor their compliance with these regulations. Many M&A deals unknowingly run afoul, particularly if undertaken by “serial inverters,” engaged in back-to-back, cross-border M&A deals. Packaged with the inversion regulations, new proposed rules primarily intended to address earnings stripping will likely have a much broader effect. In their current form, the breadth of the proposed regulations will capture many ordinary transactions between related parties—whether foreign or domestic. For example, the proposed regulations may significantly curtail related-party leveraged distributions by treating the related-party debt as equity for federal tax purposes. Going forward, companies should carefully evaluate related-party lending transactions’ compliance with these rules—including most run-of-the-mill M&A structuring transactions that involve related-party debt.
Sobel & Co., LLC By Kenneth A. Bagner, CPA, MST, CGMA, Partner in Charge, Tax Practice
When buying stock versus buying assets, consider all tax implications. When buying stock, the buyer receives the assets at the tax basis the seller previously had, regardless of the purchase price. When buying assets, the buyer receives full basis for the purchase price. Representation & Warranty set the threshold of both parties for liabilities as well as breaches or misrepresentations in a contract. If an employment contract is written as a four-year deal and only one year is guaranteed, it is only a one-year contract. Sometimes, to sell the business, there may be a change in the entity structure to make it most tax-efficient upon sale. Covenants establish the criteria of the deal. Working capital is essential because the buyer will expect a level of guaranteed working capital. Inversion impacts M&A deals as an alternative to being taxed on worldwide income. The United States taxes companies with headquarters here on their worldwide income. When an inversion is used, as when Burger King moved their headquarters to Canada, only U.S. income earned in the United States is taxed. The United States has one of the highest tax rates on corporate earnings, so companies with global operations are being innovative to avoid paying tax on worldwide income.
<img class="size-full wp-image-6712 alignleft" src="//commercemagnj diet tablets.com/wp-content/uploads/mcdevitt.jpg” alt=”mcdevitt” width=”200″ height=”200″ />Wilkin & Guttenplan, PC By William J. McDevitt, CPA, CVA
The tax impact of a merger or acquisition can make or break a deal. If the transaction is a merger in the truest sense of the word, it may be possible to structure the transaction so that no party pays tax now. A buyer will often want to buy assets to amortize the purchase price over time. A seller will often want to sell shares of their company so that the gain is taxed at lower capital gains tax rates. The difference in the tax bill between an asset sale and a share sale can be enormous. There has been much press lately about corporate “inversions” whereby a U.S. corporation is acquired by an often smaller foreign corporation so that the foreign income of the combined group escapes U.S. tax. Given the costs and complexity of inversions, they tend to be used by a relatively few, large players. So for middle-market companies, the M&A landscape should not be impacted. On the contrary, there is speculation that now—with inversions no longer attractive— there will be increased M&A activity among all sectors of the U.S. market.