Inversion Transactions: Structuring Deals to Capture Tax Benefits - - PowerPoint PPT Presentation

Inversion Transactions: Structuring Deals to Capture Tax Benefits and Manage Post-Merger Integration

Today’s faculty features:

1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific WEDNES DAY, OCTOBER 1, 2014

Presenting a live 90-minute teleconference with interactive Q&A

William Amon, Managing Director, Andersen Tax, Los Angeles Edward S . Wei, Attorney, Cadwalader Wickersham & Taft, New Y

• rk

The audio portion of the conference may be accessed via the telephone or by using your computer's

• speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Tips for Optimal Quality

S

• und Qualit y

If you are listening via your computer speakers, please note that the quality

• f your sound will vary depending on the speed and quality of your internet

connection. If the sound quality is not satisfactory, you may listen via the phone: dial 1-888-450-9970 and enter your PIN when prompted. Otherwise, please send us a chat or e-mail sound@ straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Qualit y To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

For CLE credits, please let us know how many people are listening online by completing each of the following steps:

• Close the notification box
• In the chat box, type (1) your company name and (2) the number of

attendees at your location

• Click the S

END button beside the box For CPE credits, attendees must listen throughout the program, including the Q & A session, and record verification codes in the corresponding spaces found on the CPE form, in order to qualify for full continuing education credits. S trafford is required to monitor attendance. If you have not printed out the “ CPE Form,” please print it now (see “ Handouts” tab in “ Conference Materials” box on left -hand side of your computer screen). Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926

• ext. 10.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the ^ symbol next to “ Conference Materials” in the middle of the left -

hand column on your screen.

• Click on the tab labeled “ Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

Inversion Transactions: Structuring Deals to Capture Tax Benefits and Manage Post-Merger Integration

Bill Amon

bill.amon@andersentax.com

Edward S. Wei

edward.wei@cwt.com

October 1, 2014

Topics

• I. Structure of a merger inversion transaction

– Types of inversions – Section 7874

• II. Capturing the benefits of an inversion

– Limiting US taxation – Non-US earnings to acquire US businesses – Base erosion techniques

• III. Post-merger integration and restructuring

– Future management – Direction and geographical presence of the combined entity – Regulatory approvals from countries involved – Integration of the two businesses

6

• I. Structure of a merger inversion

transaction

• A. Types of inversions
• B. Section 7874

7

Primary tax considerations

• Inversion structures
• Tax benefits
• Section 7874
• Regulatory risk
• Shareholder level taxation
• Excise tax applicable to officers and directors

8

Types of Inversion Structures

• 1. Full Company Two-Party Inversions
• 2. Full Company One-Party Inversions
• 3. Carve-Out Inversions (No Spinoff)
• 4. Carve-Out Inversions (Spinoff)

9

• 1. Full Company Two-Party Inversions

Simplified Illustrative Transaction

IRE Co Subs IRE Co Shareholders US Co Shareholders US Co Subs

• Prior to an inversion:
• US Co foreign subs may hold “trapped

cash” that has been earned abroad.

• Trapped cash that is repatriated may be

used to repurchase stock, issue dividends or acquire companies, but repatriation may result in US corporate income tax without an inversion.

• Prior to repatriation, US accounting

rules provide an exception to recognizing taxes on undistributed earnings of foreign subs if the earnings are permanently reinvested abroad.

• US Co may instead “access” a portion
• f the trapped cash by borrowing.
• US Co’s foreign subs are generally

subject to the US CFC regime.

• Benefits of intercompany debt are

limited.

Key Considerations

Pre-Acquisition Structure

10

Merger Sub

• 1. Full Company Two-Party Inversions

Simplified Illustrative Transaction

Irish Newco HoldCo HoldCo

• Irish Newco may be owned by

nominees prior to the inversion.

• Foreign company target does not need

to be in the same jurisdiction as Newco for inversion to occur.

• Common jurisdictions of Newco include

Ireland, UK, Netherlands and Canada. (Here, Ireland is used by way of illustration.)

• Choice of jurisdiction is typically based
• n a variety of tax and non-tax factors.
• The use of intermediate holding

companies may be necessary for inversion structuring as well as post- closing tax planning.

Key Considerations

Newco Structure

11

US Co

• 1. Full Company Two-Party Inversions

Simplified Illustrative Transaction

IRE Co Subs IRE Co Shareholders US Co Shareholders Subs Irish Newco HoldCo HoldCo < 80% > 20%

• Irish Newco acquires IRE Co, e.g.,

through a scheme of arrangement.

• IRE Co shareholders typically receive

Irish Newco stock resulting in more than 20% of the vote and value of Irish Newco.

• Merger Sub merges with and into US Co

with US Co surviving.

• US Co shareholders typically receive

Irish Newco stock resulting in less than 80% of the vote and value of Irish Newco.

Key Considerations

Post-Acquisition Structure

12

• 2. Full Company One-Party Inversions

Simplified Illustrative Transaction

US Co Shareholders US Co Subs

• Prior to the change in law relating to the

substantial business activities test, full company one-party inversions were more common.

• US Co forms Irish Newco, which forms

Merger Sub.

Key Considerations

Pre-Acquisition Structure

Merger Sub Irish Newco

13

• 2. Full Company One-Party Inversions

Simplified Illustrative Transaction

US Co Shareholders US Co Subs

• Merger Sub merges with and into US Co

with US Co surviving.

• US Co shareholders receive 100% of

the Irish Newco stock.

• Typically, this structure is used only if

the Irish Newco group has substantial business activities in Ireland (or, if Newco is in a different jurisdiction, the relevant jurisdiction of Newco).

• This structure has been rarely used in

the most recent wave of inversions.

Key Considerations

Post-Acquisition Structure

Irish Newco

14

• 3. Carve-Out Inversions (No Spinoff)

Simplified Illustrative Transaction

IRE Co IRE Co Shareholders US Co Shareholders US Co Subs

• Carve-out transactions may provide for

a means to effect a transaction when the economics would not otherwise make sense.

• Transactions may be possible with a

domestic acquirer and target.

Key Considerations

Pre-Acquisition Structure

Asset 1 Asset 2

15

US Co

• 3. Carve-Out Inversions (No Spinoff)

Simplified Illustrative Transaction

US Co Shareholders Subs Irish Newco HoldCo HoldCo < 80% > 20%

• IRE Co transfers Asset 1 to Irish Newco

in exchange for Irish Newco stock.

• IRE Co typically receives Irish Newco

stock resulting in more than 20% of the vote and value of Irish Newco.

• Merger Sub (not pictured) merges with

and into US Co with US Co surviving.

• US Co shareholders typically receive

Irish Newco stock resulting in less than 80% of the vote and value of Irish Newco.

Key Considerations

Post-Acquisition Structure

IRE Co Asset 1 Asset 2

16

• 4. Carve-Out Inversions (Spinoff)

Simplified Illustrative Transaction

Foreign Co Shareholders Foreign Co

• Carve-out inversions involving a first

step spinoff, followed by a merger with a third party may be possible.

• Because of the complexity of these

transactions, these transactions do not

• ccur often.
• Alternatively, it may be possible for a

US Co to spinoff a company, followed by a one party inversion of the company (though this is uncommon).

Key Considerations

Pre-Spin-off/Acquisition Structure

Foreign Business 1 Foreign Business 2 US Co Shareholders US Co Subs

17

• 4. Carve-Out Inversions (Spinoff)

Simplified Illustrative Transaction

Foreign Co Shareholders Foreign Co

• The spinoff may or may not be tax-free

for US and foreign tax purposes. To the extent the spinoff is intended to be tax- free for US tax purposes, additional requirements must be met and step transaction principles must be considered.

• Foreign corporate and tax limitations

may apply, e.g., certain requirements may need to be met before distributions may be made.

Key Considerations

Post-Spin-off Structure

Foreign Business 1 Foreign Business 2 US Co Shareholders US Co Subs

18

• 4. Carve-Out Inversions (Spinoff)

Simplified Illustrative Transaction

Foreign Co Shareholders Foreign Co

• Merger Sub (not pictured) merges with

and into US Co with US Co surviving.

• US Co shareholders typically receive

Foreign Business 2 stock resulting in less than 80% of the vote and value of Foreign Business 2.

Key Considerations

Post-Acquisition Structure

Foreign Business 1 US Co Shareholders US Co Subs Foreign Business 2 < 80% > 20%

19

Tax benefits

• Lower US tax rate on US operations

– use of intercompany debt to strip earnings from US entity

• Lower US tax rate on foreign operations

– removal of CFCs out from under the US corporate entity – earnings on future foreign operations in non-CFCs

• Access “trapped cash”
• Facilitates future acquisitions through foreign

parent

20

Slide Intentionally Left Blank

Section 7874 (Basics)

• Section 7874 applies where:

– At least 60% or 80% of the foreign parent stock is

• wned by former US company shareholders

(“Ownership Threshold”), – the foreign parent acquires substantially all of the assets of the US company, and – the “affiliated group”, i.e., the foreign parent, the US company, and certain subsidiaries, does not have “substantial business activities.”

22

Section 7874 (Ownership Threshold)

• If 80% or more of the foreign parent stock is owned by

former US company shareholders, the foreign parent is treated as a US corporation for US tax purposes.

• If 60% or more of the foreign parent stock is owned by

former US company shareholders, it is respected as a foreign corporation but will be subject to US tax on:

– any gains resulting from the inversion, and – from outbound transfers or licenses of property to related parties in the subsequent ten-year period without reduction by tax losses or certain credits.

23

Section 7874 (Substantial Business Activities)

• Rule: Even if the ownership thresholds are met,

an exception exists where the combined company has “substantial business activities” (at least 25% of each of the combined company’s employees, assets and income) in the jurisdiction

• f the foreign parent company.
• Practical Application: For many large multi-

national companies, this is difficult to meet. A number of full-company one-party inversions were structured to take advantage of previous iterations of this test.

24

Section 7874 (Options)

• Rule: Calculation must take into account the

impact of any derivatives or equity equivalents (e.g., convertible debt, warrants, options and employee stock options), including the deemed exercise of in-the-money options for US tax purposes.

• Practical Application: Need to evaluate the entire

capital structure of the US company for Section 7874 purposes as it could differ from the capital structure for financial accounting or other purposes.

25

Section 7874 (Anti-Avoidance Rules)

• Rule: A transfer of properties or liabilities

(including by contribution or distribution) is disregarded if such transfer is part of a plan a principal purpose of which is to avoid the purposes of section 7874.

• Practical Application: Need to understand all

transactions occurring at or around the time

• f the inversion.

26

Section 7874 (Proposed Rules)

• “This legislation is designed to address a loophole which,

unless we close it, will unleash a flood of corporate tax avoidance that threatens to shove billions of dollars in tax burden from profitable multinationals onto the backs of their American competitors and other American taxpayers.”

• “Essentially, the problem we have today is that a US-based

multinational can file a change-of-address card with the United States simply by acquiring an offshore company that is a fraction of the US company’s size. Our bill would ensure that any inversion meets a more stringent test.”

– Levin Senate floor statement on the “Stop Corporate Inversions Act”. May 20, 2014.

27

Section 7874 (Proposed Rules)

• A foreign parent is treated as a US corporation for US tax purposes in two situations:

– Situation 1:

• More than 50% of the foreign parent stock is owned by former US company

shareholders,

• the foreign parent acquires substantially all of the assets of the US company, and
• the “affiliated group”, i.e., the foreign parent, the US company, and certain

subsidiaries, does not have “substantial business activities” (at least 25% of each of the affiliated group’s employees, assets and income) located in the foreign parent’s home jurisdiction. – Situation 2:

• The affiliated group has “significant domestic business activities” in the US,
• the foreign parent is primarily managed and controlled in the US, and
• the affiliated group does not have “substantial business activities” located in the

foreign parent’s home jurisdiction.

28

Section 7874 (Proposed Rules)

– Situation 2 may apply regardless of the percentage ownership former US company shareholders retain. – In situation 2, a foreign parent is “managed and controlled” in the US if substantially all of the senior management of the affiliated group who exercise day-to-day responsibility for strategic, financial and operational policies of the group are based or primarily located within the US. – Treasury’s 2015 Proposal would apply to transactions that are completed after December 31, 2014 and be permanent, whereas Senator Levin’s Bill would apply retroactively to transactions completed after May 8, 2014 and would sunset after two years. – More proposed rules and/or administrative guidance relating to Section 7874 (and other provisions affecting inversions) are expected to be enacted or released to curb inversions.

29

Shareholder Level Tax

• In full-company stock deals, US company’s US

shareholders are generally taxed on the receipt of foreign parent stock.

– An exception to tax may apply in the case of the US company’s US shareholders owning 50% or less of the foreign parent stock and certain other requirements being satisfied. – IRS Notice 2014-32 limited an exception that affirmatively used the “Killer-B” regulations under section 367. – Recently, companies have employed other structures to defer shareholder tax.

30

Excise Tax

• A 15% tax generally applies on the fair value of unvested or unexercised

stock compensation held at any time during the six months before and six months after the closing of the inversion.

• This excise tax may be avoided by vesting prior to closing, resulting in

taxable income to officers, and waiting at least six months and one day before issuing new equity compensation.

• Narrow exception to excise tax may apply if no shareholder level tax is

imposed.

• For example, this exception may be available where no shareholder

exchanging US company stock for foreign parent stock recognizes any gain in the exchange.

31

Examples of Announced Inversions

New Burger King New AbbVie Mylan N.V. Salix Pharmaceuticals, plc New Auxilium Medtronic plc Mallinckrodt Pharmaceuticals Horizon Pharma plc Energy XXI (Bermuda) Ltd. ChiquitaFyffes plc Actavis plc Endo International plc TEL-Applied Holdings B.V. Perrigo Company plc Actavis plc Liberty Global plc Eaton Corporation plc Pentair plc Alkermes plc

Transaction Post-Transaction

/ / / / / / / / / / / / / / / / / /

(non-US assets)

Post-Transaction Domicile

/ 32

Case Example: Medtronic/Covidien

~30%

Medtronic Covidien New Medtronic plc

~70%

Covidien Shareholders Medtronic Shareholders

• “New Medtronic and IrSub have each secured a bridge financing commitment that together have an aggregate commitment amount of $16,300,000,000

from Bank of America, N.A. to finance the cash portion of the acquisition. Neither New Medtronic nor IrSub currently plans to draw funds under the bridge loan facilities. In lieu of drawing funds under the bridge loan facilities, New Medtronic expects to receive proceeds from a new debt issuance and IrSub expects to obtain an intercompany loan on arm’s length terms from certain Medtronic affiliates using proceeds from the liquidation of cash equivalents by such Medtronic affiliates.” Form S-4 Medtronic Holdings Limited filed with the SEC on August 26, 2014.

Simplified Post-Acquisition Structure

Subs Subs

33

• II. Capturing the benefits of an

inversion—WHY INVERT?

• A. Limiting US taxation
• B. Non-US earnings to acquire US businesses
• C. Base erosion techniques

34

• A. Limiting US taxation
• --The new foreign parent of the US group can establish new foreign operations without

being subject to the subpart F provisions.

• --The new foreign parent may enable the US group to reduce US taxes on US source

income by pushing down debt to the US and as such creating deductible interest and/or royalties through a treaty jurisdiction.

• --As the inverted group is not subject to the US CFC rules (for new foreign entities), there

are enhance opportunities to relocate profits worldwide at a reduced rate of tax. For example, the foreign parent generally can perform intellectual property tax planning without concern about the US CFC provisions. Such earnings stripping is common when companies invert-discussed infra in ‘Base Erosion & Profit Shifting Techniques’ (“BEPS”).

• --By relocation of corporate headquarters in tax jurisdiction other than the US will likely

reduce the rate of tax on earnings earned by the foreign parent (e.g. 20% in the UK v the US rate of 35%). Income earned in by the former US parent company is still subject to the US tax rate.

• --Most countries have a form of territorial system of taxation that only taxes income within

the borders versus the US system of worldwide taxation.

35

Limiting US taxation

Territorial System v. Worldwide System Territorial System v the US Worldwide System

• Most jurisdictions operate a territorial system of taxation

– Based on the principle that taxes are charged in a given jurisdiction on profits generated in that jurisdiction – If parent company has subsidiaries in other jurisdictions, the profits of the subsidiaries earned in those jurisdictions will generally not be subject to taxation in the parent’s jurisdiction

36

Limiting US taxation

Territorial System v. Worldwide System Territorial System

• Example

– UK Co earned $100 in Singapore. UK Co owes taxes to Singapore on the $100. UK Co owes nothing to the UK.

37

Limiting US taxation

Territorial System v. Worldwide System Worldwide System

• US operates a worldwide system of taxation

– Based on the principle that a US-based company is subject to US tax on all of its worldwide earnings, whether earned in the US or

• ther jurisdictions.

– US tax on non-US earnings generally is charged upon two events: (1) Repatriation or (2) Immediate taxation for certain types of income, e.g. inclusions under sub part F

38

Limiting US taxation

Territorial System v. Worldwide System Worldwide System

• (1) Repatriation of non-US earnings
• US-based company’s tax liability on its non-US subsidiaries’ non-US

earnings is deferred until the earnings are “repatriated” back to the

• US. At this point, US-based company will incur corporate income taxes

(net of foreign tax credits to the extent available)

– Note: Foreign tax credit is generally limited to foreign tax on the foreign income. Given that US income tax rates are often higher than foreign rates, the actual and deemed repatriation of foreign income often results in additional tax paid in the US and a higher worldwide effective tax rate for a US based group.

39

Limiting US taxation

Territorial System v. Worldwide System Worldwide System

• (2) Immediate taxation for certain income
• Some types of non-US earnings do not qualify for deferral until

repatriation and are taxed immediately

– Passive income (i.e. interest, dividends, annuities) – Income from certain related party transactions

40

Limiting US taxation

Territorial System v. Worldwide System Worldwide System

– Example

• US Co earned $100 in Singapore. US Co owes taxes to Singapore on

the $100. US Co also owes taxes to US on the $100.

• Assume US federal tax rate of 35% so US Co owes $35 to US upon

repatriation of $100 profit from Singapore.

• Note: The $35 owed to US is reduced by foreign tax credit for the

amount of taxes paid to Singapore.

41

Limiting US taxation

Benefits of inversions Reduce tax charge

– Overall tax bill is reduced by moving a US-based parent company from a worldwide taxation system to a territorial tax system with a lower tax rate

• Profits are taxed in the various jurisdictions at that jurisdiction’s tax rate

– End result

• New foreign parent company faces a lower home country tax rate and no

tax on the company’s foreign-source income (as it has already been taxed in the local jurisdiction)

• US taxation will generally be limited to US earnings only (i.e. eliminates US

tax on foreign operations)

42

Slide Intentionally Left Blank

• B. Non-US earnings to

acquire US businesses

44

Non-US earnings to acquire US businesses

• Generally a US corporation pays US tax upon a

repatriation of earnings from its foreign subsidiaries or the use of those earnings to acquire US assets.

• After an inversion, the new foreign parent

generally will be able to use the group's non-US earnings to acquire US businesses or to pay dividends to shareholders without paying US tax

• n those earnings.

45

Non-US earnings to acquire US businesses

• End result: Inversions create an opportunity to

use overseas cash to acquire US businesses without having to “repatriate” such cash to the US

– Overall reduced taxes generates a better use of cash to acquire US businesses

46

• C. Base erosion techniques

47

Base erosion techniques

• Following an inversion transaction, the new

foreign based group can engage in techniques to lower its US tax base

• Popular techniques include:

– Payments of interest, royalties, rents or management service fees

48

Base erosion techniques

Payments of interest

• The most popular method to reduce US tax base

(also known as “earnings stripping”)

• Example:

– After an inversion transaction, new foreign parent makes an intercompany loan to US subsidiary. US subsidiary pays back interest on debt via income earned in the US.

49

Base erosion techniques

Payments of interest

• Tax consequences to foreign parent:

– Receipt of payments from US subsidiary by foreign parent are generally subject to a low tax rate or no tax (assuming a favorable jurisdiction).

50

Base erosion techniques

Payments of interest

• Tax consequences to US subsidiary

– Taxable income of US subsidiary is reduced because the interest payments to the foreign parent on the intercompany debt are tax deductible

• However, the interest payments are subject to limitations of

Section 163(j)

– Applies when a corporation’s debt-to-equity ratio exceeds 1.5 to 1 and its net interest expense exceeds 50% of its adjusted taxable income. – If corporation exceeds such thresholds, no deduction is allowed for interest in excess of the 50% limit that is paid to a related party and that is not subject to US income tax (i.e. a income tax treaty reduces the US income tax on such interest).

51

Base erosion techniques

Payments of interest

• Tax consequences to US subsidiary

– Payments by US subsidiary to foreign parent are subject to US withholding tax.

• However, such taxes may be reduced (or none may

apply) by an income tax treaty (if one exists between the US and that particular foreign jurisdiction).

52

Base erosion techniques

Payments of royalties

• Example:

– After an inversion transaction, new foreign parent licenses intellectual property to US subsidiary. US subsidiary makes royalty payments via income earned in the US.

53

Base erosion techniques

Payments of royalties

• Tax consequences to foreign parent (Licensor)

– Receipt of payments by foreign parent are generally subject to a low tax rate or no tax (assuming a favorable jurisdiction).

54

Base erosion techniques

Payments of royalties

• Tax consequences to US subsidiary (Licensee)

– Taxable income of US subsidiary is reduced because the royalty payments to the foreign parent are tax deductible

• However, the US subsidiary will be considered a withholding

agent and will be held liable for failing to withhold the require amounts from the royalty payments to the licensor. Note: Income tax treaties may be in existence that reduce or eliminate such withholding requirement.

55

Base erosion techniques

Payments of royalties

• This technique is especially appealing to

pharmaceutical and biotechnology companies, which sell products all over the world and

• ften locate their intellectual property in tax-

favored jurisdictions

56

Base erosion techniques

Payments of rent and management services

• Same concept applies

– Example: Foreign parent owns building and rents to US subsidiary. US subsidiary receives a tax deduction for rent paid.

57

• III. Post-merger integration and

restructuring

• A. Future management
• B. Direction and geographical presence of the

combined entity

• C. Regulatory approvals from countries involved
• D. Integration of the two businesses and Entity

Rationalization

58

Slide Intentionally Left Blank

• A. Future management

60

Future management

Best practice

– Establish clear leadership and role clarity during transition process – Identify a tax integration leader who can:

• Identify sub-teams and leaders for tax areas of interest including

responsibility for tax compliance in the various jurisdictions

• Ensure tax matters are addressed by other functions and tax-

related input is considered

• Secure and understand tax related documentation of

target entity to ensure combined entity will be able to comply with deadlines

61

Future management

Best practice

– Identify a tax integration leader who can (continued):

• Understand historic tax positions by target entity to prepare

for potential audit (especially if target personnel have left the company)

• Decide which tasks should be a part of the tax function (i.e.
• ften Section 280G relating to golden parachute payments

and Section 409A related to deferred compensation are handled by legal or human resources)

• Consider engaging outside tax advisors to help with local tax

complexities or hire new personnel with appropriate skill set

62

Future management

Other considerations

– Location of management – Decision making model – Expendable executive positions – Integrate different cultures of two businesses

63

• B. Direction and geographical

presence of the combined entity

64

Direction and geographical presence of the combined entity

Considerations

– Assess whether duplicative legal entities within a jurisdiction can be eliminated post-close to reduce complexity and cost of compliance

• However, consider value of tax attributes of an entity

before elimination

– Consider location and profitability of manufacturing operations – Evaluate transfer pricing policies going forward

65

• C. Regulatory approval from

countries involved

66

Regulatory approval from countries involved

• Consider impact and necessary approvals

required.

– Countries may have foreign investment laws that require approval of transactions exceeding a specified amount

• i.e. Canada’s Industry Department

– Certain industries may require approval

• i.e. Food and Drug Administration for pharmaceutical

companies

67

Regulatory approval from countries involved

• Other considerations

– Local laws may require surviving entity to obtain governmental permits, licenses, etc. to continue the merging entity’s business – If merging entity received any governmental subsidiaries, grants, or other incentive, may have to provide notice or get approval from relevant government agency

68

• D. Integration of two businesses

69

Integration of two businesses

Tax considerations

– Combined company’s future effective tax rate – Where are cash taxes being paid – Cost of tax compliance – Local country filings and other requirements – Ability to utilize tax attributes – Implications of new post-acquisition structure on indirect taxes (i.e. VAT, customs or duties)

70

Integration of two businesses

Tax considerations

– Assess impact of change in ownership:

• Necessary tax elections (state and local taxes)
• Credits
• Section 382 analysis

– Transfer of assets (i.e. tangibles, intangibles, contracts, including leases, real property) to tax favorable jurisdictions – Reporting system and managing documentation for efficient tax accounting and compliance

71

Integration of two businesses

Other considerations

– Synergies between two businesses – Harmonizing IT systems – Capture scale economies – Group’s financing structure – Employee transfers and reductions in workforce – Impact on supply chain – Financial reporting

72