In this article we examine the impact of BEPS on M&A activity and set out some of the areas we recommend you should consider if you are making an acquisition or disposal (or indeed, what your potential counterparties will be considering).
The BEPS recommendations are wide ranging, and will impact financing to operating models, compliance to reporting. In response, your due diligence scope must be updated to include BEPS related matters which could have a material impact on the future financial results of target, and its business and organisational structure. BEPS will need consideration in all material territories, as different jurisdictions may implement the BEPS recommendations in different ways. It is critical to properly understand the post-BEPS profile of your target: failing to do so, might result in the acquisition of a material business restructuring or refinancing exercise. This could be costly and disruptive.
Fundamentally BEPS could, and most likely will, impact the forecast effective tax rate (“ETR”) and earnings per share (“EPS”) of any multinational target. Understanding this will be key to obtaining an accurate and realistic pricing of a deal. If BEPS is likely to have a material effect on target, the deal price should take this into account.
Another important aspect to consider is acquisition structuring. Traditional structures may no longer be fit for purpose in a post-BEPS world. An assessment of your proposed acquisition structure should take into account the key operating jurisdictions (both for the target acquisition and your existing group), and the proposed financing structure of the transaction. To give a tangible example, the UK has proposed significant changes to its interest deductibility regime which will limit interest deductions to broadly 30% of EBITDA. This is significantly different from the current interest deductibility regime and for some groups could result in a material tax cost, and an increase in the cost of raising debt finance.
The potential ripple effects of BEPS outside of the traditional tax sphere are apparent and should be an imperative consideration in any transaction going forward.
Our M&A tax team understand the impact of the BEPS proposals in both their theoretical form and how they may practically impact commercial transactions. We have been factoring BEPS into our M&A tax work as the OECD’s project has progressed and we already have a wealth of experience of managing the impact of BEPS within the commercial framework of a transaction.
In the second article of our series for Economia, we continue to explore why BEPS cannot be viewed as “just a tax matter”. Here Robin Walduck, international tax partner at KPMG in the UK, considers the impact of BEPS on treasury and M&A activity.